Buying a rental that tenant didnt pay rent.

16 Replies

He BP community.

I am set to close on a property where a Tenant has put in the vacate notice, but plans to stay in the unit for 11days past closing. Everything would be good except they didnt pay rent and dont plan to. The managment company said they were keeping the damage deposit to cover back rent. My thought was if they ( managment company ) agreed then the damage deposit should transfer, and uncollected rent would be the sellers responsibilty. I also would need to file suit to collect 11 days of unpaid rent if i so choose. Whats your thoughts, should damge deposit be transferred, or should the unit be vacant on/before closing. Lesson learned here, always put rents/deposits in closing, here I thought it would be good outside closing..

Thanks

BM

If you haven't signed the contract, yes it should be vacant upon possession.  Deposit should be included in the closing if you will be expected to pay it back to the tenant.  

Check your local laws to see if the deposit can be applied to rent or if it is exclusively used for repairing any damages.

The contract is between you and the seller, not the PM; so is the PM giving it back to the seller or planning on keeping it?

Personally, I'd require the unit to be delivered vacant. Push back the close if you need to. This will be YOUR tenant after close and if they decide not to leave, Then YOU will have to evict them. Too many loose ends. Require it to be delivered empty.

Your question is confusing. I think your answer depends on what day of the month you closed escrow and the date the tenant's rent was due. If tenant's rent was due on the 1st of the month the seller has the right to hold (not keep) the deposit because there is no guarantee the escrow will close when scheduled. Then, if you closed escrow on the 5th of the month the seller should pay you for 25 days of rent from the deposit that was not used when he was the owner and then it is now your obligation to get the tenant out of the apartment and you get to make the decision regarding how much of the deposit the tenant will get back. If the tenant stays the entire month it is obvious that you need to be paid through the deposit and there is no reason the seller should pay himself from a deposit for a rental unit he no longer owns.

A small percent of sellers will agree to have a rental unit vacated the day escrow closes because there is too much risk to lose a lot of money because too many buyers back out and can't get loan completed. Imagine naive sellers giving their tenants the 'boot' and the property falls out of escrow 1, 2 ,or 3 times and it does happen. Then, you really put the seller in a risky position because he has a property that get vandalized and finds squatters living in the property who take several months to evict. Meanwhile, the squatters have barbecues inside the house with wood from the structure and they sell all the copper plumbing and electrical wiring for heroin.

I purchased 24 properties in the beautiful city of Las Vegas. The properties were in nice neighborhoods and before I closes escrow on 3 properties the air conditioners compressors were stolen and probably sold for the copper and aluminum inside them. Some properties had to air conditioner compressors. Fortunately, I do pay an employee to inspect every property the same the escrow closes, before it closes. Then, I get an instant credit through escrow to cover the thefts. I had a few more vacant properties where all the appliances were stolen including washers, dryers, refrigerators, microwaves, dishwashers and stoves. It is very dangerous with all the homeless people to have a vacant property.

@Jack Orthman rent due the 1st. Possesion on the 8th. I believe I am entitled to the whole damage deposit. Assume I recieve the damage deposit. Tenant moves on Aug 20th, no rent was collected from July 1st to closing. Seller is out 1 months rent and deposit, but hes off the hook for any damages. Seems fair to me. Part of me feels like they should have evicted the tenant after month 1, but realistically i know this process can span some time.

@Brandon Moreau

Clarify, lines from PSA

328 PRORATION OF TAXES AND ASSESSMENTS: Seller and Buyer agree to prorate taxes, Special Improvement District

329 assessments for the current tax year, as well as prepaid rents, water and sewer system charges, heating fuel and tank

330 rental, irrigation assessments, Homeowner's Association dues and/or common maintenance fees, as of the date of closing

331 unless otherwise agreed as set forth in the additional provisions

You added a little more and I did not know that the tenant was more than 1 month late. In that case, I will bet they the seller is entitled to the entire deposit since his rental agreement most-likely states that he can used the deposit for unpaid rent and the rent was unpaid and due long before you took over the property. If the tenant was late for only the same month the property closed you would be entitled to the difference for that month.

@Jack Orthman

Thank you for your input. Obviously I did not know the tenant was behind, but also feel like maybe the unit should be vacant before we close. Or the seller forfeit the deposit. At 30 days past due, the property managment company has not done the seller any justice here.

For a good businessman, a few snags is an expectation and a part of doing business. Don't let it destroy the love for doing business and don't take the problems home to your family. Enjoy the fact that you have the ability and the health to be in the real estate business.

Do you have a strong Realtor? I think your recourse is going to be different depending on the state, the contract, and the lease and rental laws in your area.

Here, if I didn't know he was behind when the contract was signed then when that info came out it would be new information, allowing re-negotiation, just like when you write and offer and then an inspection goes bad, you renegotiate. Also here, when the property transfers any paid rent gets prorated and the security deposit must transfer to the buyer, so if the tenant is there, you would get the security deposit for sure, though that may not be the case there. And if you had a tenant that didn't pay rent as supposed to during the contract I would require that tenant to be gone or caught up before closing. An eviction is a great way to start off badly for a new property.

The seller does not have a crystal ball and cannot disclose that the tenant is not going to pay the when when the seller does not know whether or not the tenant will pay the rent, but the seller does have the right to hope the tenant will pay the rent and he has the right to keep the deposit for the portion of rent that was owner when he owned the property. Disclosure for a fact before something occurred and was finalized would be a tough argument for the buyer to beat in a court

Just an update for those of you at the edge of your seat... JK.

Learned me a lesson on contracts. Seller and I have come to common ground and settled on how to proceed. Thanks for your input and views.

I would recommend you find an attorney other investors in your community/state trust.  They should be able to help you with both the tenant side and the working with the seller.  It's the worth the call to get their counsel on this.

You have a few risks here. What if the tenant DOES NOT vacate and stays longer? What if the tenant decides to RIP OUT THE TOILET. Yes these are possible. You need to put in the closing some how the place must be vacant and reasonable working condidtion. They could stay forever and it can take you months to evict them depending on where it is located and rip the place apart since they know they will not receive their deposit.

GOOD LUCK

Dennis