I've been doing some diligence on an 8 unit apartment building by obtaining details from the seller's agent and running some analysis. Outside of the numbers, I've got a few details around this potential opportunity that I'm hoping to run by the BP community to see if anyone has any guidance/experience with my specific queries.
The building in question is fully rented. However, the agent says that there are no leases in place - only tenancy at will agreements. Additionally, the seller has no security deposits, and he only has the last months rent for two of the units.
I've reviewed the landlording info on the mass.gov website, but wanted to check with any more experienced Massachusetts investors here on BP:
- Is a new owner allowed to step in and require signed lease agreements if no lease was previously in place in Massachusetts?
- Has anyone had any experience with taking such a step, and any guidance on that front? Are tenants put off by this? Do you advise allowing the tenants to remain on a month-to-month arrangement in order to make sure they are good tenants and the relationship will work?
- Can a new owner ask for a security deposit from existing residents if they didn't have to provide one to a previous landlord?
I'm not particularly enamored with the idea of not having a lease agreement in place, even if its a month-to-month lease, so am wondering how this would play out.
Thanks in advance!
I don't have any experience with such things, however, if I was a tenant and then the new landlord wanted a security deposit from me, I would probably find it difficult to get you the money.
First, I would screen the tenants yourself. Legally, I don;t know what you can't or can do if they already live there, but it may be nice to know (if a tenant works at night and sleeps all day, for example).
Second, I would think of a creative way for them to get a security deposit. My first thought would be a "forced" saving plan. Something like, add $25/month to each rent check that would be added to their security deposit account. Once you reach that amount, they can continue with the current amount. Say, if they don't damage anything beyond a reasonable amount, they would get that lump sum back when they move out. Obviously, put this in writing and make sure they understand it. (While typing this, I was thinking about how you don't really know what damage they caused and the damage that was there before they moved in, so you might be out of luck for security deposits for these current tenants.)
To address your questions @Michael Cutting ...
1 Yes you can purchase the property and then require all tenants to sign leases. Since they are tenants at will now you will have to give them at least 30 days notice. As a TAW you don't need the agreement to be in writing but it's a good idea. You can find a Greater Boston Real Estate Board TAW agreement free online and print a few copies.
2 - Personally, I would say if you have good tenants (clean apartments, long-term tenancy, good payment history, etc...)it might be best to leave them as TAWs but just have them sign a written agreement.
3 - I'm not a fan of long term leases for apartments. I prefer the 30 day TAW. It gives you more flexibility if you need to evict, raise rent, etc...
4 - You can ask for a security deposit but you need to be sure you are familiar with the laws. Massachusetts has extremely strict laws for handling security deposits. You will have to have a statement of conditions filled out, give the tenant a receipt with the bank name and account number, you must pay interest, etc..
This could be a turn-off for an existing tenant that has never been required to pay a security deposit. Personally, I don't collect security deposits. It's not worth it, in my opinion, to jump through all the hoops that this state requires. I only rent to tenants by word-of mouth and don't advertise so I always know who I'm renting to usually friends of friends.
I have heard way too many stories of landlords not handling a security deposit properly and if the judge finds out about this during an eviction you could be ordered to pay the tenant 3X the amount of the deposit in damages.
Good luck. PM me anytime if I can be of help.
@Paul Brockmann Thanks for the input. Definitely agreed that asking for a security deposit from an existing rental tenant might be a tall task. I also think you're spot on with the idea of wanting to screen them myself. Most of the tenants have been in the place for at least 2-3 years, but a couple are much more recent, so have less track record with the selling landlord.
@Rob Beland Really appreciate your thoughts here, and I agree on all your points. I haven't really thought much about the lease vs. TAW idea, mainly because all of my own renting experience was for annual leases. My high level thoughts on the rental market in New Bedford (where the property is I'm reviewing) would be that most tenants are probably more suited to a monthly agreement, as you say - better for the flexibility for both parties. At a minimum I think it'd be worth getting a written agreement, perhaps just memorializing the TAW agreement rather than a full lease with specified tenure.
You also make a valid point on the security deposits - just reading that section of the mass.gov webpage on Landlord rights and responsibilities was quite a chore to understand the various steps and requirements involved!
Hi @Michael Cutting , great questions and it sounds like you have a potentially exciting opportunity.
I am going to have a slightly different opinion compared to @Rob Beland .
I agree about being able to require them to sign leases. I am not sure if you can ask for a security deposit if they are already a tenant, you should ask an attorney. My guess is yes, but you cannot hold more than 1 month's rent as security deposit and the amount collected must go into an interest bearing account (which is .05% today) - 1 account per tenant OR you have to keep track of individual interest allocated if you co-mingle money. I do not find this to be a big deal (neither do my qualified tenants) and always prefer to collect a security deposit.
Massachusetts makes it very easy to find the security deposit laws and tenant-landlord laws online. But again, a good landlord attorney will keep you most protected and the cost of legal advice far outweighs doing something wrong and it favoring the tenant's bank account.
I personally always like to have a 1 year lease (nothing longer for residential) and security deposit for the following reasons:
1) I am theoretically guaranteed to not have a vacancy during that time and I know what my income will be.
2) My tenants know they are legally responsible for paying the rent during that time. Yes, they could move out overnight and I may never get paid, but legally they are responsible.
3) A security deposit shows 2 things: 1) they have the money to afford security deposit and rent (credit and income verification will prove this anyway) and 2) they are responsible for any damage they create and there is an incentive (as small as it may be) to not leave the unit damaged.
You may also have the opportunity to increase rents when asking them to sign a lease, of course given 30 days notice. They don't have to accept it, but it's a way you can add value and correct an under-valued rent situation.
Get something in writing, regardless of TAW or 1 yr lease.
Some people may not like or want to sign a lease and for those you will need to either begin the eviction process or have them sign a TAW agreement. I would caution that whatever route you take, be consistent to each and every tenant because if you say one thing but do 2 or 3 things, courts will not look positively at you for inconsistent practices.
If/when you need to find new tenants, be sure to have your own application, use the GBREB forms, and I've used the smartmove background/credit check online system multiple times with much success.
BTW, you will find multiple opinions of what to do or not do... neither is right or wrong, everyone has their own system that works for them, so you will need to make that choice on your own. But you will need to be sure you follow all the applicable laws - everyone should be consistent in that regard.
I think you are getting some great advice in here.
I agree with most of what @Rob Beland and @Ray H. have said.
Won't regurgitate all the same stuff so will just add a few details and places where I have different thoughts.
Yes you can ask for leases with proper notice, or ask for formal TAW agreements to be signed and either of those can include a rent increase if you are inclined to do that.
One thing to keep in mind for notice is that it is 1 month or 30 days, whichever is longer. So in a 31 day month you need to give them the full calendar month and if you are giving notice to be out for March 1st you need to do it a few days before the end of Jan or they can stay the first couple days of March.
In this situation I would keep them all as TAW but have them sign an agreement that states all the leasing conditions. That way there will be no misunderstanding and if you do need to evict the rules are all in writing. Since you didn't screen these people and don't have personal history with them I would like the option to get them out of there in 30 days/1 Month if they are big pains and not have to have cause.
For security deposits they are tough to deal with in MA. For these units I would not bother. When you have turnover I think it is fine to get that if you want to and are ready to comply with the stringent laws. I would say that I would only get a security deposit if you are going to collect the maximum 3 months rent up front allowed by law. If you are not then get the last months deposit before security. WAY less hassle and frankly if you have a crappy tenant 9 out of 10 times the security deposit will end up going to unpaid rent anyway.
One thing not mentioned is that you should have the current owner and all the tenants fill out estoppel certificate. This is a form that basically states a bunch of facts about the units to give you verification of all the information. So it would say things like do you have a lease (if they say yes that is a big WTF! to bring to the owner), if they have a security deposit and how much if so, same for last months rent but it should also have things about who owns things like the appliances (Are you thinking you are buying 8 fridges but the tenants say they own them when they move? Or you think they own them but when it breaks they say you have to fix it because it came with the place) and stuff like who pays what utilities, is their parking and if so is it assigned and all that kind of stuff. You can find these kinds of forms here in the fileplace. Kevin Perk who does a lot of good landlording articles on the main blog did a good post on that a while back and I believe his form is here. This is just a fact finding form (though everyone should sign it) so I would not be worried about getting attorney review of it.
@Shaun Reilly makes a really good point about getting the estoppel cert. Definitely have them sign what they claim.
"I would say that I would only get a security deposit if you are going to collect the maximum 3 months rent up front allowed by law."
Shaun, when you said collect the 3 month's rent up front, do you mean first, last and security? Or something separate?
Yes @Ray H. I was referring to first month (Always get that of course!) or rent, the last month of rent and the legal limit of 1 month of a rent for security deposit. I never have collected key money, but that is an option too.
This does remind me of another little detail that is important to keep in mind. The last month of rent and the security deposit can not exceed the amount of the FIRST month's rent.
So if you ever do a rent promotion like "First month's rent for $1" then your deposits are only $1 each. Always make the 2nd month the cheap/free one.
More common for the small guy Landlord would be you have a vacant unit and tenants that are staring a 1 year lease on 7/1 but since it is vacant they agree to pay the last 10 days of rent in June and move in today. Get something in writing that they are paying their first month of rent for 6/20-7/21 and will only need to pay for 10 days of rent in July. Otherwise you technically should only collect 10 days of rent for the deposits.
@Shaun Reilly and @Ray H., this is extremely helpful and valuable information - thanks very much for discussing!
From all my reading/listening to the BP podcast/your guidance above/my own common sense, the biggest item boils down to making sure something is in writing, and I fully intend to make sure all ducks are in a row and written down as a landlord! I had some landlords myself that just did things off the cuff which worked out to varying degrees.
Great points to note on the 30 days/1 months notice and the estoppel certificate (which I've heard of before but never actually known what is was for!). I also plan to make the last months rent/security deposit conversation part of future tenant turnover in the event I make this deal happen - the existing landlord is a bit of a "lifestyle" landlord, for lack of a better term, and so my plan would be to slowly increase rents, establish formal lease agreements, security deposits, etc. as tenant turnover opportunities come up.
@Michael Cutting I'd say that since the Leases and Security Deposits are not up to speed, the rents are probably not as "market rate" as they could be.
I only do TAW.
I've never had luck when I inherited a Tenant in a 1-4. 8 is more like a Business with Property Management...
Thanks, @Mike Hurney . It would be interesting to see what kind of luck I have with tenants in this specific property. As I said above, the seller has managed this property for many years and has apparently not treated it like a business, i.e. having long stretches of vacant units while he took his time in making any needed repairs or maintenance. The selling agent has definitely tried to sell the high list price by saying this is a great opportunity to raise the below market rents, but the answer there will be (1) I'll pay an appropriate value based on the current rents, or (2) feel free to raise the rents and come back to me if they're all rented at higher rates!
(1) I'll pay an appropriate value based on the current rents, or (2) feel free to raise the rents and come back to me if they're all rented at higher rates!"
You got it Buddy!