Inherited Tenant Friends of Seller

Scranton, PA · Member since 2016 · 14 posts · 2 votes

We are set to close on our first investment property in mid-April. The unit it is a duplex with one of the units rented by a tenant for about 6 years. We were under the impression that the tenant was paying $650 per month. When we finally got the estoppel agreement signed, he is paying $600 per month and no security deposit. The tenant is close friends with the sellers and the tenant is currently on a month to month agreement. Should we push the issue of the extra $50 per month before we close or do we create a new contract with the increase of $50 per month or should we not push the issue since it would be tough to get a new tenant in during this pandemic?

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Ron Todd

Rental Property Investor · OK · Member since 2019 · 126 posts · 114 votes

If the tenant is paying on time and they haven't had any issues with them, I would keep them until we know more about the extent of covid's impact. It's month to month so the power is in your hands to raise rent later on. If you try and raise rent and the tenant leaves, it would take a full year to recoup a 1 month vacancy ( 12months * extra $50 = $600). I'd wait until the market has stabalized and then raise rent.

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Ron Todd
Rental Property Investor · OK · Member since 2019 · 126 posts · 114 votes
6y
If the tenant is paying on time and they haven't had any issues with them, I would keep them until we know more about the extent of covid's impact. It's month to month so the power is in your hands to raise rent later on. If you try and raise rent and the tenant leaves, it would take a full year to recoup a 1 month vacancy ( 12months * extra $50 = $600). I'd wait until the market has stabalized and then raise rent.
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
6y
@Katie Ritter What is the going rate for the area? Given the situation right now, I'd ask the seller why the difference and see what they say. If it is close to the market rent, I'd leave it and raise the rent this fall.
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Max T.
Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
6y
@Katie Ritter
Ride it out until this virus is done.
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Carmichael Lewis
Chicago · Member since 2019 · 75 posts · 49 votes
6y
@Katie Ritter- the existing tenants should know that when ownership changes there might be different rules. The 6 year tenants had that price from previous landlords. Now that you are the current owner, the best time to redo the lease adding the $50 is now.
I would give them 90 days to prepare but the chances of them leaving would be slim. They have been there comfortably for 6 years and I dont think $50 would make them move. No matter when you decide to raise rent it will be an issue from tenants. Whether you raise it now or later. I was concerned about getting my property rented at this time due to the economy but I ended getting $100 more than expected per month.
This is just my opinion. Best of luck!!!
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Account Closed
San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
6y
First, do you have proof the tenant actually paid the seller? Via receipts or bank statements? I'd ask for that first, and if it can't be proven, I'd tell the seller the tenant must be out before you close the deal.
Plan B: Get the seller to give you $600 in whatever form for the year's worth of extra rent you were anticipating before having to raise rents - or some form of that. Put it on the seller, not the tenant to make up for any loss.
With a M2M, you can just give the tenant notice (however much notice is required where the property is - 30, 60, 90 days) of any changes you want going forward in a rental agreement. You can do this with just a "Notice of Change in Rental Agreement" for whatever rule or change you want to implement. The tenant doesn't have to sign anything. It's much better than trying to get a tenant to sign something. They can say no, it gets awkward. They can be overwhelmed or angry if you give them some multi-page contract full of legalese. A simple notice of whatever change you want going forward is much simpler and easier for the to digest, and it's all you need.
Congrats on your property!
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Karl B.
Rental Property Investor · Erie, PA · Member since 2015 · 1k+ posts · 2k+ votes
6y
Hello. Have the seller get the security deposit from the tenant now - it will be transferred to you at closing. Tell your agent you want this done now as it's a lot easier to put the seller on the hook for this now prior to closing than try and get the security deposit from the tenant after closing - trust me.
I learned this lesson early on... we're sitting at the closing and my lawyer asks if there's a security deposit and the dual agent and seller's lawyer shrug their shoulders (hindsight: there was no security deposit).
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Russell John Walsh
Member since 2020 · 40 posts · 13 votes
6y
Did the seller put in writing that the rent was $650? Trying to inflate the income to induce you to buy is a problem too.
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
I would want to dig and figure out what is going on.... is there a lease? What does it say? If not can either the seller or the tenant prove the rent amount?
If the seller lied about the amount that is bad. If the tenant lied that is bad.
I would not close until I had this figured out.
Also, the whole idea of booting tenants is ridiculous. You are buying rental properties. The value is in having a tenant. Heck in commercial RE you cant even get a loan unless the units are full and the value of the property is based off the income the property generates. So having tenants in place is good. As long as they were screened properly etc.
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Lynnette E.
Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
6y
Try to keep the tenant for now. Not only because it may be hard to re-rent now, but because once the unit is empty you will want to paint or do other things that will cost you money.
But go in with your eyes open. $50 for $600 rent does not seem like a big increase, but it is 8%+. Depending on where the house is located, if you have rent control it may be very hard to have an eight percent increase. Know what your local rent rules are and how much you can increase the rent.
Also know if you are required by law to have a deposit and if it must be in an interest bearing account. IF so, have that corrected before you buy.
And it would not be unfair to ask the seller to credit you with a years worth of the lost rent if the seller told you it was more before you made your offer.
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Amer Mallah
Monkton, MD · Member since 2014 · 32 posts · 15 votes
6y
Is there a lease or a move-in inspection report? A change of ownership would be a good time for a walkthrough (to document the current state of the house for when the tenant does move out and you need to assess damage) and a new/updated lease.
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Account Closed
San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
6y
Originally posted by @Mary M.:
I would want to dig and figure out what is going on.... is there a lease? What does it say? If not can either the seller or the tenant prove the rent amount?
If the seller lied about the amount that is bad. If the tenant lied that is bad.
I would not close until I had this figured out.
Also, the whole idea of booting tenants is ridiculous. You are buying rental properties. The value is in having a tenant. Heck in commercial RE you cant even get a loan unless the units are full and the value of the property is based off the income the property generates. So having tenants in place is good. As long as they were screened properly etc.

I understand this point of view, and it does make sense on paper. But, I'd rather find my own tenants. Tenants who are moving in because they like the unit, they think the rent is fair, they were happy to sign the contract I wanted to use and to give me the security deposit I wanted, etc., and I'm starting off with them recognizing me as their landlord from the get-go. They won't be comparing me to the last guy - "But, the last manager did this, the last manager let me do that." I had very few inherited tenants that didn't cause me problems.

It's like getting a new manager at your job. They're going to want to change things, you're going to be nervous you'll get laid off, etc.

Tenants will worry about the rents being raised, and inevitably you'll be in a situation where that's necessary. So, they'll be angry and they'll start pointing out all of the things they think should be fixed or upgraded to "justify" the higher rent. Just ugh.

So, yes, on paper it makes great sense. But, tenants are humans and human nature is such that inherited tenants are usually a pain in the rear. At least in my experience. They usually ended up high maintenance, disgruntled pains in my rear.

My point for mentioning getting rid of this particular tenant, is that he's a friend of the owner - red flag. I was saying if the rent he was supposedly paying can't be verified, he may end up being a squatter friend who will have to be evicted and I think that should be the seller's problem, in that case.

And, I would also wonder - if this is such a great rental, why is the seller selling it? My guess, is it's usually tenant problems.
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Ramon Flores
Rental Property Investor · Los Angeles, CA · Member since 2016 · 172 posts · 122 votes
6y
@Account Closed There are a lot of good suggestions in this post. I suggest you work with the tenant and ask the seller to credit the $600 deposit when you close. It is not worth getting rid of a tenant for $50 a month. Every time there is a turnover in my properties I'm looking at $3,500 plus lost rents that I have to cough up. Perhaps wait until the lease is up to increase rent $50.
I would also look at how clean they are and if they are taking care of the property. If they are taking care of it then they may be a quality tenant and that is definitely worth keeping.
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Michael King
Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
6y
@Katie Ritter Welcome to BP! Some excellent answers from previous posters, Katie.

Where did you get the impression they were paying $650? Have you got an email or text from the owner? The Estoppel could have been the tenant's way of saying this is how much I want to pay. Like @Account Closed said about getting the SD via the owner prior to closing. More pure gold and easy solutions.
Congratulations on your first property!
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Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Katie Ritter. I'd be more concerned about the lack of a damage deposit. I would request $650 from seller as a "damage deposit". And don't forget about prorated rents, written into the PA. And, after close, everybody gets under your lease, whatever rent amount you may decide upon.
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Paul S.
Real Estate Agent · Allentown, NJ · Member since 2014 · 39 posts · 44 votes
6y
The month to month might work to your advantage. If they keep the place in good shape, keep them in there and when things improve that's when you renegotiate with them. As it was mentioned above, a good tenant paying a little less is better than turnover and/or a nightmare tenant. I'd ask where they work before I'd think about raising rent right off of the bat. Good luck.
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Katie RitterPro Member
OP
Scranton, PA · Member since 2016 · 14 posts · 2 votes
6y
All- I appreciate all of your input. To answer a couple of questions to better clarify; the unit should probably be around $675 per month based on 2-3 bedrooms. We believe our realtor had mentioned that the tenant was paying but we aren't sure if they assumed based on the listing that indicated the vacant property could be rented at $650 and if we all assumed that is what the current tenant is paying. We have since received information from the appraiser that had spoken with the listing agent confirming the tenant was paying $650 per month. We will see if we are able to fix this, with either a credit for the lost rent or we can change the rent the first month back to $650 since while it is an 8% increase as indicated by the above comment it is what they have been paying. I also like the suggestion that we collect a credit as a credit for their security deposit. We have definitely learned a lot about what needs to be done before negotiations are complete.
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Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
6y
@Katie Ritter, I am with @Account Closed that generally speaking, inherited tenants are more of a PITA than placing your own, and compound that with a friend of the prior owner. Was this tenant also helping out for free with anything around the property? Formally or informally? I know people who live in their friend's buildings and while there is no formal agreement, they definitely help out, even with little things like letting the owner know about other issues, that might not normally happen.
As mentioned, the more you can clean everything up before closing, the more leverage you have with seller, who wants you to close. Chances are this small discrepancy is unintentional and can be cleaned up.
Lastly, I would just ask for some type of credit, but not name it a security deposit. If labeled as such, there may be cause for the tenant to collect it when moving out, if apartment is left in good condition.
1 Reply
Brian Ploszay
Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
6y
I am not sure what the market rent is for that unit. I would probably address the discrepancy with the owner. Glad they are month to month, so you can have flexibility if you need it.
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Katie RitterPro Member
OP
Scranton, PA · Member since 2016 · 14 posts · 2 votes
6y
@Evan Polaski thanks for the input and the recommendation on receiving a "credit". Our realtor is looking into the discrepancy and I hope like you mentioned it was unintentional.
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
6y
Originally posted by @Katie Ritter:
@Evan Polaski thanks for the input and the recommendation on receiving a "credit". Our realtor is looking into the discrepancy and I hope like you mentioned it was unintentional.

Spoiler Alert: It wasn't unintentional.
All the advice you've been getting is great, but definitely have plans to talk to the tenants directly after closing. Get them on your lease (with a security deposit that the seller procures for you and conveys to you at closing) as soon as possible, so you know what their lease says.
With such a close-to-market rent in this uncertain time, I wouldn't raise rents until you for sure want them out.
Have a walk through of their apartment and note any damages. Unless they have a walk though with the seller, this is your starting point, so any damages currently you have to assume were there when they moved in. Get a detailed walk through report and have them sign it.
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Ravi P.
Investor · Schaumburg, IL · Member since 2015 · 219 posts · 104 votes
6y
@Katie Ritter
Good job on getting an estoppel letter. So many investors don't bother with one, or are aware what it is.
But why did you have the impression that the tenant was paying $650.00/month in rent.
You should also request a proof of payment typically 3 months at minimum 1 month. Maybe once the seller had it under contract. He may have informed his friend/tenant that he will drop the rent.
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Dave Rav
Summerville, SC · Member since 2018 · 588 posts · 252 votes
6y
Unless the are overwhelmingly on board with your directives (new rental rates, new rules, new lease, etc) my advice is move on.
Inherited tenants can be problematic. I have two from a property purchased in 2016 in a MF property. Constantly fighting with me. Clearly they were given free reign for too long. They're the only two I have issues with!!
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Katie RitterPro Member
OP
Scranton, PA · Member since 2016 · 14 posts · 2 votes
6y
@Mindy Jensen Definitely will work on getting that security deposit and putting them on our lease once we close. The walk-through is actually a bit of a sticking point since in PA the seller's realtor is not allowing us to enter the occupied unit because of COVID-19, so we are trying to work out a FaceTime call. Do you have any advice on doing a virtual walk through?
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Katie RitterPro Member
OP
Scranton, PA · Member since 2016 · 14 posts · 2 votes
6y
@Ravi P. We think originally our realtor told us it was being rented at $650, I have tried to go back through my emails to see if I have it in writing from them. We entered the rent numbers in the BP calculators so I know we got it from somewhere. Unfortunately finding it easily in our record keeping is proving difficult and certainly something we will do differently on the next deal. Interestingly when we got the appraisal on the property they confirmed with the realtor that the rent was $650 for the occupied unit.
On another note, I am curious do you get your estoppel's notarized? We didn't get ours notarized 1) because I didn't realize it was necessary 2)it is difficult to get things notarized during this environment. I only made a good judgement call because of Brandon and Heather Turner's book on Managing Rental Properties, it has been instrumental in doing our first deal!
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Ravi P.
Investor · Schaumburg, IL · Member since 2015 · 219 posts · 104 votes
6y
@Katie Ritter
I have never gotten the Estoppel letter notarized, always accepted it in good faith. I have requested the letter as part of my attorney review. Anything in question, I requested clarification. Never had a discrepancy, similar to yours. But it's not a bad idea to get it kotarized.. The current pandemic doesn't help.
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