New purchase, current tenant is not current on rent

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New purchase, current tenant is not current on rent

David BowlesPro Member
Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes

Hi Guys! I recently had a seller (another investor) agree to a 45k purchase price (cash) on a house with ARV of 60k. The house had a full gut rehab 4 years ago when this investor bought it.

The current tenant is “all caught up at the end of this month” but has repeatedly been late in the past. That said, she takes great care of the house and has been there since he placed her over 4 years ago.

The property is in Michigan and right now evictions are suspended due to the Coronavirus as far as I know.

Is this tenant too big of a red flag? Or does her taking great care of the house outweigh the “always getting caught up”? I’d hate to have my first investment property get stuck with a non paying, Coronavirus squatter. Any thoughts/feedback are welcome and appreciated!

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y

She probably pays late because the Seller allowed her to. Let her know you're aware of her payment history and that you want to start off on the right foot. She needs to pay "on or before the first day of each month" period. Learn your late fee and eviction laws and be prepared to hit her the moment she violates. You don't have to be mean about it; just be factual. If you're allowed to start evicting on the third day, do it.

I would also keep her on a month-to-month lease. If she continues to screw up, give her notice and try again with the next one.

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  • Catherine Emert
    Realtor · Bend, OR · Member since 2018 · 323 posts · 224 votes
    6y

    Did she pay her rent in April? If so, I think that some tenants are just habitually late in rent. I am not sure that you would be stuck with a squatter if she just pays late and takes care of the property.

    3Reply
  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Catherine Emert Thank you for your reply! My understanding is that at the end of this month she plans to pay both April and May. I really don’t think I’ll end up with a squatter either, but I’m being cautious. As this will be my first property, I really want to make sure it’s not my last! LOL!

    The seller is willing to take 30k down and finance the rest which is awesome!

    Thank you again for your thoughts!

    1Reply
  • Corey Hawkinson
    Rental Property Investor · Bloomington, MN · Member since 2019 · 404 posts · 542 votes
    6y

    @David Bowles It sounds like a red flag to me. Not necessarily a deal breaker if the price is good enough to justify that issue. It shows that the tenant is either struggling financially or very unorganized. Sometimes a landlord can “train” the tenant that it is ok to pay late. Then it just becomes normal for the tenant to pay whenever they want.

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  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Corey Hawkinson Thanks for your input! I think the case here is that the tenant may have been trained that it was OK. The current owner is a very kind hearted man and is extremely lenient and happy that he can bless others When he can.

    As everything stands right now, the current tenant is on month-to-month. Would it be in my best interest to institute a lease when I take the property over? Or should I keep her month to month just in case I need to find a tenant that will pay on time?

    1Reply
  • Nick W. Graham
    Attorney · Carrollton, IL · Member since 2020 · 65 posts · 14 votes
    6y

    @David Bowles. If she has a written lease already, you’re bound by those terms until the lease expires. We always suggest new leases once you take over the property to ensure you’re protected. If you can, get her on your lease ASAP.

    3Reply
  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Nick W. Graham Thanks Nick!

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  • Justin Schaefer
    Real Estate Investor · Mukwonago, WI · Member since 2017 · 76 posts · 16 votes
    6y

    @David Bowles what about telling her that she has to switch over to automated ACH payments every month. Set the due date to the 5th, to make it a nice easy day, and see what happens. If she doesn't have the money there and set to go on time, she's gonna get with fees from you AND the bank. It's some incentive to have that money there on time.

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y

    She probably pays late because the Seller allowed her to. Let her know you're aware of her payment history and that you want to start off on the right foot. She needs to pay "on or before the first day of each month" period. Learn your late fee and eviction laws and be prepared to hit her the moment she violates. You don't have to be mean about it; just be factual. If you're allowed to start evicting on the third day, do it.

    I would also keep her on a month-to-month lease. If she continues to screw up, give her notice and try again with the next one.

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  • Craig Sloan
    Member since 2018 · 200 posts · 123 votes
    6y

    Good advice from @Nathan Gesner  Tenants often get away with what they can.  Be kind but professional.  You're holding up your end of the deal, the tenant should do the same. 

    2Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    6y

    I am curious about the pricing. You say it is 45k on a house with an ARV of 60k. But this house was just gut rehabbed 4 years ago....so what exactly is the ARV based on it if has already been renovated?

    IMO if the house was worth 60k the seller would be asking 60k 

    2Reply
  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Justin Schaefer Thanks Justin! That’s something I hadn’t thought of!

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  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Nathan G. @Craig Sloan Thank you both for the advice! Wouldn’t an even toon be easier if I have a lease in place? How would I prove to the courts what our initial arrangement was?

    0Reply
  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Mary Mitchell Thanks for your time in this discussion. I’d be happy to share more details with you!

    The has fallen on some hard times. He has NEVER used leverage, everything cash. Due to a recent divorce, he is looking for capital to start flipping again. He looked into a cash refi on the house, but with the market how it is, he’s looking at paying super high lending costs. To add to that, Michigan is locked down right now so time on market has significantly.

    He is a friend of a friend so is willing to sell me the house for 45k. The 60k value is based on comps within 1 mile over the last year. Appraisals are coming in all over the place right now, and I do not plan to sell the property any time soon.

    Feels like a great deal that came at a great time for me! What are your thoughts?

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  • Craig Sloan
    Member since 2018 · 200 posts · 123 votes
    6y


    @David Bowles yes an eviction would be easier with a lease in place.  Try to go month to month if you anticipate problems.  Usually in court only things that are in the contract are enforceable.  Without an agreement in writing it would be hard to prove what your initial arrangement was. 

    1Reply
  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    To add to my last comment. The seller is even willing to let me finance the property. My plan at this point is to do a conventional 20% down Loan on the full 60. I’m expecting around 6k closing so that leaves me bringing 18k to the table. The seller is then going to give me back 15k immediately after closing. I’m thinking I can end up with only about 3k into the deal, a 48k mortgage on a 60k house that is currently renting at 650 a month.

    It sounds CRAZY to me. Am I missing something huge here guys?

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  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Craig Sloan Thanks so much Craig! I appreciate the advice so much more than you may realize! And I’m sorry that my autocorrect failed me on the spelling of “eviction”! 😂

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    6y

    @David Bowles. Any time I am writing up a Purchase Agreement wherein the tenant has a history of not paying rent on time, or the place has been trashed, I simply write into the purchase agreement; "Unit must be delivered empty and broom clean at time of close". This is especially the case if the tenants lease is about to expire or is MTM. If the seller refuses or doesn't want "the hassle" of doing that, I would move on. It would have to be an exceptional deal in order to take on the headache. And, $15k below value is not an exceptional deal to me. 

    3Reply
  • Craig Sloan
    Member since 2018 · 200 posts · 123 votes
    6y

    @David Bowles you're more than welcome. Happy to help. No worries on the autocorrect. If I can be of service in the future please reach out. I'd be happy to help.

    1Reply
  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Anthony Wick I definitely understand your stance on the tenant issue and I would normally do the same. The difference for me here is a few things. Firstly, she has been there and takes care of the house for 4 years. The only time she asked for repairs was a clogged toilet that got replaced. On top of that, he has already told her that the new landlord will not be accepting any late rents without a late fee coming with it.

    I think you and I may be in different financial boats as I think buying 12k in equity with 2k is a good deal. As I’ve mentioned, I own 0 investment properties currently. I truly do appreciate your input!

    1Reply
  • Rick Ortiz
    Rental Property Investor · Philadelphia, PA (19148) · Member since 2020 · 38 posts · 39 votes
    6y

    @David Bowles

    Can you be sure she is "always caught up"? Will the seller share there financial records. Is it too late and you already made the purchase than its a moot point. If she is just always late but always pays thats ok. But to be always late is a bit scary. You will be stressing out every single month till the payment is made and thats not good

    0Reply
  • John Teachout
    Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
    6y

    With a new property owner, this is your chance to play "new sheriff in town". Tenants realize the situation may not remain the same so if you  need to adjust the rent, put a rental agreement in place or give their 30 day notice, this is time to do it.

    By the way, giving someone a notice of non renewal or notice to vacate is NOT an eviction.

    1Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    6y

    As to the tenant issues:

    This tenant will never be able to catch up.  A tenant who doesn't have the April rent, will never be able to pay April rent plus May's rent at the end of April.

    As far as the rental agreement, there is no need for a lease and you definitely don't want one with a tenant who doesn't pay rent on time and is already behind.  It's easier to get rid of a tenant with a M2M agreement.  Just give them notice to move.

    When a tenant is on a M2M agreement, all you need to do is give them notice of new terms.  No need for them to sign anything.  "Notice to new rental agreement terms as of _____________ insert date that's allowed by law (30, 60, 90 days etc.)"  It can be anything from increased rent, to pets to parking rules - you name it, as long as it's legal.

    When there isn't a written agreement/lease, then the default is the city/state laws.  

    No written lease will guarantee a great tenant who will abide by whatever you wrote in it.  So, never fall into this mind trap.  The best guarantee for a great tenant, other than great tenant screening, is a month to month agreement that allows you to get rid of a bad tenant asap. Because you can rent to a great applicant, who may promptly move in their baby daddy or crazy lover or get a pit bull, you name it.  And if they have a lease, it can take you a year to get rid of the problem.  The only thing a written term in a lease does, is give you something you can try to evict them over - if it's even legal.  But, your mission is to never have to enforce a lease.  Or hire an attorney to enforce it for you.

    That all said, I don't think your deal is a good one.  The terms don't sound good to me at all, and I think you're inheriting a problem.  Something is wrong.  You don't know if they really only ever called about a plugged toilet.  And even if that's true, that's not always a good thing.  If tenants aren't calling you to tell you about maintenance problems, you could end up with serious damage from a toilet that's been leaking on the floor for a year and now the sub-flooring had all rotted out, etc., etc.  

    Plus, you're going to have to evict this tenant, in my experience.  Tenants who take great care of property are great, for sure. But, you invest in rentals for income.  You're not looking for a house cleaner who you will give free rent to, in exchange for taking care of your property.  You're looking for a tenant who will do both - take care of the property and pay rent on time every month, which is completely reasonable.

    4Reply
  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Rick Ortiz I do intend to ask the seller for proof of rent payments for the last 6 months. I expect he will share that with me as I mentioned, he’s a friend of a friend. From my understanding she isn’t always late, but sometimes is, but always catches up. It’s definitely not too late. I’ve made no agreements of any sort at this point. I am planning to meet the owner/tenant Tuesday for a walkthrough of the property. My REA friend (also an investor) will be going with me as well to give his advice.

    Thanks for your feedback!

    0Reply
  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @John Teachout Thanks For the advice John! I didn’t realize you could even tell a tenant to move without evicting them!

    1Reply
  • David BowlesPro Member
    OP
    Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
    6y

    @Sue K. thanks for the reply Sue! I am hoping that by asking the seller for detailed payment history (thinking last 6 months is good enough, what do you think?), I will be able to have a clearer picture of the situation. I am not trusting enough to take someone’s word for it when it comes to my money!

    At this point today, if I decide to keep the tenant, I would have her sign a month to month rental agreement I think. At least that would allow me have my terms made VERY clear to her up front. I was originally leaning towards keeping her, but after this thread, I’m 50/50 LOL!

    As far as the condition of the property, I should have a better idea of how well the property is taken care of on Tuesday when I walkthrough. I also plan to pay for an outside inspection at that point should I decide to move forward.

    I’m very curious as to your comment “the terms don’t sound good at all.” What about them is not to your liking? As a RE newb, all I can do to analyze is look at the numbers and use spreadsheets like the BP one, and it looks good from that aspect. I definitely hear your advice here, and will keep it all in mind while making my decision!

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