Buying a property with tenant with no lease

Involved In Real Estate · Brooklyn, NY · Member since 2014 · 57 posts · 7 votes

Hello guys,

Working with an investor, who is putting an offer to buy a property that has 4 tenants renting out rooms with no lease, and 1 tenant with month to month lease and 30 days to vacate. This is in New York, anyone knows if the new owner able to break their arrangement and vacate the house?

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Will H.

Real Estate Broker · Boston, MA · Member since 2015 · 8 posts · 4 votes

10y

Leases stay with the property, and it looks like NY law is similar to our rules here in MA, so your client would have to give all of the tenants at least 30 days notice to vacate. If the end of the current lease term (usually the end of the month) if less than 30 days away, you usually need to bump the notice to the end of the next month (e.g. if you give notice on November 24th, so you'd have to give the tenants a December 31st end date). This includes the tenants without leases.

The tenants without leases are treated as tenants at will, and have the same basic protections as the tenant with a lease. Like MA, it appears that NY requires a 30 day notice to quit for tenants at will: http://codes.lp.findlaw.com/nycode/RPP/7/228

Also, be aware that, if NY is as friendly towards tenant as MA, your client is going to run into problems getting the tenants out in the winter if you wind up in housing court. I might have your client chat with an attorney about what (if anything) can be done to avoid that before moving forward.

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Will H.
Real Estate Broker · Boston, MA · Member since 2015 · 8 posts · 4 votes
10y
Leases stay with the property, and it looks like NY law is similar to our rules here in MA, so your client would have to give all of the tenants at least 30 days notice to vacate. If the end of the current lease term (usually the end of the month) if less than 30 days away, you usually need to bump the notice to the end of the next month (e.g. if you give notice on November 24th, so you'd have to give the tenants a December 31st end date). This includes the tenants without leases.
The tenants without leases are treated as tenants at will, and have the same basic protections as the tenant with a lease. Like MA, it appears that NY requires a 30 day notice to quit for tenants at will: http://codes.lp.findlaw.com/nycode/RPP/7/228
Also, be aware that, if NY is as friendly towards tenant as MA, your client is going to run into problems getting the tenants out in the winter if you wind up in housing court. I might have your client chat with an attorney about what (if anything) can be done to avoid that before moving forward.
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Aaron Montague
Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
10y
@Anna Hamann
Easiest way to deal with this is to not close until the tenants are out.
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Will H.
Real Estate Broker · Boston, MA · Member since 2015 · 8 posts · 4 votes
10y
Originally posted by @Aaron Montague:

@Anna Hamann
Easiest way to deal with this is to not close until the tenants are out.
This is definitely the best move. It could turn into a mess if they buy it tenanted in the winter, and since your client is an investor they can probably wait to close until it's sorted out by the current owner.
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Saurabh Passi
Investor · Staten Island, NY · Member since 2015 · 27 posts · 3 votes
10y
Not to buy the house with tenants, could make he deal fall apart. Your best route is have seller deliver vacant if possible, otherwise have the seller put good amount of money in escrow at the time of the closing and seller will get his/her money back when tenants leave. If the buyer is getting a good deal, then he should just close on the property and try to negotiate with the tenants to give them 30 days notice and give them some money to help with moving, last resort would be to go to court, where it could take 4 to 6 months to get the tenants out.
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Randi Plevy
Investor · New York City, NY · Member since 2014 · 141 posts · 65 votes
10y
Is the investor is getting the property at a great price because he or she is buying with the tenants? An evaluation needs to be made as to whether the tenants are willing to vacate. As the broker, you can help the investor perform some pre-contract due diligence by making a discrete investigation into the nature of the tenancies.
Additionally, are the tenants paying less than market rate? Are they paying on time? Is the investor planning on making improvements right away, or unit by unit?
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Kim Smith
Tallahassee, FL · Member since 2015 · 58 posts · 6 votes
10y
Many times tenants paying less than the current rate. Tenants will definitely out just do not close this.
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
10y
I would recommend cleaning up the mess before you step into it. If you purchase the property knowing they occupy the units without a written agreement, that could be seen as approval of the arrangement. I would not step into a situation like that.
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Anna Hamann
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Involved In Real Estate · Brooklyn, NY · Member since 2014 · 57 posts · 7 votes
10y
Hi @Nathan Gesner
Thank you for response. The deal is just so good, but the fact of the tenants in there makes an investor worried about it, so far they think they can figure something out once they get the contract in their hands, so we will see.
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Anna Hamann
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Involved In Real Estate · Brooklyn, NY · Member since 2014 · 57 posts · 7 votes
10y
Hi @Randi Plevy
Thank you for your comment. This is an estate sale, and it was not disclosed after the investor submitted an offer that the building has 5 tenants, and it is 1 Fam, so I am assuming they pay less then market value renting out rooms. The plan was to get the contract and ask for 60 due dilligence and go talk to the people there to gauge their characters and if they will be or wont be willing to leave
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Anna Hamann
OP
Involved In Real Estate · Brooklyn, NY · Member since 2014 · 57 posts · 7 votes
10y
Hi @Saurabh Passi
Yeah I agree, that is why we want the deal, the escow sounds great, I will suggest that to them. Not sure though how everything is going to go, since this an estate sale
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
Originally posted by @Anna Hamann:

Hi @Nathan Gesner
Thank you for response. The deal is just so good, but the fact of the tenants in there makes an investor worried about it, so far they think they can figure something out once they get the contract in their hands, so we will see.
I'm curious as to what makes the deal so good.
Are the tenants paying market rents?
Does the property cash flow with the current tenants at their current rents?
Will it cash flow at market rents?
Which pieces are we missing?
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Anna Hamann
OP
Involved In Real Estate · Brooklyn, NY · Member since 2014 · 57 posts · 7 votes
10y
Hi @Will H.
Yeah I know NY is very favorable towards tenants, so that is why they need to be extremely cautious. I wonder if after 30 days notice the tenants won't leave, then you have to go to court to file for an eviction, and that would take 3 - 6 months + attorneys fees, which they would like to avoid of course. So yeah I agree that the best way is not close before everyone is out
Thank you!
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Anna Hamann
OP
Involved In Real Estate · Brooklyn, NY · Member since 2014 · 57 posts · 7 votes
10y
@Aaron Montague and @Will H.
The issue here is that this is an estate sale, and whoever is making the decisions may not be so lenient, I'm not sure how that works though in estate sales, never been involved in one.
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Anna Hamann
OP
Involved In Real Estate · Brooklyn, NY · Member since 2014 · 57 posts · 7 votes
10y
@David Dachtera
The deal is good because it is a run down brownstone in a very good area, and if you buy right, then invest to renovate you will get a very good cash flow producing property. The current tenants are definitely not market rates, and just take advantage of the deceased owner, who was not taking a good care of the house anyway
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
Originally posted by @Anna Hamann:

@David Dachtera
The deal is good because it is a run down brownstone in a very good area, and if you buy right, then invest to renovate you will get a very good cash flow producing property. The current tenants are definitely not market rates, and just take advantage of the deceased owner, who was not taking a good care of the house anyway
Have you run the numbers to back those statements up? (May be an obvious question. It just seems like there's a lot of up-front work and want to make sure the return is there.)
What price can you get it for to "buy it right"?
Do you have an estimate on the repairs / rehab?
Does the "buy it right" price fit into the MAO formula?
((ARV x 0.7) - (repair costs) - (closing costs to acquire / resell) - (your desired profit) = MAO)
Just want to make sure you haven't "fallen in love" with it, that you're making a sound business decision.
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Harriet Baldwin
Financial Advisor · Elmira, NY · Member since 2015 · 132 posts · 67 votes
10y
Originally posted by @Anna Hamann:

Hi @Randi Plevy
Thank you for your comment. This is an estate sale, and it was not disclosed after the investor submitted an offer that the building has 5 tenants, and it is 1 Fam, so I am assuming they pay less then market value renting out rooms. The plan was to get the contract and ask for 60 due dilligence and go talk to the people there to gauge their characters and if they will be or wont be willing to leave
Agree with "get seller to deliver vacant" consensus.
If that isn't possible, talk to a landlord/tenant attorney - if the house is being used for an unapproved use, and/or if the occupancy is over allowable limits, you might have an easier time in court. I wouldn't count on "gauge their characters" - folks who are big on following rules wouldn't be 5 to a home with no written lease.
The landlord/tenant attorney could also give you guidance on how long the process is likely to take - investor could agree to pay for process but not close until after vacant (so if it becomes an unending saga your investor could walk away) - although that would make more sense for an owner/occupant, as an investor I'd be more likely to go to the next deal.
If the home were in an area with more landlord-friendly courts, I wouldn't be so concerned. We have purchased homes and then given notice to tenants - but around here that's a little less than 3-month process worst case, more like 7 weeks best case for a 30-day notice. I would be a bit concerned about the estate's lack of disclosure - typically occupancy and rents would be known before making an offer...
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Will H.
Real Estate Broker · Boston, MA · Member since 2015 · 8 posts · 4 votes
10y
Originally posted by @Anna Hamann:

Hi @Will H.
I wonder if after 30 days notice the tenants won't leave, then you have to go to court to file for an eviction, and that would take 3 - 6 months + attorneys fees, which they would like to avoid of course. So yeah I agree that the best way is not close before everyone is out
Thank you!
No problem! You would have to evict if they didn't leave (assuming NYC is the same as MA). It's winter now, so that would be my primary concern. Housing courts are usually loathe to evict tenants in the winter.
If it's a good deal, it may still be worth moving forward on. If the seller won't agree to wait on closing, I would make sure that your client consults with an attorney to get an estimate of the worst case scenario. That way they can factor any potential eviction costs into their financials to confirm that the deal is worth it.
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Damon Bodine
Real Estate Agent · New York City · Member since 2014 · 359 posts · 195 votes
10y
@Anna Hamann   You definitely want to get the seller to deliver the unit vacant if possible. There is a good chance if its an estate sale they won't agree though....   and you'll have to take as is including any existing tenants, violations, back property taxes etc...
If you take the building with tenants its likely going to go 1 of 2 ways. #1 You'll have to file eviction paperwork. This will take 3-6 months to get it all the way. #2 You could offer to buy them out which sometimes is the path of least resistance .
If less than 6 units the units likely are not rent stabilized. But make absolutely sure and look extensively into the DHCR. (hire a professional to do this for you)
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Anna Hamann
OP
Involved In Real Estate · Brooklyn, NY · Member since 2014 · 57 posts · 7 votes
10y
@David Dachtera
I appreciate your concern with it, and if this was my own deal I would use a formula to help me understand. In this case I am working with an investor, who is using his own calculation. All I know is that the property priced way under market, and the location is superb.
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Anna Hamann
OP
Involved In Real Estate · Brooklyn, NY · Member since 2014 · 57 posts · 7 votes
10y
@Damon Bodine
it is a brownstone building in Clinton Hill in BK, it is not rent stabilized, because it is configured as 1 fam for now, and you can make it 2 fam. And yes, this is one of my concerns, that since it is an estate sale, the Sellers may not agree to this, but we will shall what happens. Appreciate your response
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Asa Gunderman
Rental Property Investor · Knoxville, TN · Member since 2015 · 45 posts · 24 votes
10y
If you're his agent, I think you've done your part by alerting your client to the possible risks. Beyond that, it's their choice as an investor if they are willing to accept the risks. I wouldn't stress it. -Asa
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
Originally posted by @Anna Hamann:

@David Dachtera
I appreciate your concern with it, and if this was my own deal I would use a formula to help me understand. In this case I am working with an investor, who is using his own calculation. All I know is that the property priced way under market, and the location is superb.
You still want to "run the numbers". The deal has to make good business sense, all "opinions" aside. If the investor has his own formula make sure (s)he can explain it. If the explanation is lucid their understanding may be sound, but still use your own judgement.
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