Investor · Woodstock, GA · Member since 2015 · 57 posts · 19 votes
Hello BP friends,
So, I found a good deal and I am about to purchase a property with a tenant in place. I am concerned with the lease that is in place. I haven't seen it yet. The house looks good and the tenant seems to take some pride in the house by keeping it clean. I haven't met the tenant but by the looks of it so far she's a keeper.
My question is, in the process of purchasing the property am I tied to the current lease as well, or can I give the tenant the option to sign my lease with same rent amount, with probably some more clauses added to my lease?
Should I ask the seller for the tenants deposit money?
What else am I missing here?
As always, I look forward to your advice. Thank you guys very much
IANAL but you will generally inherit the existing lease.
At the very minimum you want to see a copy of that lease prior to releasing your inspection contingency, so you can ensure that it's a lease you can live with at least until it is up (make sure your seller/landlord didn't promise the tenant anything crazy that you are unwilling to live up to... the tenant isn't a "bad guy" here that deserves to be bait-and-switched on).
Various things you could ask for on top of that if any spidey sense is tingling:
Estoppel cert, either semi-formal (eg, something you write up and have the tenant sign) or formal and notarized (to 100% validate who actually signed the thing). https://en.wikipedia.org/wiki/Estoppel_certificate
Proof of receipt of on time rent for 12 months, with it being reasonable for the seller to black out their account numbers and the like. If rent is $2247, seller can search their account online for all $2247 deposits and get you a quick list in 2 minutes.
Copy of Schedule E of seller's tax returns, with it being reasonable for the seller to black out their personal info and other properties they might own, so that you see exactly what the seller told the IRS she or he made, as a check against exaggeration.
Requiring all three of those things on top of a copy of the lease is probably a bit much; requiring any of it prior to being in contract would also be a bit much. Once in contract, it wouldn't be crazy to let the seller pick which one of those three they'd prefer to provide. Two if your spidey sense or BS Detector is pinged, telling you that someone might be lying or misrepresenting.
I will take your advice on the proof of rent payment from the beginning of the lease. Going to research that Estoppel Cert and ask my closing attorney as well.
Great points Chris, let me add that security deposits belong to the tenant and therefore you are entitled to the deposit. The estoppel cert. will confirm the held security deposit too.
@Andres Rivero, Yes you need to ask for a copy of the lease and some form of rental payment records as @Chris M suggested. If tenant is on a month to month, you can give notice and issue a new lease with a rent increase. If tenant is still on a lease agreement that hasn't expired yet, you'll have to wait until it ends. Be sure to check the landlord-tenant laws in your state on how to give proper notice and also know rent increase limits. In California, for example, the tenant's security deposit (if there is one) is transferred to the new owner at close of escrow. Check your state how this is done. Once you switch tenant to your lease, I would recommend you also have them fill out a rental application as well. Other items I'd ask for from the owner would be a copy of last six months of utility bills and a CLUE report to see if any insurance claims have been filed on the property.
Don't forget to ask for any walk through or move-in inspection documents so you have documentation of the property prior to the tenant moving in. Otherwise you may end up returning the entire security deposit if the tenant claims all damages were "like that when I moved in" and you have no evidence to disprove them.
If the previous owner did not keep move-in inspection documents, you can perform your own walk through inspection when you get the property to in case there are damages between then and move-out.
The lease hasn't expired. She's actually renewed her one year lease in April. I got a copy of it and reviewed it well. I also reviewed the bank statements from the last 12 months. She has paid her rent late several times but always paid the late fees. Rent is fair so I wont be increasing it till the lease is up. I will ask for the deposit at closing and have the tenant fill out my rental application. What exactly is a CLUE report? Is that a normal request? Thank for the advice.
@Todd Witt Thank you for the advice as well. I performed a walk through inspection on the property. I used to be a Home Inspector so that has helped me a lot. But I will ask for the move-in inspection report. I did notice where the owner did many of the repairs and some that are needed. Nothing major.
The CLUE report (Comprehensive Loss Underwriting Exchange) tells you if there has been an personal claims made on the property. It is entered into a database shared by insurance underwriters and lists claims made against the property for up to seven years. This can only be ordered by the current owner of the property. It's important because if there are claims filed against the property, it may make it difficult to find insurance at a reasonable cost. And no, many investors don't think to ask for it until a history of claims surfaces after it has been purchased.