Due Diligence Checklist
Real Estate Agent · New York, NY · Member since 2019 · 19 posts · 4 votes
Due Diligence Checklist
Most Popular Reply
Drew SygitBusiness Member
Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votesUse this:
Purchase Agreement Clauses for Buying Tenant-Occupied Rental
If you’re considering buying a tenant occupied rental property, there are some documents you want to acquire for review prior to the closing. Once the closing takes place, the seller has zero incentive to cooperate with supplying them.
Not only do you want to obtain these documents, you also want time to review them well before the closing because unfortunately, there’s always the potential that one, or several, of the documents may be fraudulent.
So, let’s go over each document and why it’s important:
- Lease: this one should be obvious. A lease is a contract between the landlord and tenant. It spells out the monthly rent, when it’s due, the length of the lease (or term), should contain clauses required by the federal and state governments, and much more. Without the lease a buyer has no legal means to collect rent from a tenant or evict them for nonpayment.
- Rent Ledger: this is a record of all tenant charges and payments. It proves if the tenant is current on their rent and their history of whether they’ve paid on time or not. It should also show any security deposit collected, pet fees, cleaning fees etc.
- Tenant Contact Information: current phone number and email address are needed to be able to communicate with tenants.
- Tenant(s) Government Issued ID: typically, this will be a driver’s license to prove the identity of the tenant(s). Without, you have no way of confirming the occupants of the property are those named on the lease. Proper identification of tenants is also needed if you want any chance of having local code enforcement write tickets against the tenant and not the owner.
- Any Legal Action Documents: you’ll definitely want to know if the current landlord is evicting or suing the current tenant(s).
- Tenant(s) Social Security Number: this should have been obtained by the current landlord to do a background check during the application process. A new owner will need it if they want to pursue collection and garnishment for unpaid rent and/or property damages.
- Tenant(s) Employment & Bank Information: additional information useful for garnishment actions to collect unpaid rent and/or property damages. Usually collected as part of the application process.
Fraud: let's not pretend it doesn't happen. Desperate sellers do desperate things. We've seen fake leases and rent ledgers, even fake tenants - who were placed by the seller to backup the fake lease and ledger. So. it's not uncommon to request proof of rent deposits via bank statements and corporate/LLC tax returns. Of course, it can be almost impossible to validate any rents the seller claims they collected in cash. So, sellers can also be asked to sign notarized affidavits personally guaranteeing the validity of leases and ledgers.
So now, let’s get to the clause to include on your purchase agreement to make sure you get all this information in enough time to review it.
Seller(s) agrees to provide the following to the buyer within X days of buyer’s satisfactory inspection, but in any case at least X days before closing: All rental leases, rent ledgers, tenant(s) valid phone numbers and email addresses, rental applications & supporting tenant identification, income and asset information, any documents corresponding to any ongoing legal actions pertaining to the property, leases, service contracts, etc., at least three (3) months of the most recent bank statements for any account(s) rental funds were paid into and any company or corporate tax returns for proof of income and expenses. Seller(s) also agree to sign an affidavit at closing personally guaranteeing the validity of all leases and rent ledgers.
Now that may seem like a lot for a seller to agree to, but if they have nothing to hide, why would they not agree?
As always, none of this should be construed as legal advice and we recommend you consult a real estate attorney.
Logical Property Management4.9465 Reviews
10 Replies
- 4yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
@Juan Contreras Those are good things to ask for and I would for sure say that trying to get as much info as possible, my experience is that most owners/rental owners of SFR/condos do not keep that good of track of their leases/data/records as bigger property owners.
It would go something like this for people and their record keeping:
1. SFR/Condo rentals (bottom tier in record keeping, most of the time maybe a lease)
2. Small multifamily (middle tier in record keeping, lease, insurance expenses)
3. Five units and above (top tier in record keeping, all the items you mentioned and more)
The McKernan Group4.958 Reviews - Real Estate Agent · New York, NY · Member since 2019 · 19 posts · 4 votes4y
@Peter Mckernan I agree 100% but I believe the unit was managed by a property management company for the past few years, so the property management company should be able to provide the requested information. Just wondering if they could actually decline providing such information. Also whether I could speak/interview the current tenants.
- 4yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
@Juan Contreras you should be able to get the info from the PM, I would check your state regs about it to confirm. The interview/speaking would be okay as long as you clear it with agent, owner, and PM.
Also, in my experience through the SFR/Condo purchase with a tenant in place is on the lower percentage side of being a good tenant (my experience).
The McKernan Group4.958 Reviews - Rental Property Investor · New Haven, CT · Member since 2022 · 40 posts · 24 votes4y
@Juan Contreras You definitely can, (and should) ask for that information, but as Peter says they may not have it. If it's a PM company they should have that info, and if they are unable or unwilling to provide it that could be a red flag.
- Real Estate Agent · New York, NY · Member since 2019 · 19 posts · 4 votes4y
@Afam Agbodike @Peter Mckernan thanks for your help guys. Greatly appreciate it.
Anything else you’d suggest I ask for?
- Rental Property Investor · New Haven, CT · Member since 2022 · 40 posts · 24 votes4y
@Juan Contreras Those are the big things, since it is a townhome they probably don't have the greatest records, so you might want to get an inspector out there to look for any major issues, but there is certainly a cost associated with that. The other thing I can think of is check with the HOA to see if there are any assessments coming, or any planned major work or fee increase, and make sure they have good reserves.
- Investor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes4y
From a negotiation standpoint definitely ask for things now during this period while you can get EM money back. The contract might even have language for it built in, but often no one knows that, so it’s good to negotiate and insist on it. Even though it’s a “hot market” tenant occupied can take longer to sell in my area at least.
- 4yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
Use this:
Purchase Agreement Clauses for Buying Tenant-Occupied Rental
If you’re considering buying a tenant occupied rental property, there are some documents you want to acquire for review prior to the closing. Once the closing takes place, the seller has zero incentive to cooperate with supplying them.
Not only do you want to obtain these documents, you also want time to review them well before the closing because unfortunately, there’s always the potential that one, or several, of the documents may be fraudulent.
So, let’s go over each document and why it’s important:
- Lease: this one should be obvious. A lease is a contract between the landlord and tenant. It spells out the monthly rent, when it’s due, the length of the lease (or term), should contain clauses required by the federal and state governments, and much more. Without the lease a buyer has no legal means to collect rent from a tenant or evict them for nonpayment.
- Rent Ledger: this is a record of all tenant charges and payments. It proves if the tenant is current on their rent and their history of whether they’ve paid on time or not. It should also show any security deposit collected, pet fees, cleaning fees etc.
- Tenant Contact Information: current phone number and email address are needed to be able to communicate with tenants.
- Tenant(s) Government Issued ID: typically, this will be a driver’s license to prove the identity of the tenant(s). Without, you have no way of confirming the occupants of the property are those named on the lease. Proper identification of tenants is also needed if you want any chance of having local code enforcement write tickets against the tenant and not the owner.
- Any Legal Action Documents: you’ll definitely want to know if the current landlord is evicting or suing the current tenant(s).
- Tenant(s) Social Security Number: this should have been obtained by the current landlord to do a background check during the application process. A new owner will need it if they want to pursue collection and garnishment for unpaid rent and/or property damages.
- Tenant(s) Employment & Bank Information: additional information useful for garnishment actions to collect unpaid rent and/or property damages. Usually collected as part of the application process.
Fraud: let's not pretend it doesn't happen. Desperate sellers do desperate things. We've seen fake leases and rent ledgers, even fake tenants - who were placed by the seller to backup the fake lease and ledger. So. it's not uncommon to request proof of rent deposits via bank statements and corporate/LLC tax returns. Of course, it can be almost impossible to validate any rents the seller claims they collected in cash. So, sellers can also be asked to sign notarized affidavits personally guaranteeing the validity of leases and ledgers.
So now, let’s get to the clause to include on your purchase agreement to make sure you get all this information in enough time to review it.
Seller(s) agrees to provide the following to the buyer within X days of buyer’s satisfactory inspection, but in any case at least X days before closing: All rental leases, rent ledgers, tenant(s) valid phone numbers and email addresses, rental applications & supporting tenant identification, income and asset information, any documents corresponding to any ongoing legal actions pertaining to the property, leases, service contracts, etc., at least three (3) months of the most recent bank statements for any account(s) rental funds were paid into and any company or corporate tax returns for proof of income and expenses. Seller(s) also agree to sign an affidavit at closing personally guaranteeing the validity of all leases and rent ledgers.
Now that may seem like a lot for a seller to agree to, but if they have nothing to hide, why would they not agree?
As always, none of this should be construed as legal advice and we recommend you consult a real estate attorney.
Logical Property Management4.9465 Reviews - Investor · VA · Member since 2021 · 11 posts · 8 votes4y
Wow, great information to know. I am new and currently in the process of selection some property in the Virginia Beach/Norfolk area.
- Atlanta, GA · Member since 2021 · 493 posts · 162 votes4y
Hi Juan,
Some good questions to consider when touring or if you have the opportunity; Who lives here? What's the draw of the property? Why would they rent somewhere else? What's been the biggest surprise since you've owned? Most recurrent fixes? Have any renovations been completed?
Hope these help and best of luck going forward.
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