General Real Estate Investing

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David Moudy
  • Property Manager
  • Indianapolis, IN
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Tenant Napped! A learning experience

David Moudy
  • Property Manager
  • Indianapolis, IN
Posted Aug 7 2019, 19:15

Would love to hear thoughts on this:

TL/DR: First Key Homes lied and took our tenants. A learning experience.

Want to share something that has recently happened.

We closed on a home recently that had a tenant in place.

During due diligence we asked for lease ledgers, copies of leases.

Everything looked good, and during walkthrough of property talked with tenants, they let us know that they wanted to stay with the property which was great.

During escrow period our buyers and us were asked not to communicate with tenants until after closing about change in property management or anything about transaction. Understandably so we thought because don’t want to confuse tenants about who property management was just in case we didn’t close. Perfectly reasonable request.

Per contract we stated prorated rent amounts were to be transferred to us at closing as well as security deposits.

We honored request to not reach out to tenants until after closing. The tenants lease was up in September(next month) so we knew we would need to reach out to renew leases directly after closing.

Day of closing we reached out to the tenants to inform them that we had indeed closed on the house, as well as wanted to offer lease renewal for them. When received a response back from them:

“THANK YOU FOR THE OFFER BUT FIRST KEY HOMES TOLD US TO VACATE DUE TO SELLING HOME WOULD NOT LET US KNOW IF THE NEW OWNERS WAS A RENTAL CO. SORRY , WE HAVE MOVED AS OF FRIDAY”

We later found out that the tenants were placed into another First Key Homes Rental property.

Can anyone say Tenant Placement Fees?

Leaving the property at close vacant, which is not the product we intended to close on and we were told not to contact tenants until after close.

Tenant snatchers?

Where not ideal, we now have to turn the property and didn’t have the luxury doing a move-out with the tenants. Can only move forward from here.

Moving forward action steps to help prevent this from happing again a few thoughts:

Further condition:

Current tenant(s) to sign lease with new property management company prior to closing.

Tenants to be informed of property management change 7 days prior to closing.

Closing contingent upon current tenants remaining with the property post closing.

Would love to know what your reactions to and or response would be to this.

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John Teachout
  • Rental Property Investor
  • Concord, GA
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John Teachout
  • Rental Property Investor
  • Concord, GA
Replied Aug 7 2019, 19:19

Well, I realize you had the understanding that this was a turnkey property but picking your own tenants may be a good thing in the long run. Sounds frustrating though...

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Matthew Olszak
  • Real Estate Broker
  • Chicago, IL
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Matthew Olszak
  • Real Estate Broker
  • Chicago, IL
Replied Aug 7 2019, 19:25

@David Moudy A few things to do next go-around. First, get lease copies during your due-dillegence period. The leases run with the land - just like a selling owner can't force out a tenant, a tenant can't end their lease agreement due to a change in ownership. If you had a lease copy you could threaten them with a lawsuit (which wouldn't go anywhere, but nonetheless).

Next, make sure your contract includes a provision that the seller will not change the occupancy of the units through closing - no new tenants, no loss of tenants. And that the seller must inform you of any past-due tenants or tenants that become so prior to closing. Verify occupancy the morning of or evening prior to closing. Verify you are receiving the prorated rent and security deposits on your ALTA statement.

I'd be pissed, but it'd be for naught. I doubt it would be worthwhile to pay an attorney a $5-10k retainer to go after the seller or tenant. Take this opportunity to improve the property to get higher rents, or if its already maxed, get you own tenant who matches your screening criteria placed asap.

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David Moudy
  • Property Manager
  • Indianapolis, IN
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David Moudy
  • Property Manager
  • Indianapolis, IN
Replied Aug 7 2019, 19:27

@Matthew Olszak we got copies of the leases and lease ledger.

Also asked for prorated rents and security deposits to be transferred.

We know leases transfer however previous PM told them to vacate without our knowledge

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Matthew Olszak
  • Real Estate Broker
  • Chicago, IL
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Matthew Olszak
  • Real Estate Broker
  • Chicago, IL
Replied Aug 7 2019, 19:36
Originally posted by @David Moudy:

@Matthew Olszak we got copies of the leases and lease ledger.

Also asked for prorated rents and security deposits to be transferred.

We know leases transfer however previous PM told them to vacate without our knowledge

Sounds like you did everything right. Your options would be to refuse to close w/o a credit if you catch this before closing (but I assume the tenants left just after you closed?), or to go after the tenant for breaching their lease, but that likely would cost more than you'd be able to squeeze from them.

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David Moudy
  • Property Manager
  • Indianapolis, IN
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David Moudy
  • Property Manager
  • Indianapolis, IN
Replied Aug 7 2019, 19:40

@Matthew Olszak I think we could have had contingency in place for tenants to stay with property.

Other suggestions we have been presented would be to use an estoppel which was first time ever hearing about this type of document as have never ran across this situation before.

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Matthew Olszak
  • Real Estate Broker
  • Chicago, IL
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Matthew Olszak
  • Real Estate Broker
  • Chicago, IL
Replied Aug 7 2019, 19:46
Originally posted by @David Moudy:

@Matthew Olszak I think we could have had contingency in place for tenants to stay with property.

Other suggestions we have been presented would be to use an estoppel which was first time ever hearing about this type of document as have never ran across this situation before.

The estoppel certificate is simply a document signed by the tenant confirming the lease terms/status. Your only way to enforce that, again, is by suing the tenant which won't usually get you anywhere. I think the only way to help prevent what happened is having open communication with the tenant so they understand their obligations under the lease (to stay put) and that you don't want anyone to move out. The seller preventing you from doing so is somewhat of a red flag. I understand limiting communication early on in the contract period, but once contingencies are removed you should be allowed to introduce yourself and company to the tenants to give them a heads-up at least that they don't need to move, which is what many tenants assume.

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Theresa Harris#2 Marketing Your Property Contributor
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Theresa Harris#2 Marketing Your Property Contributor
Replied Aug 7 2019, 19:57

@David Moudy  Very frustrating.  If there is a next time, I'd leave your contact info with the tenants and let them know what your plans are.  Trying to look at the positive, you can chose your own tenant and get it rented for Sept/before school starts.

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James Wise
  • Real Estate Broker
  • Cleveland, OH
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James Wise
  • Real Estate Broker
  • Cleveland, OH
Replied Aug 10 2019, 05:28
Originally posted by @David Moudy:

Would love to hear thoughts on this:

TL/DR: First Key Homes lied and took our tenants. A learning experience.

Want to share something that has recently happened.

We closed on a home recently that had a tenant in place.

During due diligence we asked for lease ledgers, copies of leases.

Everything looked good, and during walkthrough of property talked with tenants, they let us know that they wanted to stay with the property which was great.

During escrow period our buyers and us were asked not to communicate with tenants until after closing about change in property management or anything about transaction. Understandably so we thought because don’t want to confuse tenants about who property management was just in case we didn’t close. Perfectly reasonable request.

Per contract we stated prorated rent amounts were to be transferred to us at closing as well as security deposits.

We honored request to not reach out to tenants until after closing. The tenants lease was up in September(next month) so we knew we would need to reach out to renew leases directly after closing.

Day of closing we reached out to the tenants to inform them that we had indeed closed on the house, as well as wanted to offer lease renewal for them. When received a response back from them:

“THANK YOU FOR THE OFFER BUT FIRST KEY HOMES TOLD US TO VACATE DUE TO SELLING HOME WOULD NOT LET US KNOW IF THE NEW OWNERS WAS A RENTAL CO. SORRY , WE HAVE MOVED AS OF FRIDAY”

We later found out that the tenants were placed into another First Key Homes Rental property.

Can anyone say Tenant Placement Fees?

Leaving the property at close vacant, which is not the product we intended to close on and we were told not to contact tenants until after close.

Tenant snatchers?

Where not ideal, we now have to turn the property and didn’t have the luxury doing a move-out with the tenants. Can only move forward from here.

Moving forward action steps to help prevent this from happing again a few thoughts:

Further condition:

Current tenant(s) to sign lease with new property management company prior to closing.

Tenants to be informed of property management change 7 days prior to closing.

Closing contingent upon current tenants remaining with the property post closing.

Would love to know what your reactions to and or response would be to this.

 Lol man, that's kinda rough. Tenants move in and out all the time, especially during ownership changes so that's just part of the business but it's pretty darn sheisty that they told the tenants to move out and into another one of their homes. I think going forward you should obviously avoid buying a rental from these sellers. Beyond that making it a contingency that the tenant signs a new lease or at least has a lease that extends 60-90 days past your anticipated closing date is practical. As for notifying tenants of change of management prior to close, that's probably a non starter. Don't see why a seller would be willing to accept that as a contingency. Puts a lot more risk / unnecessary burden on the seller than necessary.

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Jay M.
  • Contractor
  • Fairhaven, MA
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Jay M.
  • Contractor
  • Fairhaven, MA
Replied Aug 10 2019, 06:21

Option #1,764,387 in how to get screwed in the REI business.......Got to give them props for originality.......I'd never heard that one before.

Now you know where to send every single tenant that doesn't qualify for your properties.  

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Clint Shelley
  • Surveyor
  • Dothan, AL
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Clint Shelley
  • Surveyor
  • Dothan, AL
Replied Aug 10 2019, 07:01

One of my personal faves: run a Craigslist ad "we recycle old non working appliances and TV's. Drop off anytime, day, night, weekends." Drop off point their main office.😁

Clint