Triplex under contract, full occupancy, want to purchase under FHA (need a tenant removed)

General Landlording & Rental Properties
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Triplex under contract, full occupancy, want to purchase under FHA (need a tenant removed)

Andrew Whicker
Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes

Hi,

A few facts:

- Triplex under contract

- 100% occupancy

- FHA loan secured

- 100% tenants on month to month leases

- Due Diligence stage is almost complete.

The questions:

- The tenants are long term and I think that any hope of getting a security deposit from them is low. I would like to live in the unit that needs rehab the most (currently renting very low, $330 / month). I was thinking that instead of using the eviction process, I could pay him a month of rent in order for him to leave quietly. How do I put this under contract or is it simply verbal?

- At what point does the eviction process start while the house is under contract? I am still in the due diligence stage and I did not want start an eviction process, find out I didn't want the house, and then have to stop the eviction process.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    12y

    Only the current owner can do an eviction. After you own it, you inform the tenant their month to month lease is not being renewed, according to your State regulations, or cask for keys if they cooperate.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    12y

    @Andrew Whicker

    Check with your agent, in some jurisdictions you are allowed to request that a residential property (or portion there-of) be delivered vacant - this would make it the Vendor's problem. Here the landlord law has special provisions for this scenario ... they carry with them a {minimum} 60-day close to allow the tenant enough time to move.

    I more human way of handling it, is to work with the chosen tenant and Vendor to find a new home for this tenant and help them move {again: at the Vendor's expense if at all possible}.

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  • Andrew Whicker
    OP
    Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes
    12y

    Thanks for the responses.

    The responses seem obvious. I'm having a hard time with communication on this project. It being my first house, I'm getting a bit burned out on bad communication.

    Have you asked for an extension on due diligence? Is it understood if you don't have the information you have asked for from the seller?

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  • Kimberly T.
    Investor · Colorado Springs CO · Member since 2014 · 535 posts · 253 votes
    12y

    @Andrew Whicker , I think you are using the term "evict" when you really mean "give notice to vacate." You only evict someone who has somehow broken the rental agreement, but it doesn't sound like this tenant has done that. Also, I am not aware of it being legal to evict someone from a property you don't own (unless you're a PM, obviously).

    You have a few options, depending on how far along you are in the purchase process:

    1) Request that the unit be delivered vacant by close of escrow. Talk to your buyer's agent to get this requirement added as part of the deal.

    2) Wait until close of escrow, then give the tenant notice to vacate. Check their rental agreement and your state/local landlord laws to confirm how long the notice period needs to be.

    3) Wait until close of escrow, then offer them "cash for keys." This means offer to pay them $XXX to move out by XXX date. Get the agreement in writing. This could be done in conjunction with option 2 above.

    As for getting a security deposit from the current tenants, that is something you should be credited for from the current owner at closing (in addition to prorated rents). Have you received copies of the current rental agreements, and signed estoppels from the tenants, demonstrating the current rents and deposit amounts? You should have requested these in your purchase agreement.

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  • Andrew Whicker
    OP
    Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes
    12y

    Thanks for another great response.

    Stated another way: These security deposit, pro-rated rents, etc in my purchase agreement - is this something that I have to ask a realtor to do or is this something that they should advise me on? I'm getting really frustrated right now. She knows this is my first house.

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  • Andrew Whicker
    OP
    Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes
    12y

    @Kimberly T.

    @Roy N.

    (Forgot to add your names to above post)

    Also, what is estoppels?

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  • Kimberly T.
    Investor · Colorado Springs CO · Member since 2014 · 535 posts · 253 votes
    12y

    I've always used my states' standard purchase agreements, which I think include a line about transferring security deposits and prorating rents at close of escrow. Regardless, the title company always seems to do it on the HUD-1 (the form where they account for all the money from the buyer and to the seller). I'm not a lawyer or an agent, but I've never personally had a problem with getting this done.

    Estoppels are a simple form where the tenant fills out the basic rental agreement info (i.e., month to month versus lease, rent amount, security deposit amount, who owns each appliance, amenities included in the unit, etc.). These are particularly important if the tenants don't have a written rental agreement with the current owner, or if the rental agreement is very old.

    Your buyer's agent should know all about this stuff and how to get it included in your purchase. If not, tell her to talk to her boss and get it handled for you.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    12y

    Andrew:

    Estoppel is a legal doctrine in common law to prevent a person {in the instance of a real estate transaction, the Vendor} from conveying or asserting an untruth.

    An estoppel letter or estoppel certificate is essentially a letter which outlines all of the terms of a tenancy (start date, place leased, rental amount, amount of security deposit, lease term, any covenants, etc) and is reviewed and signed by the tenant. You, or your lawyer, will prepare the estoppel letters based on the information provided by the Vendor and have them confirmed by the tenants. This is usually where you learn about any side deals or verbal agreements between the existing owner/property manager and the tenant.

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  • Andrew Whicker
    OP
    Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes
    12y

    @Kimberly T. , @Roy N.

    Okay, an estoppel letter looks like exactly what I need.

    The tenants are in fact month to month based on an 'understanding.' Basically, we have old leases and the tenants are still there. So.. the assumption is that they are month to month.

    This is something that I would have never known about: estoppel agreements. Thanks for the info.

    Cheers,

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    12y

    @Andrew Whicker an estoppel is pretty basic stuff where leases etc are involved. Sounds like your agent is a newbie to multi-unit housing. You might request they have someone familiar with multi-unit housing review the contract and paperwork and make any suggestions. Offer them a get out of jail free card if they do it now, vs the not so friendly call from my attorney if things go south later.

    Sounds like an old and poorly managed property. I can tell you from experience that you are just touching the tip of the iceberg. I hope you have a very health reserve account. You don't know what you don't know and it will cost you one way or another.

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  • Andrew Whicker
    OP
    Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes
    12y

    All signs point to a very mis-managed rental. I agree with you 100%.

    On top of that, I'm concerned that there are many unknown unknowns in the contract area (estoppels being an example). I'm very close to calling it quits on this property. The owner seems very lazy with information and the property was obviously left to it's own devices with little to no management. While that could provide quite an upside for a post-rehab rental situation, it could also lead to a money pit.

    The owners didn't even have the electricity (heat) to two of the units separated, so the owner is actually footing the electric bill (avg. $230 / month). Amazing.

    @Bill S.

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    12y

    @Andrew Whicker Based on what you have said, assume all major components are in need of an upgrade in addition to the cosmetic deficiencies. These type of turnaround projects are real money makers if you have the funds and time to make the turn around and get it for the right price.

    My experience is that you will end up with them all vacant within a year of closing. They especially won't like the new sheriff in town. Not to mention, when they see the place being spruced up they know rents are going up so they bail out knowing they can't afford it.

    How motivated is the seller? One strategy is to lowball them on the price and then beat them up with inspection some more. You can comb through the information (probably don't have it but you might get a copy of their schedule E for the property) they do provide and find things that differ from the listing. For example if you find out one tenant went a couple of months without paying that decreases the revenue.

    Happy investing.

    0Reply
  • Andrew Whicker
    OP
    Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes
    12y

    @Bill S.

    I have met one of the tenants whom I would like to stay (from a numbers standpoint) and he was def. a complainer.. I was actually concerned about how re-signing leases would go when I would want them to all sign year long leases while they've been on these month to month leases.

    I know they aren't going to like me having them pay electricity. My one saving grace would be that I would plan on putting new windows in right away, which is something that needs to be done.

    I don't have unlimited funds, but I am willing for my first property to be live-in up to a year. As I have a job on the side, I can fund as I go. However, this property may just be too much for me.

    Thanks for all your advice,

    0Reply
  • Wade Sikkink
    Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes
    12y

    Here's a couple suggestions. We bought a "fixer upper" apartment last year that had similar issues to what you are describing here. I agree with Bill S. that this will be a great money maker in the long run, but will take a couple years of work to get there.

    Upon closing, make all the tenants sign a new lease with you. If they don't have a current lease, you can require this. However, I would strongly recommend NOT putting them all on 1 year leases. Here's why: it will do little to protect you. If someone wants to leave, they are just going to leave. But, if you discover a tenant is behaving badly, you can't get rid of them. When we closed on our property we had all the existing tenants sign new 6 month leases with us. A few weeks ago the police were called to one of our apartments because the tenant had overdosed. She spend 3 days in jail, but now is out. We obtained the police report which shows drugs were found in the apartment. Unfortunately, we can't evict her for this. I know, surprising. The good news for us is that her 6 month lease is expired next month and we will give her a notice to vacate because her lease is not being renewed. Going forward, everyone is going to be on month to month leases so that if we discover any issues, we can get rid of them in a month. For lower end rentals I would recommend doing the same.

    Good luck.

    0Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    12y

    The house next door to me is a duplex rental. Market rate rent would be at least $1100 each side, but current long-term, month-to-month tenants pay $700 on one side and $500 on the other. Snatched out from under me by another buyer, who sent very nice letters to the tenants, informing them rent would be increased to $1000 per month in 60 days. CO law states a 30-day notice for month to month tenants to leave. An easier way to get rid of them is to just give notice the rent will be significantly increased. Give them time to vacate on their own. Maybe even explain that your mortgage is $XX and you just cannot afford to continue to rent at that low price. They know they are paying far below market.

    It does sound like you need better representation. Your agent should be telling you all of the things the BP group has been, like estoppel. If the agent is going to get that commission, they should EARN that commission. Good luck!

    [email protected]Podcast Guest on Show #261
    BiggerPockets
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