Does anyone know the best method to securely transfer a lease and security deposit during a home sale? I have a friend whose property in northern Virginia currently has a 2 year lease on it, which most home buyers will not go for. However an investor would and can produce between $400-$600 monthly NOI. Haven't found anyone interested so far however when the time comes we are trying to figure out the best approach for safely transferring security deposit and lease without any issues. Would Estoppel suffice?
most buyers in my experience want the tenants to enter into a new lease application thus they are screened for credit issues, income etc anew and the security deposit is understood to transfer from old to new owner at close, but hopefully an expert in VA will chime in on that legality.
Leases run with the property even with a sale. So, there is nothing to do to transfer the lease. It simply remains in force after the sale.
The security deposit and partial month rent would show up as a debit for the seller, credit to the buyer on the HUD-1.
An estopple letter is useful to the buyer. It outlines the key terms of the lease, and is signed by the tenant. Its a way to avoid situations after the closing where the tenant says "yeah, I know the lease says $1000 a month, but we had a verbal agreement for $800."
Also realize that investors will typically pay a lower price than an owner occupant. You certainly will not get any premium for selling an already-leased house to an investor. So, it may be more profitable to see if the tenant would take a buyout to leave early and then sell it to an owner occupant. Especially if its in a homeowner area vs. a rental area.
Investors will sometimes pay strong prices for homes that are leased at profitable rates, especially if there is a strong payment history. I bought one of these when I was building my rental portfolio and I recently sold a property with a tenant in place to an investor. When I purchased mine I did so with a bank mortgage loan and it was cash flow positive from day one. The property I sold was to a foreign investor for cash. The 3+ year tenant who was current on the rent was a definite plus for the buyer.
The transfer was easy. The buyer had the lease documents prior to closing and simply notified the tenant of the sale and how to pay the rent.
When I bought it was even easier as I retained the existing property manager for a year or so after the purchase. The PM simply sent the payments to me instead of the previous owner.
You can use an assignment of lease if you want to, but as one of the posters pointed out, the property comes with the lease by function of most State law. I suspect that's the case in Virginia as well.
Thank you guys so much, this is so helpful!
I was going to write a similar post with the same question but searched and found this post first. I am closing this month on a duplex in Shawnee Kansas that is currently rented out on one side. The duplex is currently managed by a property management company. What should I do in this situation if I am planning on managing the property myself? Do I just contact the seller and have them send me a copy of the lease and records? What would happen if the seller is under contract with property management company? I assume they would pay any early termination fees? Thank you in advance for your help. This post was very helpful for me. -Ian
I'd put in the sales agreement that the seller is responsible for terminating the agreement with the PMC. Then, you would get the security deposit from the seller in escrow, as I understand it. I'd also put in the agreement that the seller is to notify the tenants that you are the new owner, and that future payments of rent are to be paid to you.
Then, after closing, you simply notify the tenant that you are the new owner in writing, with instructions on where to send their rent. I know this sounds like redundancy, but they're also going to want to hear it from the owner or property management company that they're supposed to send their rent somewhere new.
The tenants are under no obligation to sign a new contract. And you have to honor the old one, except regarding where to send payment. If you can get them to agree to a new contract, that's fine.
That's my understanding, anyway.
Sue, thank you I really appreciate the response.
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