I'm in the process of purchasing an eight unit apartment with tenants already there. The seller manages the property himself, and does not have current leases on the tenants. We are still in the due diligence process before closing on the property. Should I ask the seller to provide current lease agreements before the closing or should I close on the property then get current leases on the tenants?
Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes
3y
Aloha,
If they are not on a current written agreement, you need to find out what terms they ARE on. Since you also know nothing about the existing Tenants, you certainly do not want Seller to have them signing any new agreement. You can request an estoppel letter to establish the basic terms of each, and then plan on giving them a formal non-renewal at the earliest lawful date once you close the sale transaction. I would want to perform full credit and background checks on every adult on the property once you own the property. Then offer renewals to those that meet your criteria, and inform the others that as a courtesy, you will give them 60 - 90 days to vacate, prorated to last day of occupancy.
Before you do anything, consult with someone and find out the tenant/landlord laws in your specific area as these can make a huge difference in your options. You should find out what terms the tenants are renting on from the owner before purchasing. If you like the terms, they match your initial UW, or better, get a lease in place before closing. If you are looking to do rehab on the property or bring the rents up, make sure you follow the appropriate process for your area to end their occupancy after closing.
Real Estate Consultant · Miami · Member since 2023 · 165 posts · 62 votes
3y
Hi @Henry E Williams. Good question. Lenders/Mortgage Brokers typically want to see copies of signed leases for 1-4 unit properties when financing a loan. Since it's an eight unit, they'll probably ask for a rent roll instead. As for the need to have signed leases in place before or after closing, that's hard to say. Are all units occupied? Are all tenants paying rent on time? Are there any problem tenants? Unsigned leases might be a blessing. I'd talk with a RE Estate attorney that specializes in tenant/landlord agreements and ask their perspective from a legal standpoint.
Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
3y
There is probably value in this mis-managed apartment, but you need to protect yourself. Don't close until the tenants are all on leases. This will likely hold up your closing as they will have little incentive to sign anything now that they are in the building.
Option B would be that you have the seller sign a rent guarantee, but you'll likely be out thousands in evictions, so unless you are a seasoned investor, get the leases first.
Ask the seller to put leases in place prior to closing otherwise you will have a nightmare on your hands.
I know of a property that was bought, the seller claimed there were valid leases, but the day after closing he disappeared and disconnected his cell phone number. Make sure that does not happen to you and you do not get stuck with costly legal headaches.