Acquiring property with tenants in place

11 Replies

I am about to acquire a triplex that is fully rented until next year. I’m taking over the leases and need some advice on next steps. After closing, I’m thinking of scheduling to meet each tenant and go over their lease, their experience, and my expectations. Am I able to institute new policies such as no smoking indoors, snow removal, restrictions on pets? Or would this have to wait until the lease expires? Must we continue the leases as is, or do we create new leases, since the original ones were signed by the previous owner? Any other advice? This is my first time acquiring a property with tenants in place. Thanks in advance!

@Sheena Lee It's truly a matter of state law (or even municipal rules) around landlord-tenant...typically, the lease will remain as-is with the sale. Altering the lease may violate landlord tenant law and you end up in a bind...we've inserted addendums before, but there were not really material...it was more or a reminder on what to do to be a good tenant.

If you run into a non-payment issue, or the tenant is found to be in violation of the lease terms, the circumstances change drastically...an attorney would serve you best if that's the case.

You've waited far too long to learn your local laws. You need to download a copy of your local landlord tenant laws and familiarize yourself with them before you end up in a situation, not after.

If you did download your local laws you will most likely find that the lease transfers to you upon purchase. The lease is as legally binding to you, as it would be if your signature was on it. You cannot make any modifications without the tenant agreeing to it.

My advice, beyond learning your local laws, is to make sure you are getting security deposits and pro-rated rent at close. Close as early in the month as possible, so your pro-rated amount is as high as possible. This also gives you more time to introduce yourself and give tenants time to figure out where to send rent. Finally, get estoppel letters signed by tenants and current owner so the tenant cant give you some unknown story about how they pre-paid rent for the whole lease and its not their fault the old owner didn't give you the money.

@Sheena Lee

Yes, the bus is in the ditch, and there's only one way to get it out of the ditch. You will have to honor your tenant's signed lease with the former landlord to the letter. No new policies until the leases expire.

I second @Andrew B. 's comments to make sure you get the security deposits at close. Not getting them and having to deal with tenants demanding them later is incredibly common. The owner will almost certainly buck at this, since the sad truth is that the deposits were probably never set aside in an escrow account in the first place (as is the law in many places, including my area), and the owner is mightily hoping to pocket them as a shady little bonus for this sale.

Research "estoppel certificates": a fancy name for a simple thing, a form given to tenants confirming the monetary amounts of their rental agreements.

Good luck, Sheena. I'd advise you to keep asking questions here as you go through this process. This is where the BP community shines.

In addition to what people have already said, when I inherited tenants I made a point of meeting them and then doing a "move in" check sheet with them. In other words, I met with them and we both decided what deferred maintenance needed to be done, and it gave them a new start for any damages (since I couldn't prove what they maybe broke anyway). And it also gave me a chance to review with them the new instructions for paying rent, verify their email/phone, and get a general feel for said tenants. I also told them; "just so you know, your current lease will remain in place until (insert date it expires)". 

as @Jim K. said, estoppel certificates are key in this situation. They basically affirm that the lease the seller gave you is true and accurate and there are no changes or other terms to a lease that could come back and bite you later.

You should inspect the lease as part of your inspection phase, long before closing. If the Seller tells you the units are all renting for $1,000 a month, you need to verify that. If the Seller says the tenant put down a $2,000 deposit or that they don't have animals or that they pay rent on time every month, or that they've lived there for 16 years, you should verify all of that so you know exactly what you are getting.

As mentioned, you can do this with an estoppel certificate or estoppel letter, a review of the lease agreements, and a detailed inspection of every unit. The estoppel certificate is a form filled out by the tenant and then confirmed by the Landlord. It's supposed to ensure there are no surprises after closing. For example, you buy the place and the tenant could claim the Seller allowed them to paint the walls black or that their security deposit was twice what the Seller claimed. How will you know? An estoppel certificate fixes this problem.

Some things it may include:

1. Tenant name, contact information, and address

2. Occupancy date

3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate

4. Are there any modifications to the written lease?

5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?

6. Current lease term (expiration date, month-to-month)

7. Current rent rate

8. Rent due date

9. Security deposit amount

You can find plenty of examples by searching for "tenant estoppel certificate doc" or exchange "doc" with "pdf" for more options.

Here is an example and explanation: https://eforms.com/rental/estoppel-certificate/

Some have a lot of legal jargon but this document does not need to be so detailed. This is an important tool for anyone buying a tenant-occupied property.

Most of the problem loser tenants you encounter in your landlording career will be inherited tenants through a purchase . Inherited tenants are almost always a huge pain in this business 

Thank you all for the great advice! My realtor has been great in making sure we get everything we need, such as leases, security deposits, rental permit, etc. I am now concerned, as one of you mentioned to close early in the month. Right now we tentatively closing on the 26th of the month which I am now questioning how this will work out. We want a smooth transition and no late rent, so I'm hoping with careful planning we can prepare for this. Any tips on the best way to document the condition of each unit upon acquisition? 

@Sheena Lee

Reference Your: Right now we tentatively closing on the 26th of the month which I am now questioning how this will work out. We want a smooth transition and no late rent, so I'm hoping with careful planning we can prepare for this.

RESPONSE: Prepare an intro letter; saying you are new owners, and here is where and when to pay the rent. State you would like to come by to meet them and do a walk through (give a choice of dates) and identify any items that needs maintenance in their opinion. Anything else you think might be important for them to know upfront. Keep the letter positive and couched toward creating a great relationship between you & Tenants. 

Get this letter to them the day after closing or as soon as possible after funding, if the closing and funding are not coincidental.

Good luck - you can do this!