Inheriting Tenants with 1 YR Lease and Well Below Market Rent

28 Replies

Good morning, BP.

I've got a bit of a sticky question here. An accidental landlord family has contacted me with an offer to sell me their home. They had to move for jobs a year ago and have a tenant leasing their home with 1 yr left on the 2 yr rental agreement. It is my understanding the tenants are good people, pay on time, and are not violating any lease terms, however, they are paying $300-400 below market rent. And honestly, the numbers aren't interesting without recouping that monthly income.

What, if any, are my options to either up the rent on the current good tenants, or have them move and get a new family in there at current market rates? Would it violate any tenant rights or state laws to simply offer the tenant a renewal contract as the new owner or a notice to vacate knowing it legally has no claws and teeth? I'm by no means trying to be shady, a jerk, or unlawful, but really curious how I could make this deal work. Its a beautiful property in a nice area and the tenants themselves are wanting to sign another 2 yr lease. 

Rather than upset a good tenant and possibly break the law, why not deduct the $3600-$4800 in lost rent from the purchase price? Work with the seller and show him the numbers to justify the deduction. 

If you do purchase the property then you'll probably want to give the tenants a decent advanced notice of the intended rent increase so they aren't sticker shocked at renewal. If you want to keep them then you'll probably also need to justify the increase to them.

you are better off reducing your offer price by $3600 ($300*12 months) to account for the loss in rent.

Any attempt to force them out when they have a valid lease is a violation of tenant rights.

No, yes. The lease stands and you should negotiate with the distressed seller prima facie. Another option is to convince the seller to that they should negotiate a buyout of the existing lease and you then could obtain the property on month-to-month terms. It may be cheaper for the seller to give them a free month rent in exchange for voiding the existing agreement. However, you lose in this scenario you are the bad guy and jack the rent up.

Lose-lose consider passing. 

Originally posted by @Stephen G. Wolff :

No, yes. The lease stands and you should negotiate with the distressed seller prima facie. Another option is to convince the seller to that they should negotiate a buyout of the existing lease and you then could obtain the property on month-to-month terms. It may be cheaper for the seller to give them a free month rent in exchange for voiding the existing agreement. However, you lose in this scenario you are the bad guy and jack the rent up.

Lose-lose consider passing. 

Great idea! I love how out of the box this community is. The numbers are pretty set as the owners are selling it practically at the cost of the mortgage still owed. I'll see if there is a way to do the buyout. 

@Aaron R. , check with your state's landlord tenant laws, but I believe the lease runs with the house, not the landlord. In order to alter any lease terms, you would both have to agree on it, and who is going to agree to a $300-$400 per month increase? 

These tenants know they're paying below market, of course they want an additional 2-year lease. Make sure to give them plenty of notice that the rent will be going up to the current market rate. This notice time varies from state to state.

@Aaron R. First, what does the lease say? My leases state if I sell they all change to month-to-month. Second, if you’re buying house at what is owed, is it such a deal that you should buy it knowing the rents will be $3,600 below market for the year?

@Aaron R.  Who wouldn't want to stay in a place at $300-$400 under market.  Don't count on the tenants staying when they see the new price.  ;-)

Another way to look at it:  It's 1 year, not a lifetime.  If it's a good property that you want in your portfolio, then do it.  If not, then don't.  Look at it as a 'bad' year where the AC blew up.  ;-)

Obviously we all want to make money in real estate and want to make good purchases right from the get go, but real estate has this funny way of covering up mistakes over time. I like the idea of lowering the purchase price by the amount of lost rent for the first year.

@Aaron R. You will be stuck with these tenants for another year until the lease expires. If you are going to buy the property, I would lower your price offer and make sure you have calculated the market value correctly. If you have miscalculated it and need extra rent for the numbers to work, you will be stuck in a year if you are not able to find a tenant whom will pay the rent that you are calculating now.

I like the idea of cash for keys. Their reaction will I dicate if they've already considered moving or not. Communicate with them. That alone shows good faith. You're not obligated to do that. If they're hell bent on staying, they may look for a reason to come after you. Ask them how much it'll take and then consider that in your negotiation. 

On my recent purchase the tenant had been paying the same amount for 10 years. She's older and I wouldn't be able to sleep at night knowing I forced her out. $50 a month more makes my numbers work much better and frankly she can stay there for another 5 years at that rate.  Didn't bother her. I'm also giving her a screen door the last owner wouldn't give her and when I paint it in a few months I'll even let her pick the color. 

You stopping by, letting them know the situation and making them aware that legally a different person can make the purchase and not care for their input or best interest. $200 below market if they never leave could be one of the best things to happen to you. Closer to a win - win.

I would give them 2 options:

1.) Let them know rent will go up by $400 /M at the end of their lease without question

2.) Sign a 3 year extension right now for $250 / M increase

Let them decide

Negotiate with the seller accordingly. Not your issue they are barely covering their mortgage payoff. Remember you make money on the buy!

Best wishes

Updated almost 3 years ago

Should have said 2 year lease not 2 OOPS!

Updated almost 3 years ago

Should have said 2 year lease not 3

@Chris Youssi i would never agree with this for two reasons. 1. there is no reason to offer them a 3 year lease at $150 below market. 2. Absolutely a terrible idea to lock in a tenant on a 3 year lease when you have no idea if they are good or bad.
Originally posted by @Andrew B. :
@Chris Youssi

i would never agree with this for two reasons.

1. there is no reason to offer them a 3 year lease at $150 below market.

2. Absolutely a terrible idea to lock in a tenant on a 3 year lease when you have no idea if they are good or bad.

Neither would I - was a typo should have said 2 year . Running your own background check will solve your 2nd thought

 THX for the catch

@Aaron R.. You Buy the house - you get the tenants! Until the lease is up at whatever lease terms are agreed to by current Owner.  

Any changes to the lease are subject to New Landlord - Tenant Negotiation.  

Guys, thank you all so much for the great info and points to ponder. I have to say, its refreshing to be able to ask questions like this and not get shouted down or banned on the assumption that I want to do anything illegal or unethical. As I said before, I have no intention to break the law or violate tenant rights, but seriously had no idea how some have changed agreements before... then enters @Chris Youssi with exactly what I was wondering:

So you can give them the option to renegotiate on the spot with a new lease? This was really what I was trying to figure out. I see how leverage on my end would work, but I did not know the new lease could be replaced assuming both parties agree and sign on the dotted line. Correct me if I'm assuming incorrectly here.

@Aaron R. Along the lines of these other suggestions, assume the lease sticks (it does) and take the lost revenue from the offer amount if possible or take it as a known expense if not. Once the property is yours, let the tenants know that the rent will increase to market at renewal as others have said, but I suggest giving them the option of moving out at any point with 30 days notice. You'll honor the lease on your end to the end, but they can leave anytime they choose. You get the discount up front but may also get to raise rents sooner if they find a new place in 6 months. No cash for keys required, just offer it.

@Aaron R. I'm actually closing on a property next week with this exact same situation. I think it's a pretty simple really. I'm going to run the numbers and offer to buy them out. 

A couple of thousand dollars in my market will go a long way.

They might not take it but I think they'll definitely think hard about it when they know that there lease will certainly not be renewed.

Originally posted by @Will Gaston :

@Aaron R. I'm actually closing on a property next week with this exact same situation. I think it's a pretty simple really. I'm going to run the numbers and offer to buy them out. 

A couple of thousand dollars in my market will go a long way.

They might not take it but I think they'll definitely think hard about it when they know that there lease will certainly not be renewed.

 Will, what are you offering them or willing to pay for the buyout? 1 months rent? 2?

@Aaron R. It is it two different tenants but I am going to go up to 2.5 months. My initial offer will likely be 1.5 months. It just doesn't make sense if I have to pay more than that based on when the two leases end.

A lease goes both ways so of course I will honor it regardless. But I think they will likely accept based on rents in the area, cost of moving, etc.

@Aaron R. I would recommend you buy NOLO Every Landlords Legal Guide and read the book (or just check it out from the library). As a landlord it is your responsibility to know the laws that govern your business. Ignorance of the law is not a defense, so you could accidentally find yourself in legal trouble. My concern is if you don't know the lease goes with the property, what other important legal details are you missing. By all means, come here for advice and to ask questions, but for your own sake take time to learn more about the legalities of this business.

In addition to the the NOLO legal guide, every state and some cities have landlord guides and laws you can read. Many cities even offer free training on fair housing. If you are going to be in this business, it is your responsibility to learn it.

Originally posted by @Aaron R.:

Guys, thank you all so much for the great info and points to ponder. I have to say, its refreshing to be able to ask questions like this and not get shouted down or banned on the assumption that I want to do anything illegal or unethical. As I said before, I have no intention to break the law or violate tenant rights, but seriously had no idea how some have changed agreements before... then enters @Chris Youssi with exactly what I was wondering:

So you can give them the option to renegotiate on the spot with a new lease? This was really what I was trying to figure out. I see how leverage on my end would work, but I did not know the new lease could be replaced assuming both parties agree and sign on the dotted line. Correct me if I'm assuming incorrectly here.

Both parties have to agree to dissolve the old contract and replace with a new one. It can't be under pressure from you either. Thinking about it logically, why would someone agree to pay several hundred dollars more a month? You have to offer them something of value to get them to agree to that. Ultimately, we are talking about $3600. If you are paying the right price for the property, just figure this into your numbers. Also it may sound great to get this tenant out, but don't forget about vacancy. Let's say they leave and the property sits vacant for a month. That might cut $1200 or more out of your $3600 that you stand to gain in that year.

@Aaron R. - What about designing a lease option for 12-24 months? You can design the deal to recoup the lost rent on the front side, build some equity toward your down payment if you're purchasing conventionally, and set things up with the tenants to gradually increase the rent so they will stay beyond current lease term.

2

The lease stays in place with the sale...you inherit it, so there is no change with the change in ownership

Run your numbers based on the current situation and lease..... then run it on a conservative plan based on increased rents and factor in turn over cost, renovation, vacancy etc..... based on those number you decide if it makes sense to try and buy them out with "cash for key" or suck it up for a year with the current lease or worst case walk away from the deal

Its definitely worth a shot to try and renegotiate the selling price based on the current rent..... but sounds like it wont budge much....

No way would I try and extend the lease even farther with a tenant that I know ZERO about.....