Hello -- I'm considering making an offer on a duplex with both units currently rented. I'd prefer not to inherit the tenants as I want to make some improvements, raise the rent, and put my own tenants in. What is the best approach to this other than writing it in the contract that the property be vacant at closing? Also, in general from the seller's perspective, what is the obligation to tenants who have a signed lease but you're wanting to sell the property? Thanks!
You need to review there leases. My leases are terminated if a property is sold but not all states allow that and it likely has to be in the lease. I do not think you can force the seller to remove them. At best I think you have to take ownership, give 30 day notice and not renew there lease. Process will likely take 60 days to get them out.
You can require a copy of all there leases be sent to you before closing.
@Gordon French Got it -- thanks for the response!
If the leases are month to month you can request that the property be delivered vacant. The seller may not always be able to accommodate but it is an option. Just make sure when you put in your offer that your agent specifies it and that your lender (if you are using one) is OK with a vacant purchase. In most cases they will just want to see at least 3-6 months of expenses for the building above and beyond any construction money. Hope that helps!
@Michael Lee That's a very tricky situation so I would tread carefully. You have the right idea though of wanting to not inherit tenants because that's who most of the horror stories come from. I would definitely talk to the owner and ask to see the leases and read them through. Maybe they are month to month or have a clause that the lease is void if the property is sold. You can always go and talk to the tenants themselves and offer to help them move to another property. A sort of cash for keys type of thing, or pay for the moving truck or what not. That way you will be helping them help you. Another thing I just thought of is to offer a little more money for the property if the seller gives it to you vacant this will put the problem on them instead of you! Really just ask the owner and the tenants and see how you can help them and then do that in a way that helps you obtain a vacant property!
not to buy the property.
I'm new to posting here but a long time investor/landlord. I don't understand why so many people are turned off with getting a property with the current tenants. The truth be told, unless you are a very experienced landlord your tenant picks probably won't be any better than the sellers. As an experienced landlord I'll make the best out of the existing tenant knowing that eventually we'll part ways, but till that time I'm making all the money I can from you.
@Robert Cheek It really depends on what you find in your due diligence. Assuming you can get payment history from a landlord that is selling it will not be reliable if the tenant has a poor payment history. If when doing the inspection you find negative aspects about a tenant or the seller has only placed a tenant to facilitate the sale then you will likely regret inherited tenants.
The reality is that a large number of properties go up for sale because the landlords have not been able to manage their bad tenants.
Better to have a seller provide vacant occupancy then have to go through a eviction as a new owner. Espically in tenant friendly states. Safer to clean house and start fresh but unfortunately under many regulations this may not be possible.
"Is there way to not inherit tenants"
"What is the best approach to this other than writing it in the contract that the property be vacant at closing?"
None... period.... If it is not in your contract for purchase you are taking them on. If they have a year left on the lease and you put "delivered vacant" then the seller has to get them out. They can pay them, or ask them to leave, or give them presents or beg them. It's their problem.
If you do not put it in the contract, it's your problem.
Granted you may live in a place that has different laws that allow new owners to remove leases, but I am unaware of a place that does that.
@Robert Cheek @Thomas S. Great points from you both. I agree that it may not always be prudent to change out the tenants arbitrarily but in this particular case, I feel like the opportunity to add value to the property is to make some improvements and increase the rents. I just imagine this being difficult with holdover tenants.
Ditto on the fresh start @Thomas S.
@Mike Cumbie Understood -- most (if not all) the transactions I've been involved with for similar situations, it's been included in the contract and the burden is on the seller like you mentioned. I just know this can put them in a bind so didn't know if there was an alternative that I can consider . But thanks for the great response!
@Michael Lee If you’re negotiating you can definitely ask how long the tenants have remaining on their leases. Cash-for-keys won’t be cheap if tenants are reasonably smart and they know there’s a “For Sale” sign in the front yard. If the leases expire 30 days after you close escrow it might be easier not to renew the leases once it’s your property. It might just be easier to use your preference for some minor leverage in the negotiation. If it’s delivered vacant, you win. If there’s a concession elsewhere to offset that preference, you win. Now if they signed 12 month leases in January that’s a different story...
Thanks @Andrew Johnson ! This one is somewhere in the middle as both leases end in August, so a fairly significant amount of time left. I think you're right though that negotiating with 'vacant property delivered' is the way to go then if the seller says he/she can't make that happen, try to gain an edge based off that.
Why not just improve the units as people naturally move out? I bought a 4 plex last year. Had some issues with one tenant. He moved out a couple months ago. I replaced nasty carpet with wood looking durable flooring, painted and got it rented for 750 vs. $675 before.
Leases run with the land. In most states, you can't just terminate a lease. So, check the leases in place, and your local landlord/tenant laws for guidance.
Your renovations can, and should wait. If you have Tenants paying rent, you shouldn't pursue anything until they are, at least, up for renewal.
@Michael Lee with the leases being in place through August, the seller is really stuck. Forcing them out would be illegal most everywhere. The seller could work out a deal with the renters, but that would likely involve paying them money. If I was a seller, I wouldn't even approach my tenants about this. There is too much risk in vacating the property before selling. What if you back out of the deal? Then the seller is stuck with no cash flow.
The bigger question is why are you so insistent on the property being vacant? Even if you make an offer now and lets say it takes two months to close, so you get the property in the middle of April. The leases run through August, so you are stuck with them for only four months.
Here is what I would do. Send them a new lease agreement 60 days before the current lease ends. Raise the rent to your preferred "after rehab" amount and change the terms to month-to-month. One of two things will happen:
1. Tenant will say it is too much money and will move out.
2. Tenant will sign the agreement and pay the higher amount.
If the tenant stays at the higher amount, then you get more rent without having the expense of rehab. If they leave, then you get to rehab over the winter months when less people move.
@Joe Splitrock Nice! Great advice -- I think my preference for a vacant property just comes from prior negative experience as a PM and hearing about such from other landlords/investors. And four months is still a decent amount of time. But I think the plan you outlined makes a lot of sense. Appreciate it
Worst case scenario... Simply don't renew the leases when they're up. I always try to make sure I can either end the lease through a sale clause in the lease or that the lease will end soon.
Or look for properties that are owner occupied which means you'll have at least one unit free upon the sale.
When I acquired my duplex it had tenants. One of the contingencies of the sale was that the property had to be vacant and you get a final walkthrough. This protects you from 'horror stories' in inheriting bad or poorly trained tenants. It would also protect you from the tenants destroying the property when they leave.
This is exactly what I did and had no problems at all.
As for the lease and obligations to it. The lease comes with the property and if the lease is extended such as a 12-month lease then there isn't anything you can do unless something in the lease specifies the sale of the property, which most don't.
This was an awesome thread, thanks everybody for your insights I may be running into a similar situation and am debating either keeping the tenants and letting their leases run out, or ask to have the property vacant. I'm leading towards the former.
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