Buying house and taking over the existing tenants

[Jorge Caceres]

Hey fellow BP fans!

I'm in the process of buying a house but have agreed to keep the existing tenants. I did some due diligence on them to make sure I wanted to do this. This is my first time taking over tenants. What should the process be?

I'm thinking I will have them sign a new lease starting the day I take ownership, with the same existing end date, and stipulate that this invalidates the prior lease agreement. What I'm not sure about is if I need something specific from the existing owner.

Thank you in advance for your answers

[Jeff Copeland]

The lease normally survives the sale and remains in effect. 

You can have the seller of the property sign an Assignment of Lease at closing, basically assigning all of the rights and benefits of the lease over to you as the new owner. This isn't absolutely necessary, but one could certainly argue it's a best practice. 

As mentioned by others, you should absolutely have the tenant(s) sign an Estoppel. It's a fairly simple document that asks the tenant to sign verifying things like:

My lease term is from ___ to ____ at ____per month

My security deposit is _____

I paid advance rent (i.e. last month's rent paid in advance) in the amount of ____ 

My rent is current through _____

Tenant Estoppels are often overlooked, but they can become very important at two particular times: 

Immediately after closing: Tenants have a tendency to say things like "I already paid my November rent early to the old landlord (sometimes they did, which leaves you scrambling to collect it from the seller, but sometimes they didn't, and having a signed Estoppel avoids this situation). 

Several months after closing: There's nothing worse than coming up on a lease expiration or renewal and finding out the tenant paid their last month's rent in advance, but the seller didn't transfer it to you at closing (a surprisingly common occurrence) OR having a tenant say they paid their last month's rent in advance and you don't know if that's true or not, and the seller now lives off the grid in Belize or something! 

Another issue that can pop up is you got a $1500 security depsost from the seller, but eight months later when the tenant moves out, they show you a receipt or canceled check that shows they actually paid a $2500 security deposit (you are likley coughing up the extra $1000 in this scenario if you didn't get an estoppel).

As you can see Tenant Estoppels are a powerful tool when it comes to ensuring:

1. The leases show the correct rents, deposits, and expiration dates (and if not, this can and should be addressed prior to closing, rather than finding out months later when you likely have to eat the loss).

2. The correct prorated rents and deposits get transferred to you at closing.

3. The tenant signs off on exactly what they agreed to and paid in terms of rents, deposits, and lease terms, so you both avoid any confusion after closing.

I have sample Lease Assignments and Tenant Estoppels I'm happy to share if you want to reach out.