Inheriting tenants, rent is way under market, and no lease-Help!

16 Replies

Hi BP Community!

This is my first forum post so I hope I'm doing this correctly.

My husband and I are closing on our first investment property on October 5th, a multifamily property with 4 units, one of which we will be living in.

The other 3 units are currently rented by people who have varying levels of relationships with the sellers, the rents are all way under market, and none of them have leases OR security deposits. We've been told that none of them have given notice, but because of the relationship with the sellers I'm concerned we may not be getting all of the information.

Given the timing, if we were to ask them all to leave they wouldn't vacate until Nov 1. Bringing us into the slow season for finding new tenants. 

We have the following two options, and would love your advice:

1. Keep tenants and raise rent marginally (+$25-$50 per month) while asking them to sign a 6-month lease, bringing us to Spring.

2. Plan to bring rent up to market pricing (+$200 per month) and ask them to sign a 1-year lease

Both risk us losing tenants that are currently in place, however if we are able to increase to market rents by Feb 1 with new quality tenants we could recoup the cost for the vacant months.

Again, we would love to hear your advice on pros, cons, and other options we may not be thinking of!

Thanks!!!

If you are experienced landlord, I would recommend bump up rent to market rent so tenants would leave.  Rent apt to new tenants who start out good with new lease and your lease terms.  Old tenants will complaint about you anyways because tenants ALWAYS hate new management and retaliate. 

Since you are new in renting, I would recommend either keep rent same and do short term lease or increase very little.  It will take you time to learn other landlord issues.  You don't need finding new tenants headache right off the bat.  Plus most of time when tenants leave, they leave mess and vandalize apartment.  Keep your life simpler in beginning of trade. Do short term lease.

If there is no lease, how are you going to charge rent? They might refuse to pay and you can't evict them unless you sign some kind of contract with them.

It might be as well ejectment which is much more complicated.

Also, the seller has to put it in writing that he doesn't have any security deposits because these tenants might require them if moving out.

I'd included it in the purchase agreement that property must be vacant before closing or otherwise secured the relationship with the tenants.

Right now they are squatters and once the house is sold, they can live for free

@Irina Belkofer : The sellers provided a one page "apartment lease renewal addendum" for each unit, but no actual lease to which it is an addendum for, such a mess. The "apartment lease renewal addendum" reads like an estoppel agreement, but it's not actually called that on the document so I don't know what it legally is. Great point about asking for documentation of no security deposits, we didn't think of that!

@Felicia Magliula you have to have tenants signature to have any relationship with them.

If you sign the lease with them on the same amount they are paying - consider yourself lucky. They don't owe you anything and they already live there.

After that addendum with the seller you can sue him for damages but it's expensive too.

This case is like buying a house on auction with people still living there - search the forum on the topic and get ready for your own battle.

You MUST secure your investment before closing: there must be something in writing to enforce if the tenants won't leave or pay. Otherwise, it's a long and expensive journey :(

@Felicia Magliula  Learn and understand the Landlord-Tenant laws for your jurisdiction. There may be no written lease, but there is an implied month-to-month rental agreement, supported by what has been done historically. Get a written description from the seller as to key aspects of the verbal agreement they have had with the tenants and as much history about the place as possible.

The BP forums have had many discussions about inherited tenants and how to proceed (with or without sufficient documents from the seller). Use the BP search box and start reading as many of those threads as you can. You have many more options than what you propose.

Listen to many BP Podcasts, read BP Blogs, read the most recommended books about landlording. There is an art to doing well in this business.

At a minimum you need a great rental agreement. Make it month-to-month, as it will be easier to change terms as you go along. You will meet with each household and introduce them to your management style and written rental agreement. They will have a choice to sign it or prepare to move. If you keep the rent the same or only slightly more than what they've been paying, they are more likely to sign your rental agreement. You can always adjust the raise the rent closer to market later.

Find out as much as you can about the tenants and their expectations. Inspect each unit and be swift to address any deferred maintenance. This will win the tenants over and establish a better baseline as to the property condition and how you want the tenants to take care of their homes. Ask the tenants about their unit and any items that may need to be addressed.

The key is establishing a great landlord-tenant relationship from the start. Be friendly (smile), be fair (abide by landlord-tenant law and don't play favorites), be firm (have moxie and enforce the terms of your rental agreement), be flexible (when warranted), be respectful, be professional, be kind. It is natural for tenants to be wary of new owners. Win them over.

Originally posted by @Irina Belkofer :

@Felicia Magliula you have to have tenants signature to have any relationship with them.

If you sign the lease with them on the same amount they are paying - consider yourself lucky. They don't owe you anything and they already live there.

After that addendum with the seller you can sue him for damages but it's expensive too.

This case is like buying a house on auction with people still living there - search the forum on the topic and get ready for your own battle.

You MUST secure your investment before closing: there must be something in writing to enforce if the tenants won't leave or pay. Otherwise, it's a long and expensive journey :(

Many successful landlords have taken over properties with similar drawbacks to what this investor faces. It's about negotiation and establishing a new understanding with all parties involved.  The new owners can establish their role and introduce their management style; present their rental agreement; listen to the existing tenants and note their concerns; and attend to maintenance/repair items swiftly. There is great opportunity here and will be easier to achieve with a positive mindset.

I would not sign a 6-month or 1-year lease with them yet in case they are bad tenants who don't pay rent.

I would sign a month to month lease with them at the same rate at the beginning, just try to get a signature from them on the lease agreement that we are now landlord-tenant relationship.

In case they don't pay rent, I can take the lease agreement to file an eviction.

After signing the lease agreement, wait one month or two month to test if they are good tenants pay rent on time or not.

If they don't pay rent starting the first month, I would file eviction immediately.

If they are late on rent starting the first or second month already, I would give them a 30-days move-out notice one month later.

If they pay rent on time and you consider them good tenant, I would give them a new lease offer with raise rent ($100 to $150 cheaper than the market price plus security deposit) two months later.

If they sign the new month-to-month lease and pay you the security deposit, that's great.

If they do not sign the new lease or do not pay security deposit, give them a 30-days move-out notice immediately, in case they don't sign the new lease and try to stay there forever.
Have them move-out.

After signing the new lease for 6 to 12 months, raise the rent to market price or $50 cheaper than the market price.

@Marcia Maynard this is real estate - everything has to be in writing to be enforceable.

Positive attitude has nothing to do with legal actions: if inherited tenant won't leave and won't pay, there is a long process which cost the new owner.

Before closing everything can be settled. After - not so much.

Just on this forum are plenty of topic on the subject: house bought in PA at foreclosure where the owner won't leave and the litigation still going, about inherited tenant who finally get kicked out but it's a headache - all that you can avoid if make sure you have all the paperwork done.

I was in situation before: I bought a house at foreclosure and there were people living in the house.

You can't disconnect their utilities, you can't evict them, no legal recourse besides starting process of ejectment.

I stopped by, introduced myself as an agent of the Buyer and offered some help with moving and other things. I was bluffing, the owners were not too sophisticated and everything was settled quickly - they moved out in couple days. But they didn't have to until the court order.

That's why you have to have everything in writing and nothing implied. If you have to stand your ground in court, you better have something to show for your position.

@Marcia Maynard thank you for your take on the situation! I did a little more research and I think (I will be checking with our attorney to confirm) that the one page agreement that the owners shared with us will hold up as an estoppel agreement for the three units in Colorado.

We've read Brandon Turner's books and recently purchased the Colorado forms package from BP so we are prepared with rock-solid agreements moving forward! It's just a matter of getting started on the right foot with the new tenants.

I really appreciate your win them over strategy because I've been a renter my entire life, and this is a strategy that has worked on me in the past. 

@Rick T. Thank you! I totally agree with you if we were experienced because we really want to screen and select our own tenants. I've known people who retaliate, and that is our biggest fear. Thanks for offering your perspective.

@Irina Belkofer We are not requesting the information that we need from the sellers in writing before closing. Thank you for bringing our attention to the potential security deposit situation!

Account Closed Your perspective offers a really nice balance of consideration for us as investors and for the current residents! We are working on a plan for moving forward, and will be keeping your advice in mind!

@Felicia Magliula so there is some wrong advise above. I won't call out any names. In Colorado, any unwritten rental agreement is month to month. Colorado now requires 21 days notice to end a month to month rental agreement unless the written agreement states otherwise. 

You do want an estoppel statement from each tenant. The tenant must sign this. This protects you from them claiming they gave the landlord $10k security deposit. It stops them from producing a 5 year lease at half market rent after closing. The Colorado Real Estate Commission has a standard form estoppel statement. You should use that. Especially since the tenants have a relationship to the seller.

Even with no written agreement you can evict for non-payment of rent very easily and very straightforward. This is not a an owner occupied foreclosure situation so there would be none of those laws to come to bear on you after the closing. It's pretty much no pay no stay. If they don't pay Nov rent, it's likely with proper preparedness you can have them out before the end of Nov if the don't move on their own.

My strategy would be to bump the rent $50 each the first month (Nov) after closing. I would show up the day of closing with your new agreement in hand and give them 4 days to sign it. If they don't sign, issue the notice of non-renewal of MTM agreement on Oct 9. That would give you possession on Nov 1. Perhaps one will leave but you are still well below market so my bet is that everyone will stay. If one does leave, finding tenants at the holidays can be done. People are moving here all the time so the problem is that it's more of a hassle to you trying to do more in an already busy time of year. 

I agree with the month to month approach. That becomes very east to get rid of the folks that don't match your style. It cuts both ways but with them paying below market it's hard for them to financially justify moving. This lets you bring the rents to market when you want. You can send them packing or raise rents to market in the spring.

In Ohio, oral leases are enforcable in court (the courts just won't enforce late fees without a written lease). I prefer month to month leases especially in "C" neighborhoods, that way all you have to do is give 30 days notice to tenants when you want them to leave and no reason is required. When we take over apartments, we have existing tenants that are already month to month, sign our monthly rental agreeent. We feel that a term lease gives the tenant more protection than it gives us (the landlords}.

I agree with @Bill S. Start by getting an estoppel agreement immediately. If you don't know what one is or need an example, contact me and I'll be happy to share. You need one for each tenant before the sale closes.

Second, I would keep all the tenants on a written month-to-month lease. You need to know who they are as renters before locking into a long-term relationship.

Third, increase rent immediately and make it significant enough to chase off any marginal renters. You could do a $100 increase now and the other $100 after 90 days (if you choose to keep them). The other option is to hit them with the full increase and hopefully chase them away

Fourth, require a security deposit. You wouldn't rent to a new tenant without one so don't allow the old tenants to stay without one, either. I am usually generous about this and give them 90 days to pay the deposit in full. However, I have a written agreement that says failure to abide by the payment schedule is grounds for eviction. In other words, if they owe a deposit of $900 then I will require $300 a month for three months, due on the first day of the month with their rent.

Let us know how it goes!

@Bill S. Thank you so much for replying, and offering your expertise. We will be moving forward with many of your suggestions. My husband and I are very interested in attending the Denver landlord meet-up that you lead. Hopefully we can thank you in person soon!
@Nathan G. Thank you, we are working on getting the estoppels today! We're still mulling over raising the rent marginally (to get us through the holiday) or significantly so that we can screen our own tenants. Either way, I totally agree that we require a security deposit from the current tenants! I'm floored by the lack of organization that we are stepping into, and I am just happy to have BP for support!
@Jill F. I totally agree, we now plan to offer month-to-month thanks to all of the advice we've received here. We don't know exactly what kind of renters we're dealing with so we want the quickest out if needed.

@Felicia Magliula This will be a very challenging situation for you to walk into as a new landlord. Dealing with tenants that have a personal relationship with the previous landlord is hard enough and never mind when they are paying less than market rent.

Hopefully you factored all of this in when negotiating the purchase price, but make sure you are leaving money allocated for having to eventually evict all of the tenants. Obviously you hope that doesn't happen, but I would definitely plan for the worse. I know in CT what it costs ballpark to evict tenants depending on the circumstances, but obviously each state will have its intricacies so make sure to get educated on your states landlord/tenant laws.

I know others have stated this, but make sure you get estoppel agreements signed. Very important.

Overall, I see a lot of newer landlords who are more afraid of a vacant unit as opposed to a paying under market inherited or problem tenant. Talk to someone who has been doing this a while and I can almost guarantee they say they would rather have a vacant unit.