Rocklin 路 Member since 2017 路 115 posts 路 37 votes
Hi BP,
I have been in contract for a duplex here in Sacramento. Estimated closing is mid July.
There is a long time tenant in one of the unit who have lived there since previous previous owner..their rent is so low compared to the are and they are on month-to-month.
My agent met them and told me that they are very nice family of 4. Polite mannered and such, he recommended me to keep them as tenant.
I told him, that I want to meet them someday as we get closer to closing date. In the meantime, I have prepared my lease agreement and I am pretty confident I've covered all the needed basis.
My question is:
-Should I get the current tenant sign an estoppel and possibly my new lease before closing?
-I plan to raise his rent a little bit ($50-$75). I know I have to give 30 day notice (the notice will be given on 7/1 - about 2 weeks before closing), so can I put the lease start date 30 days from the closing date? or perhaps starts 8/1.
- If all of the above are not possible, what's the FIRST THING I need to do after closing?
I apologize if this has been covered somewhere, I tried to look but could not find exact answer.
I will drop in my two cents here. First off, Tenants and current owner signs off on estoppel. You do not want a tenant say they paid 3 months ahead after you have closed. Also you need to know the deposit amount and repair request that have not been addressed. As far as the inherited tenants, I have never had a tenant 30% below market. It was usually within $100.00.
The day I close on the property, I go to the property and hand each tenant a letter or leave it on the door, where new rents will be mailed, that no cash will be accepted, it has to be in check or money order. I also inform them that at the end of their lease I will be offering them a new lease but the rents will increase, usually half of what they are below market on a six month lease. The next lease will be for a full year at full value.
I lose some tenants right up front, some say they will find another place. Usually, once they see the property is being cleaned up, deferred maintenance is being done, the good ones stay. I have one tenant that told me he was moving 10 years ago. His rent when I bought it was $200 per month, today he is at $575, but he recommends pretty regular and warns me of tenants that would be bad for the neighborhood. (the difference is, his sink doesn't leak, the old clay sewer pipe was replaced, so everything drains, he has insulated windows and new steel front door, and this year he got central heat and air. When the tax statements came in and my taxes went up again, i informed him that starting February when his lease was up I would have to raise his rent to $600. His statement was, "Raise it I don't care, I know I will be warm and dry and if I am not you will play Hell getting me that way." Guess what he is right.
Back to your point, I do not see how you let a 1200 rent go for 800, but you do need to be human about it, even if it is business. I would inform them that rents are going up and if they can afford it you would love them to stay, but give them the modified lease of raising the rent $100 every quarter until it is at market. If it needs some maintenance and they see you taking care of it, they will want to stay with you. But it gives them a way out.
I noticed above, someone recommended a month to month only, I personally hate these. My shortest lease is 6 months and that is to get someone up to market rents in newly acquired properties. I like 1 year leases and if they double the deposit, I will give them a 2 year lease, (for their protection against rent raises.)
Food for thought you can always get good tenants, that will stay when they move in at a little below market value, it is a headache to move for the tenant, so you can adjust your rent each year to get back to market in small increments. Very few people are willing to move for $10 to $25 more a month. One month vacancy, because you are at top dollar will cost you more than taking a little less rent for a qualified renter who is dependable and has staying power. Landlording is a people business. It is business but we are dealing with their daily lives, provide quality for the money and make sure they pay ontime and keep the property in good shape. Everyone comes out ahead.
Hi @Tony H. I'm sorry: What was the basis for your agent's recommendation that you keep the tenant? Did they screen these folks, collect an application, verify income, or do any due diligence?
Yes, both the tenant and current landlord should each sign estoppel letters. This should have been a condition of the purchase. Your agent should have proposed (if not insisted on) this for your protection.
I'm a bit alarmed. Is this agent experienced in transactions with a tenant in place? Are they going to be managing the property once you close?
@Mitch Messer Thanks for the heads up!. This is my first rental property. I am thankful enough to have only 1 inherited tenant instead of two.
Anyhow, my agent didnt have any basis at all other than he met them personally in person. All I get from the seller is a copy of the month-to-month lease. Nothing else.
i am still in the process of getting the loan. Should I get the tenant and seller to sign estoppel now?
My agent said he has helped a lot of investors before. Not sure if he had an experience like my situation now =( should have asked that in the beginning.
I told him that I do plan to increase their rent as soon as I am the new landlord.. they are paying $875 now, and market is like $1200.
I am sure if I raise all the way to $1200, it'll be raising hell. So I dont mind with raising just $50-75 for the next 12 months, but every renewal will have an increase until it reaches market price.
@Tony H. Yes, I'd want estoppel now. I'd want both tenant and seller to confirm the terms of the lease, the balance of the security deposit account (if any), and whether there are any undisclosed repairs. I'd also want to see the property repair history and the tenant's payment history.
Lastly, I think your gradual rent increase plan is wise. That said, it would be nice to know now whether, based on their income, the tenant could even afford $1200/mo. So, before you offer them a 12-month lease, you might want to see paystubs as well.
Thanks for the replies. I just talked to my agent about getting the estoppel signed. He said it will get signed at closing. Escrow will make sure that happens.
I guess I will look out for that at closing. If I dont see it, I wont sign anything.
@Tony H. Does the inherited tenant have a current lease in place and do you have a copy of it? Check with the local laws, but I believe that you would have to honor that existing lease first before putting yours in place. Even if it is an expired lease, you should have gotten a copy before going under contract.
@Tony H. - "you'll get it at the closing" are famous last words. Do you at least know what the estoppel is supposed to say? I really hate when we get fed the "you'll get it at closing" line. I usually say something like, if that info isn't correct then we aren't closing which gets everyone a little frazzled and magically it appears a couple days sooner........
@Ceril S. Their lease is only month-to-month. I have a copy of that and have reviewed it.
Everything looks okay other than the rent is so low, deposit is also very low, plus they now have a dog that is not mentioned in the lease.
I am okay with the dog. But, when they sign my lease, I will have them pay extra deposit for the dog. Plus increased rent.
The only thing that seller mentioned before I got into contract was that I should keep the tenant. I was like.. why? but it never got answered.
However, I was not worried about that since they are on month-to-month. If they have a verbal agreement with the seller, Am I bound to honor that verbal agreement? I dont believe so. there is no proofs for it, correct?
Esstopal letters are part of the due diligence process that is done prior to agreeing to close. You receive them during the process not "at closing". Tell your agent to get his butt in gear and get the letters now along with all the either info ...electric bills, heating costs, repairs, capitol expenses etc. all going back 2-3 years.
As for the tenants there is no reason for you to be concerned about keeping them. They are too far below market to diddle around raising it slowly to retain them. If they can not afford market rent get rid of them now and find real "good" tenants that can afford $1200. Don't play rent increase games with tenants below market. That is a game insecure hobby landlords play to avoid doing their job. You are operating a business, don't throw away thousands a year in income, let them move along and start fresh with your own selected tenants. Make sure you only use M2M leases so that you can remain in control of your property.
Your agent is not doing you any favours and likely knows nothing about investing in rental properties.
Thomas S. do you think it is okay if I mail the estoppel to the tenant directly? Have them fill out and sign then return to me?
I suppose the seller needs to sign as well correct?
I was thinking if at least tenant signs it, i can forward a copy to my agent and tell him to get it signed by the seller.
@Tony H.Please provide an update- I am in a very similar situation- tenants paying below market rents, month to month with no written lease- except in my case it is 4 different tenants (I am purchasing a quad). I have sent the estoppel letter to my realtor to have the tenants fill it out since my due diligence period starts on Monday- my expectation is that it is completed by both seller and tenants prior to the end of my 2 week due diligence period. Thanks!!
If you're positive of the market rents(verify with agent) and you have reserves I would raise to $50 under market rent and take the risk of losing them. That's a huge gap to make up at those increments. You can even print out rental comps to give them to show them it's still a deal in case they complain.
If you were going to raise the rent to test the tenant why would you not raise it to market. If they stay you are supplementing their rent and if they leave the new tenant would be paying market. Why would you suggest a landlord give away money to a stranger.
Also keep in mind when a landlord charges below market rent they are actually pulling down their market rents. Little wonder professional landlords don't like the way hobby landlords operate.
Keeping it just below market rents has increased my tenant pool greatly. I'd rather have a larger pool of tenants to choose from which increases the probability my units won't be trashed, will stay longer, and will leave the property in rent ready condition when they do leave.
It also says a lot about a person when they speak down on people they don't know anything about.
Leah Lindon this reply may not just be for you. I just signed the loan documents today. Again I was pushing to get the estoppel, but I didnt get one. Here is what happened and why decided to sign anyway.
1. The seller sent me a copy of the tenant's lease. The lease start date is 30 days after the seller purchased the duplex 3 years ago. I reviewed the lease and everything looks fine except the rent price that is way below market.
2. I received a signed addendum from the seller stating the amount of tenant's deposit and rent paid through end of june. The amounts matches whats on the lease.
3. Tenant asked my agent where to send their July rent. Gave them my po box address. They were mailing early because they will be out of town for the july 4 weekend. I thought this was nice of them. Although the snail mail has not deliver the check to me yet.
I know some of you may not agree with me. But somehow I feel comfortable signing the docs anyway. Mainly, i think it is because the tenant is on month to month and even if they have verbal agreement with the previous landlord, how is it that it will stand if I dont agree with it? Its not written anywhere.
In this case, isnt the estoppel really to protect tenant's interest too?? If they have verbal agreement they should have do the estoppel and have he previous landlord sign it, then give to me.
I will drop in my two cents here. First off, Tenants and current owner signs off on estoppel. You do not want a tenant say they paid 3 months ahead after you have closed. Also you need to know the deposit amount and repair request that have not been addressed. As far as the inherited tenants, I have never had a tenant 30% below market. It was usually within $100.00.
The day I close on the property, I go to the property and hand each tenant a letter or leave it on the door, where new rents will be mailed, that no cash will be accepted, it has to be in check or money order. I also inform them that at the end of their lease I will be offering them a new lease but the rents will increase, usually half of what they are below market on a six month lease. The next lease will be for a full year at full value.
I lose some tenants right up front, some say they will find another place. Usually, once they see the property is being cleaned up, deferred maintenance is being done, the good ones stay. I have one tenant that told me he was moving 10 years ago. His rent when I bought it was $200 per month, today he is at $575, but he recommends pretty regular and warns me of tenants that would be bad for the neighborhood. (the difference is, his sink doesn't leak, the old clay sewer pipe was replaced, so everything drains, he has insulated windows and new steel front door, and this year he got central heat and air. When the tax statements came in and my taxes went up again, i informed him that starting February when his lease was up I would have to raise his rent to $600. His statement was, "Raise it I don't care, I know I will be warm and dry and if I am not you will play Hell getting me that way." Guess what he is right.
Back to your point, I do not see how you let a 1200 rent go for 800, but you do need to be human about it, even if it is business. I would inform them that rents are going up and if they can afford it you would love them to stay, but give them the modified lease of raising the rent $100 every quarter until it is at market. If it needs some maintenance and they see you taking care of it, they will want to stay with you. But it gives them a way out.
I noticed above, someone recommended a month to month only, I personally hate these. My shortest lease is 6 months and that is to get someone up to market rents in newly acquired properties. I like 1 year leases and if they double the deposit, I will give them a 2 year lease, (for their protection against rent raises.)
Food for thought you can always get good tenants, that will stay when they move in at a little below market value, it is a headache to move for the tenant, so you can adjust your rent each year to get back to market in small increments. Very few people are willing to move for $10 to $25 more a month. One month vacancy, because you are at top dollar will cost you more than taking a little less rent for a qualified renter who is dependable and has staying power. Landlording is a people business. It is business but we are dealing with their daily lives, provide quality for the money and make sure they pay ontime and keep the property in good shape. Everyone comes out ahead.
Update to all. I just got the signed estoppel from the tenant. Title forgot to include it at closing.
All terms are within the lease that I have reviewed except that they also get $75 credit to maintain the lawn for both units.
Charging lower rent attracts lower quality tenants, reduces the value of your investment property and has a negative not positive impact on the chance of having tenant issues based on attracting lower quality tenants.
The higher your rent the safer your investment. Never a good business practice to mistake supplementing a tenants rent with attracting trust worthy quality tenants. It does not create respect.
Do you know what my market rents are? Do you know what I'm charging for rent? Do you know how I purchased these properties? Do you anything about the neighborhoods I invest in? Have you seen my financials?
You're making very general statements and it's obvious you're speaking out of your experience which is based on your markets which I understand and respect. Where you're ignorant is that you don't know the facts so let's just stop pretending that you have all of the answers for every market.
Ron Flatt whew that was a mouthful lol!
Thanks for your input. Overall I agree with you on raising rents.
My current situation is indeed special. Their rents are $875 only vs $1200 market price.
I just received the estoppel and it says they are also getting $75 credit a month for them to maintain the lawns on both units.
Now whether the $875 is after the credit or not is questionable. However, I dont see this as a problem. They can continue getting the credit but rent will increase to make up for it.
I signed the docs while on vacation. I'll go see them next week when im back
Hi BP!
Rather than starting a new thread, I thought of asking for some inputs here.
So, I just closed on my first duplex on Monday. I spoke to my agent about meeting the current tenant on Wednesday 7/5.
Long story short, he restated his opinion again on the current tenant. He said he has helped placing tenants in the past for his clients, this current tenant is super nice. He really recommends to keep them.
He said the tenant helps to keep the property clean and safe. They own a german shepherd to guard the backyard on both units because of occasional random people doing drugs behind the property.
This dog is not on their lease. I just spoke to the tenant's wife who is also on the lease. She sounds very polite and well mannered.
In summary, they are paying $875/month and maintains the yard on both units. Landlord pays water, garbage, and sewer.
As I mentioned previously, market rent price is $1200.
How should I structure their lease with me without causing problems?
I initially wanted to:
1. raise their rent to $950/month
2. Have them pay $50/month for water, garbage, sewer
3. They continue to maintain the yard for their own unit.
4. Charge them $250 non refundable pet cleaning fee for the dog.
5. Increase their security deposit to $950 (from $850)
Is this going too much of a shock for them?
I know I have not meet them yet, but I want to have an idea if this will become a problem.
Thanks.
@Ron Flatt- Best rant ever regarding this topic. Would love to hear more.
@Tony H. Re the German Shepard - what I will be doing is offering a refundable $250 deposit. Why refundable? If I make it refundable, the tenant knows they have the opportunity to get that money back IF when they leave there is NO sign that there was a dog there. They will have that in the back of their mind through their tenancy. If it's non refundable, they may say "well....it's ok, I've already paid $250 for my pet to be here, I don't have to worry if there's enough dog hair in the rug to make a mattress." If there is still cleaning to be done, deduct it from their "pet deposit" and mail them a receipt.
Regarding rent credit for lawn care- You want to maintain market value rents. It helps you long term. If you are ok with them caring for your property. Have them pay market rent and you can cut them a check each mont for the value of the maintenance. From what I understand, if no days or hours are set, they don't "work" for you. I think that's state specific
Then, again not 100% sure, you can write that maintenance charge off on your taxes.
Disclaimer:
I make no absolutes here. I'm learning just like you. If I am wrong, I welcome the clarification. If there are better ways, I welcome the knowledge.
@Steve Bracero I met the tenant after closing and took pictures of unit conditions.
I decided to raise their rent to $925 + $100 water garbage sewer per month. I waived the pet fee. I took their words when they say the reason they got the dog is to keep burglars away. I maybe wrong doing this, but they have had their dog for 3 years there. I didnt see any 'pet' damages in the unit. It was pretty clean too.
I also ask them to continue maintain the yards for the whole duplex. Their lease with me starts September.
When I sent them the notice of rent increase, i stated my reasonings.
They countered back saying that their unit condition is worse than next door. However, i managed to get them to understand that their rent is 30% below market because of the older condition than next door unit.
I also mention that If they want me to put new carpets and paint, they have to move out temporarily. And when they come back, rent will jump to market price $1200. They have A LOT of stuffs in the unit. There is no way they can just temporarily move out and move back in.