Taking on existing tenants.. best approach?

Question

I am in the process of buying two duplexes that will come with existing tenants. The rents are currently below the market rent... What is the best approach to make it a win / win and get the rents up? If at all possible. Thanks!

Roy N. · Answer

In many jurisdictions, tenancy law requires you to honour existing leases regardless of what is written in your agreement of purchase and sale.  Some places also offer you the right to request the property be delivered vacant; meaning your only way out of existing leases is to have the tenants move before Close.

We usually accept the existing tenants and, after we get to know them a little, may offer them an incentive to sign a new lease to replace their existing one (if we want to retain them).

Zac P. · Answer

You have to honor any lease that they are currently on. However, you could offer them some kind of incentive to sign a new lease under your terms and at fair market rent. Easier said than done, but I've seen it done before.

Bill Kenny · Answer

Thank you for your response. very helpful!.. I wonder if because the properties in question are a foreclosure, does the bank honor the lease and collect the tenant rent in the interim? I seriously doubt the bank will make any concessions on modifying the lease. Even thought the previous owner has been foreclosed on is the lease still enforced until the end of the term?

Sam Leon · Answer

your purchase agreement or contract probably stipulates you to honor the current leases so not much you can do to raise rent until each lease is up.

The only possible leverage you have is to put a contingency in your contract that previous owner modifies their leases and get tenant signatures before closing, but why would a tenant sign a new lease with a higher rent?

Now two years ago I bought a condo and it was below market rent by $500 a month, the previous owner rented to a friend.  I asked the owner to credit me at closing the amount which is the market rent minus current rent times the number of months left on the lease, and he agreed.