4-plex has potential tenants inheritance problems?

Question

Hello BPers,

One out of many great things I've learnt from reading bp posts and listing to podcasts is, to be cautious when coming to inheriting tenants from previous owner. This is something I need your help by analyzing a 4-plex I just reached mutual yesterday.

1. The property is located in an improving class B-/C area. Managed by a PM company. units 1&2 have been occupied as $1295/m for 2 months. unit 3 in eviction process (close to the end). ads for unit 3 has been out for two weeks, and no potential tenants yet. unit 4 has touchup work going on for market ready soon. P&S agreement says all units need to be in leasing for $1295/m before closing.

2. based on comps, the leasing price is 5-10% higher than market price. (I am asking for help from local PM to confirm.) There is clear intention that seller raised the rents two months ago for a better sale price. Because of the eviction, I am concerned about the quality of tenants for unit 1&2 currently occupied.

Options I have:

1. wait for the same PM to fill up unit 3&4 once tenant moves out, given eviction closes soon.

2. take over the units and advertise the property and screen tenants on my own (or with help from my own PM).

3. back off, because of too many red flags implying that we might end up with more evictions in the near future. Other than the tenants concern, overall, i am happy with this property.

In any case, I am asking the seller/PM to show us tenants applications and screening they have done.  I understand that, being a landlord, eviction happens. Am I being over-cautious here? Thanks in advance!

Account Closed · Answer

Presume your financial analysis is for all units leasing at $1295/month so that's what was agreed to. Let the seller handle it. If you believe the rents are inflated and will go down because of tenant turnover, adjust your purchase offer price.

Qingqing Gan · Answer

Thanks all for your inputs. It's a great idea to leverage this as a negotiation tool for price deduction, if the tenants can't be placed in the price the seller sees.

Peter MacKercher · Answer

@Qingqing Gan If you have an idea of what market rents are for similar units then run your numbers at rents that seem reasonable to you. Also, don't rely on any pro forma documents they've provided. "Trust but verify". Get as much financial disclosure as you can -- actual bank statements, ledgers, etc, so you can see what and when those new tenants are paying. I've seen owners fill up a building to prep it for a sale before, so that's not that unusual, unfortunately.

Since those tenants were placed just a few months ago, see if you can get their applications as well. I'm not sure on the legal side of this, but with tenants being placed so close to sale that seems reasonable. If you're comfortable with the tenants then waiting for the other units to be filled makes sense (avoids leasing fees with your PM), but make sure that new tenants require your approval.

If you know what the market rents are and your numbers work still for that property, then factor in what tenant turnover might cost and consider using that as a negotiating point on price. Assume a full turnover.

Inherited tenants are a mixed bag -- some I've had are great, and also the worst tenants I've had in the last few years were inherited. Set expectations soon and do not bend from what the lease requires from both of you. So, set your own expectations, too.

Enrique Jevons · Answer

If your Purchase & Sale Agreement state all the units must be leased up for $1,295, then I would make sure that contingency is being met.

If the seller is not able to perform, then you have some very good leverage to negotiate a lower purchase price in order to take on the additional risk and costs associated with a vacancy and an eviction.