How to buy as owner occupied on duplex when tenants on MTM?

18 Replies

Hi BP gang,

I'm wanting to purchase a 2-4 unit multi-fam property as an owner occupant, considering a duplex currently. If both units are occupied with month to month leases, am I obligated to keep the current tenants or can I give them "X" amount of days to vacate the property upon closing or the like? The lender mentioned the tenants having the right to remain in the property, and me possibly not getting financing as an owner occupant. But I know there is a way viable & ethical way of handling this so I can get the financing.

Thoughts?

@Christian Whitehead the lease terms will dictate, so read them carefully...and your state landlord-tenant laws will specify what to do....looks like you have a few city ordinances as well...so review those as well.

In general, if they are truly month to month...you, as the property owner can simply elect to not renew the lease...I typically give 30-60 days and if it may turn ugly, offer cash for keys...$500 to the tenant after they are out and the unit is clean.

Good luck! 

I went through this recently and was able to request the seller serve 30 day exit notice to the M2M tenant as part of the purchase contract.

Your mileage may vary city to city and state to state?

Hello and welcome to this site and asking a pretty good question Christian!  I think that you are asking two completely different questions.  It's my understanding that you are obligated to the exiting lease and the current owner cannot force you to do anything that is not in writing.  I'm not speaking to you as an experienced investor but I do not think the bank does not even consider the status of the current leases.  I think it is more behind the demand for those units and your credit rating and your ability to pay the loan no matter what happens that counts.

Your obligation is only the current leases and what law might apply in that city, that state, or the country it is located in.  The current Owner probably has no legal status to make a verbal promise to the tenants without your knowledge of it beforehand.  They may be responsible renters that pay their rent on time and do not request a bunch of repairs might be worth keeping.  You did not mention how long they have been month to month tenants which could make a difference of my or any other person's answer.

All of that aside I think you are making a big mistake looking only at a duplex.  It is very risky and cannot earn you much money, is it worth that?  There are questions I need to ask to give a more complete answer like do you have a W-2 Job?, do you have any money saved up?,  Do the current tenants request a bunch or no maintenance?, What are your long term goals?, Where in Dallas or elsewhere is it? How long have the existing tenants been there?  Good luck to you!

I'm under contract on a fully occupied three unit right now and it's a condition of the contract that we aren't closing until the unit I will occupy is vacant and broom clean.  He's a month to month tenant and with a few exceptions the standard in VT is 30 days notice to vacate due to sale.  I like doing it this way rather than the possible mess of inheriting a tenant who then refuses to vacate and I can't live in the house that my owner occupied financing requires me to live in until the eviction process is complete.  

@Christian Whitehead Depending on what type of financing you do - M2M is the ideal situation for an owner occupied property to be purchased. If you go FHA you just have to reside in the property within 60 days. Give them immediately their 30 day notice when you close and you'll have plenty of time to move in!

@Michael Lee

Thank you as well for the detailed response. You, I'm sure, being in Coppell, are familiar with the DFW market right now. I mean, the property I initially wrote this post regarding is no longer available....4 days later!

HECK! A duplex that went on the market this morning is no longer available when I requested a showing this afternoon!

If you don't suggest duplexes, what property types do you suggest? And how would you find these? I'd love a quad, but don't come across them often.

Originally posted by @Christian Whitehead:

Hi BP gang,

I'm wanting to purchase a 2-4 unit multi-fam property as an owner occupant, considering a duplex currently. If both units are occupied with month to month leases, am I obligated to keep the current tenants or can I give them "X" amount of days to vacate the property upon closing or the like? The lender mentioned the tenants having the right to remain in the property, and me possibly not getting financing as an owner occupant. But I know there is a way viable & ethical way of handling this so I can get the financing.

Thoughts?

If they are month to month, you pick the unit you wan to live in and give a notice (I think its 30 days) of non renewal.

You could even have your seller submit the notice as part of the sale so it is vacant when you take possession.

Financing should not be a problem.  I have gotten financing on a duplex that was going to owner occupied and had 2 active tenants.

you just have to move in, I seem to recall within 30 days, but I haven't ever had anyone ever check in to see if we had moved in.

Now for full disclosure, every time we have done an owner occupied loan, we have planned on and eventually moved in, and I would not commit fraud by taking out an owner occupied loan and never move in. 

But a couple of times its taken us a couple of months to get the rehab we were going to do completed before we move in.  

I'm trying to get one of these Finance right now and it seems like the lenders are asking for an additional 10% down because it's multifamily is that your experience as well

@Robert Walston The lender I just gave the "green light" to get pre-qual'd mentioned putting 20% down to help lower the monthly payment, but I didn't really question it, as I don't plan on doing that if not required.

But something that did catch me off guard was that he suggested I might need to show the

(income) ability to carry the entire note, as if there were no tenants.

This may not be difficult for a duplex but a 3-4 unit would be.

Is this normal, accurate? I thought tenanted units count towards the/your income. Lender said tenant would have to deposit $$ into my bank account prior to closing in order to show that it's my income & what owner would allow that?!?! NONE!

How do you work through this?

Originally posted by @Christian Whitehead:

@Robert Walston The lender I just gave the "green light" to get pre-qual'd mentioned putting 20% down to help lower the monthly payment, but I didn't really question it, as I don't plan on doing that if not required.

But something that did catch me off guard was that he suggested I might need to show the

(income) ability to carry the entire note, as if there were no tenants.

This may not be difficult for a duplex but a 3-4 unit would be.

Is this normal, accurate? I thought tenanted units count towards the/your income. Lender said tenant would have to deposit $$ into my bank account prior to closing in order to show that it's my income & what owner would allow that?!?! NONE!

How do you work through this?

 The rules have changed somewhat from the crisis when we first got into our duplex.  But when we first started doing right after the crisis,   I think it was a year (maybe 2, I kinda forget) or so before they started counting income off of our rental towards the purchase of a new property.  Especially if you do not have experience as a landlord.

The flip side is they qualify a property on a fairly high percent of your income if you are doing an owner occupied loan. 

@Christian Whitehead @Bart H.

I am getting the same type of push back and wonder is this a lender requirement or a FHA requirement. I find nothing about the inflated 10% down or as one lender stated 25% down requirement on the FHA Site. however, I do find calculating the rental income at 75% of rents on the site but find no mention of them discounting 100% of rents for 3-6 months as a reserve account anywhere on the site and think it might be a lender requirement. And if Bart puts down a 20% down payment he wont need FHA since that would qualify as a Conventional loan and then they would not have MI nor the requirement to occupy the property...

@Robert Walston

I haven't put down anything as yet...listings are going quickly here, before I can even get an offer on the table, the listing has multiple offers.

Not joking, today, July 6th, received an email alert from an agent for multi-fams, texted realtor at 8am to put an offer on a duplex, she calls me 8:15am & says their deadline for offers was 5pm yesterday. "OMG. I just got the email alert at the butt crack of dawn, how was the deadline set for yesterday?" Apparently, the property was listed after my email went out, the owners/realtor was inundated with interest, so they set a deadline for end of that same day.

Hey Christian,

I went through the identical situation on my first purchase back in april, tenants were on a mtm lease so after i closed on the property i just had to give them a notice that their lease would not be renewed at the end of the month and that i would also give them an additional 30 days to vacate after the final month was up.  It was the middle of april when i presented the notice so they were informed to be out by the end of May.  I also laid out multiple options where they would get not only their deposit back but also some extra money on top as well to help alleviate some of the hassle with moving.  I would present a notice in person if at all possible even though it can be a little intimidating.