Is it ethical and legal to do a "Fixer Upper" lease?

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Is it ethical and legal to do a "Fixer Upper" lease?

Will GastonPro Member
Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes

All:

I have a 90 year old duplex that is in very bad shape in a great location.  Some roof leaks, questionable heat, foundation issues, etc.  It's just really old and technically it might be livable, but that's about it.  My goal is is to tear this property down in January 2019 and build a new property there.  

Until then, however, I would like to get something out of it. But it makes zero sense to spend hardly anything on it, when I'm going to tear it down in 24 months. I like to take really good of my properties, but it would make more sense to let it sit vacant for two years than to spend 20-30k in Cap X.

A couple of questions:

1) Is it legal in South Carolina (or any other state) and ethical to rent the property that is in very poor shape to a handy person for a greatly reduced price? The market rate on this property is $900/month (even "As-Is") but I would rent it for say $500-$600.

2) Has anyone every done this? How do you structure a lease for a property like that? 

I'm sure somebody would rather save the $300-$400/month in paying rent and take care of any repairs, but not sure if I should do this or not.  FWIW, the property was previously rented when I bought it in it's current state.

Thanks for any advice!

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Kevin Siedlecki
Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
9y

@Will Gaston - It's not gray at all. It should be very black and white. Check your local laws. They will tell you exactly what makes a unit considered livable. Usually it includes little more than working plumbing, electricity, and heat. 

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  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Will Gaston - "Livable" is the keyword, and you say it might be. That makes all the difference. If it will pass inspections for a livable unit, then the low rent is a product of the poor but livable condition, and there should be no ethical or legal issues with this.

    2Reply
  • Will GastonPro Member
    OP
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    9y

    Thanks @Kevin Siedlecki. I'm just not 100% sure that it would fall under that as it seems to be an incredibly gray area. I don't usually deal in this space.

    0Reply
  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Will Gaston - It's not gray at all. It should be very black and white. Check your local laws. They will tell you exactly what makes a unit considered livable. Usually it includes little more than working plumbing, electricity, and heat. 

    4Reply
  • Jeff Filali
    Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    IMO, there's nothing wrong or unethical with doing that and to the tenant willing to do it, as long as everything is disclosed up front, you're helping them. As @Kevin Siedlecki said Running water, working plumbing and heat should probably qualify as livable.

    1Reply
  • Will GastonPro Member
    OP
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    9y

    Thanks @Jeff Filali. Have you ever done a fixer upper lease?

    0Reply
  • Christopher Giannino
    Real Estate Agent · Hamilton, NJ · Member since 2013 · 464 posts · 311 votes
    9y

    @Will Gaston I'm not going to comment on whether or not its ethical or legal because as

    @Kevin Siedlecki stated, you need to check your local laws.  

    Although this thought might sound like a great idea, I think it can definitely lead to sticky situation between the tenant and yourself.  In my opinion, there are a lot of questions that I would think fall within the gray area..  What are the responsibilities of this tenant?  Who pays for all the materials?  Who chooses the grade of the material?  What is the timeline of the project?  What happens if the tenant doesn't abide by the stated timeline?  What if the work is sloppy because they want to cut corners?  And these are just the basic first thoughts that pop into my head..    

    For me, I just think its too risky of situation if it is indeed legal.  Best of luck!  

    1Reply
  • Will GastonPro Member
    OP
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    9y

    Thanks @Christopher Giannino.  Honestly, I don't really care that much about what the tenant does to the property as far as repairs, materials, etc because I'm going to tear it down anyway. Just looking for a "win-win" where somebody gets really cheap rent and I get something in the meantime. Seems like this would work, but yeah it does seem a little sticky.

    0Reply
  • Account Closed
    Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    @Will Gaston  As part of doing assemblages this comes up fairly often.  I tend to do one of two things.  If the house will not be able to be moved out, I tend to simply bulldoze it.  If it will be able to moved I might fix it up some and rent it.

    2Reply
  • Will GastonPro Member
    OP
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    9y

    Thanks @Account Closed.  I agree with you. The earliest I'd be able to bulldoze it would be in 2 years, however. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Account Closed  in our deals.. we are like you usually not worth the brain drain to make 500 to 700 a month on a house that we are going to demo... and this last year 7 of the homes we demo's or going to demo were extreme hoarder houses anyway no one could live there but the previous occupants.

    In our PDX market rents are so hot and have rose so high so quick that for lower market price tenants no not to say a darn thing.. LOL..

    as for trading work for rent.. that has never worked in all my years of doing this.

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    2Reply
  • Jeff Filali
    Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Will Gaston:

    Thanks @Jeff Filali. Have you ever done a fixer upper lease?

    No, I considered it on one because I had multiple people asking if I'd do it.  But I ended up selling it instead.

    1Reply
  • Will GastonPro Member
    OP
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    9y

    @Jay Hinrichs I think I may have not explained the situation is clearly as I should have.  The only work that would need to be done on the property would be work that would have to be done to continue to make it livable i.e. if the heat goes out, the water heater stops working, etc. I wouldn't need to have any improvements done. 

    Does this make sense?  

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    I know plenty of tenants that would gladly take you up on your offer, move in, stop paying no rent, take you to court to force you to make improvements and continue living in the property after you are ready to tear it down. They are called professional tenants.

    If I were you I would bulldoze the place now and save some money on the taxes till you are ready to rebuild or mortgage the place to the hilt and invest the money in other properties.

    I would be happy to let it disintegrate into the lot for decades if the money was earning it's keep elsewhere.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    Will  work in exchange for rent in my personal experience NEVER works.. better to rent it for a few hundred a month and tell tenant your doing nothing.. find a illegal alien that will not fight you.. that's common.. Not really PC but that works.

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    JLH Capital Partners51 Review
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    4Reply
  • Stephen E.
    St Thomas, Ontario · Member since 2013 · 575 posts · 408 votes
    9y

    @Will Gaston I think what is being said above is that in many jurisdictions it does not matter whether you say the tenants take it as is or not, and it does not matter whether you get them to sign something to that effect, the requirements are that you provide habitable property. Fail to do so and they may well stop paying rent and at the same time you may be forced to make repairs to bring the place up to standard. I see two options: demolish now or leave vacant. Putting a tenant in there creates substantial liabilities. You do not want to be a slumlord.

    2Reply
  • Will GastonPro Member
    OP
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    9y

    @Stephen E. I'm with you on that. However, couldn't you get around that by just doing a month-to-month lease up front? If they aren't happy or I'm not happy then we can just end it all after 30 days? 

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    9y

    If you are going to lease to a couple tractor or have dynamic person just stipulate I'm the lease for ensuring house is habitable and do any repairs to make it habitable before they move in exchange for the reduced rent. Documentation is key.

    1Reply
  • Will GastonPro Member
    OP
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    9y

    Have you ever done a lease under this arrangement @John Underwood?

    0Reply
  • Andy Luick
    Real Estate Investor · atlanta, GA · Member since 2013 · 456 posts · 237 votes
    9y

    As long as the property is properly zoned and livable...meaning it's not zoned commercial...you can certainly rent it with tenant to perform any and all maintenance.  We've done a ton of leases that way and assumed all repairs for properties we had in our shared housing program.  We still do it that way.  For what you're doing, you might not tear it down in 2-years....as who knows where the economy will be.  In the meantime, you're taking in some revenue and that's always smart.  Just put a clause in the lease that says tenant is taking property as-is, where-is and is responsible for any & all repairs & maintenance required.

    2Reply
  • Will GastonPro Member
    OP
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    9y

    Appreciate it @Andy Luick. Do you ensure that all of your properties are livable before they're rented? i.e. that it has adequate heat, hot water, etc? My other issue would be what to do if a major expense occurs like a water heater rusting out. Not sure it's fair to have a tenant pay for a new water heater?

    0Reply
  • Gail K.
    Augusta, GA · Member since 2014 · 1k+ posts · 1k+ votes
    9y

    For what it's worth....I once had a family of EIGHT stop by to view one of my 3 bedroom, 2 bath SFH's. No way was I going to rent to this large an extended family (although it was interesting to hear how the sleeping arrangement were planned; grandma was going to sleep with two young granddaughters, three teenagers were going to share a room and the one married couple got to have their own bedroom.)

    This was a nice, polite,  hardworking, redneck extended family on a very limited budget but with what appeared to be good working knowledge regarding roofing, electrical and plumbing.   I sent them on to a landlord friend who had a LARGE house that needed repairs but fit them much better space wise.   He gave them greatly reduced rent in exchange for working on the house and it ended up being a good deal for everyone involved.   The landlord provided the supplies, the tenants did the work.   Turns out what they had been living in before moving to the area was much worse than even this house so they were quite happy to have this deal.

    Gail

    2Reply
  • Ciro Affronti
    Investor · Scottsdale, AZ · Member since 2014 · 52 posts · 23 votes
    9y
    Originally posted by @Will Gaston:

    All:

    I have a 90 year old duplex that is in very bad shape in a great location.  Some roof leaks, questionable heat, foundation issues, etc.  It's just really old and technically it might be livable, but that's about it.  My goal is is to tear this property down in January 2019 and build a new property there.  

    Until then, however, I would like to get something out of it. But it makes zero sense to spend hardly anything on it, when I'm going to tear it down in 24 months. I like to take really good of my properties, but it would make more sense to let it sit vacant for two years than to spend 20-30k in Cap X.

    A couple of questions:

    1) Is it legal in South Carolina (or any other state) and ethical to rent the property that is in very poor shape to a handy person for a greatly reduced price? The market rate on this property is $900/month (even "As-Is") but I would rent it for say $500-$600.

    2) Has anyone every done this? How do you structure a lease for a property like that? 

    I'm sure somebody would rather save the $300-$400/month in paying rent and take care of any repairs, but not sure if I should do this or not.  FWIW, the property was previously rented when I bought it in it's current state.

    Thanks for any advice!

     We have done it twice before when we had properties we planned on knocking down in a year or two, but wanted to get some cash flow in the meantime. In both cases, it was a single family home on a big lot, and we were going to level it to develop in the site in the future. We didn't want to spend the full rehab price to fix up the house.  We figured if we made it livable and up to code/basic fixing (paint, carpet cleaning, etc) we could get someone to rent it. We rented them for a bit below market, and got some money coming in while we planned the upcoming project. It worked out well.

    However we at least made sure the property was clean, free of debris, bugs, termites, livable, and was up to city codes and was insurable. If you can do that on your property and someone is willing to rent it then then you're probably in the clear.

    Good luck!

    1Reply
  • Sid Leibowitz
    Contractor · Glen Cove, NY · Member since 2016 · 209 posts · 89 votes
    9y

    The only issues are that you become a landlord and responsible to maintain the property as per the lease and the local code. You will have to maintain the structure, mechanical system which includes plumbing heating and safety issues like leaking or rotting roof. You may have more expenses in case of hurricane. You have to do pest control and maintain insurance. As landlord you have many issues that you are accountable for. When it is time to get the tenant out you may find that is not that easy. Tenants have rights also. You should seek legal advise on this lease from a local attorney that is familiar with your LOCAL real estate laws. All of this and it may not pay you to rent.   

    0Reply
  • Deanna O.
    Rental Property Investor · San Diego, CA · Member since 2010 · 366 posts · 314 votes
    9y

    I did have a friend who rented in a pricey part of Orange County for greatly reduced rent in a apt. building that was going to be torn down. She knew ahead of time that it was going to get torn down. Lack of maintenance was a bit of a pain toward the end, but it was also great to have dirt-cheap rent and lots of freedom (wanna paint the walls red? No problem!). She loved it, but the sticky part was that when time came the owner wanted to demolish it some of the other tenants really, really didn't want to leave their sweet rent deal, which I guess would be the danger in something like this.

    SFR in theory should have fewer issues, but if I were doing this I might strongly consider a rental agreement that had an escrow account for the tenant upon move-out sot there is a carrot-n-stick at the end of the two years; Say you are considering $600 for the rent. Make it $700, and every month $100 goes into the TENANT'S escrow account (it is their $, but you have control until they leave), so that the longer they stay (benefiting you) the more they benefit. If they fight leaving at the end, the expenses of the battle can come out of THEIR $, not yours. Added to a reasonable deposit, after 2 years they will be looking at $3k CASH to move into a new place, or fight a losing battle to stay for a few extra months and walk away with $0. (in theory, I'd also say be willing to write a deposit check from the escrow account to their new landlord in two years, with a bit of due diligence to make sure the landlord is legit & not a scam).

    As far as maintenance, maybe a clause that says habitability repairs can come out of the rent (but the new hot water heater belongs to you), but if there is something really, really major they will leave & you have no responsibility beyond returning maybe the past 30 days rent (again, carrot/stick). They place is a dead loss to you if it's unrented, but there are lots of people who could benefit & would be willing to take the risk/deal with the inconvenience. 

    I will say that something like this would NOT be anything I would take on with someone who was dodgy in other ways (felon, drug addict, etc). This is one of the few situations I also might consider a lawyer to do the final rental agreement after the details were hammered out. You are likely looking at ONE tenant for 2 years (or whenever you get around to tearing down -- could be longer), so might be worth $300 for a bit of legal insurance that would stand up if a renter's rights advocate got involved might nip the "I didn't understand what I was signing" sniveling that could come when the tenant is facing losing the home they have come to love (with it's cheap rent, red walls,and bathroom with rainbows and dolphins....).

    2Reply
  • John Becker
    Investor · North Kingstown, RI · Member since 2016 · 3 posts · 0 votes
    9y

    No.
    No.
    No.

    The tenant will be all smiles on day one and everybody will feel happy. You will never see the second month's rent. You will send them a 5 day demand or whatever is required by your state eviction laws and they will call the building inspector and they will meet you in court with a notice of violation. You will be unable to evict them with the property violations listed in the letter uncured. Then they will trip and fall and sue you.

    That's my experience in RI.

    People are demons that have lost their wings.

    Bulldoze it.

    0Reply
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