New purchase, current tenant is not current on rent
David BowlesPro Member
Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votesNew purchase, current tenant is not current on rent
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6yShe 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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- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes6y
@David Bowles A lot of red flags from the info you provided. Low income tenants very rarely fully catch up with their rent once they fall behind. Price in dealing with this tenant into your offer, and tell the seller if they don't want to take a hit on the risk the tenant brings then you are willing to pay more if they deliver the house vacant upon sale.
A vacant house is better than a problem tenant, especially when local laws are preventing you from taking legal action for people not paying their rent.
Also, make sure your attorney makes the current tenant and landlord sign off to what you are being told in regards to monthly rent amount, security deposits, and payment history just so everyone is on the same page because once this property closes you will not here from the seller again if you have questions.
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Michael Noto Thanks for your response! My original thought was that I’d be kind of a jerk to make her move due to my own “what of fears”. The current owner a very close friend to my real estate friend. He also owns a business very near me, so I really don’t expect to be ghosted by him. Do you really think it best to have current tenant gone when I buy? Looking at area rents just yesterday, I could probably get 750 for rent (current 650).
The seller did tell me he would have her vacate if that’s what I wanted. Maybe I should just do that and start fresh in my first house......
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
I mean “What if......” fears. Sorry for the typo.
- San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes6y
Originally posted by @David Bowles:
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?
Hi David, This deal doesn't make sense to me, which is what I was referring to. Why would you get financing for $60K? Why do you think that is good for the seller to "let" you do? Why doesn't the seller just sell it to you for $45K? Also, why are your closing costs so much as a buyer? That all just seems really weird to me and not in your best interest, but it's completely possible I'm missing something, so I'm not being mean, I'm just honestly confused as to why this is a good thing.
As to your idea to have the tenant sign a rental agreement - even if it's just month to month agreement. I highly suggest you don't bother with trying to get her to sign anything. Tenants can dilly dally and put you into the position to keep begging them for something. You just really don't want to be in that position. All you have to do is give her your new rental agreement that is in effect starting X date. No need to have her sign it. All you need is delivery confirmation. The easiest way to get this is through USPS. If you choose the package option online, you can print out priority mail labels on usps.com. Just use a bubble envelope - that qualifies as a package. So, you don't have to go to the post office. You probably get bubble wrap envelopes in the mail from Amazon all the time, right? If not, just find a small box. They just won't let you get tracking on a regular letter envelope. You can figure that out. Anyway, you just need proof they received it, and USPS tracking that shows it was delivered is good enough. No need for them to sign anything.
Unless there is some law where you live that says otherwise, this is all you need when transitioning from a lease to M2M. Just make sure you give them the proper notice of a change in terms. That's usually only 30 days, if you aren't raising the rent.
I highly suggest the Nolo Press leases and rental agreements. They're written in a way that's easier for tenants to understand than some written by apartment associations or lawyers. Having a contract that both parties don't really understand is bad for you if you ever have to go to court over it. Simple, straight-forward, easy to understand by anybody contracts are the best.
https://store.nolo.com/products/landlord-tenant
Here are some calculators I found online that are really helpful to try to figure out if a property will be profitable:
Rental income calculator:
https://www.calculator.net/rental-property-calculator.html
Use these to fill in some of the blanks in the above calculator:
Tax calculator
https://smartasset.com/taxes/property-taxes
Residential Rent Vacancy Rates:
https://www.deptofnumbers.com/rent/
This just helps learn about a market:
livability comparison
https://www.areavibes.com/compare-results/?place1=Binghamton%2C%20NY&place2=Davis%2C%20CA
- Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes6y
@David Bowles
couple of thoughts,
check current owners back account to see when tenant pays. many of my tenants pay late, but always within the 5 day grace period allowed by law. i consider them late, but would rent to them again adms the law has trained them to pay late.
is there a deposit you will be inheriting? if not, get one.
record the condition of property when you purchase. or get existing walk through docs. but i would walk through again with tenant when i purchase and set expectations.
definitely get a your lease signed. great if they are currently month to month as you can sign them at end of month. you could still go month to month, but using your lease agreement.
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Sue K. Lots of good info here! I’d love to speak with you on the side if you have some time available. I’ll be sending you a DM shortly!
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Curtis Mears Thanks for your response! I do intend to ask for proof of payment. If that is not provided, I plan to have her removed by closing. We will see how that goes!
Should I purchase the property, I’d inherit a total of 900 dollars. One month rent at 650 and a 250 per deposit (she has a tiny lap dog from my understanding. I’ll find out for sure tomorrow when I tour inside the property.
Thanks again for your advice!
- Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes6y
Hi @David Bowles, looks like you're ready to strike on your first deal...if so, congrats. While I don't know the true number, I'd venture to say that 80% of people here on BP don't get this far. They post, they watch, they listen, but push never comes to shove. So the fact that you're close is a good thing.
Now, lets ask the tough questions.
1. I don't see anything that tells me about your cash flow on this deal. 15k equity doesn't mean anything to me if I'm losing money every month. 15k equity doesn't put food on the table, at least not initially. Equity represents an exit for me, although you absolutely should make your money when you buy.
2. If you believe ARV is 60k (you're buying at 75%) but the property recently went through a full house rehab...where's the ARV coming from? It either needs repairs/enhancements to get to 100% ARV, or its at ARV.
3. Remember that buyers and sellers have different and competing desires. Of COURSE this guy wants to sell. Of COURSE he wants to finance you. This is a blowout deal for him, likely dumping an underperforming/underwhelming property for cash and then financing you so HE makes his money. To that end, you need to have a full analysis of this values of this property -- rent, minus all expenses (including set-asides for problems). I don't believe we've seen that and if you haven't done that, then you are making a ton of assumptions.
4. I think I'd rather have the property delivered vacant -- tenants that are not on time will be a headache for you, especially as a new investor. What makes you think this'll get better during a transition from seller to you? I'd have it delivered vacant, and for 20k less.
Without knowing much -- I'd say this deal is underwhelming at best. You may have an analysis that shows otherwise, but there's too many things here that (this still novice, but learning) investor would walk away from.
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y@Joe P. I will do my best to address everything in your reply. Thank you so much for your time on this!!! The seller has agreed to sell me the house at 45K. Current MARKET Value is 60K based on similar comps (fully rehabbed, beautiful comp houses within 1 mile sold for up to 90K in 2019.) I have been referring to this as ARV previously, but it is actually current market value. I am looking to do a 60K loan at 20% down and have the seller give me back 15K at closing. (as he only wants 45) The analysis looks like this using the BP calculator. I have also verified tax/ins costs on the house. I am assuming 7% vacancy and 10% maintenance/capex. Purchase Price: $60,000.00 Purchase Closing Costs: $1,000.00 (paid by me to my REA friend, also an investor, to help me through the process) Estimated Repair Costs: $0.00 (this is assuming the tenant stays. I haven't seen the property yet, nor met the tenant, so I left this at 0 for) Current Market Value $60,000.00 Property Description: Nice cottage with 2 bed, 1 bath. Comes with (small private lake) Lake priveleges. Down Payment: $12,000.00 Loan Amount: $48,000.00 Loan Points: $1,680.00 (assuming I want the 3.5% rate at 3.5 points. I'm inquiring as to how many points a higher rate would be to reduce my up front capital investment) Loan Fees:$ 5,000.00 (based on an estimate from the lender) Amortized Over: 30 years Loan Interest Rate: 3.500% Rent: 650.00 (7800 yearly income) Expenses: Vacancy $45.50 (7%) Repairs $32.50 (5%) CapEx $32.50 (5%) Insurance $67.00 (10%) P&I $215.54 (33%) Property Taxes $58.33 (9%) Total $451.37 (69%) Total Monthly Cashflow ~200.00 So in my opinion, closing looks like this. I bring 19K to the table. Seller gives me 15K back. I end up only having about 4K into the deal. I also have 48K loan on a property currently worth 60K leaving about 12K in equity. Should I keep the tenant, cashflow should be around 200 per month. The way I see it, with only 4K into the deal, my cash on cash ROI is insanely high (2400/4000=60%). I also plan to set aside 10K in a reserves account for the property leaving me with about 40-45K in my own personal savings. I know this was a lot to look at, but being able to get valuable opinions back from everyone on this thread is worth it's weight in gold to me! I just want to make sure I'm not making a decision I regret! I still have not made an offer on the property yet, so it's not too late! I also don't want to be the guy on the sidelines that never buys a house because "it's too risky". Is there a happy medium?
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Joe P. Sorry the mention didn’t work on my post. I’m still trying to figure out whether to use the phone app, or the computer. Both seem to have their quirks!
- Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes6y
Thanks David -- honestly its not a lot to look at if you do it often. But the numbers are vital.
Have you confirmed the P&I number? 60k at 3.5% comes out to $269.
Have you walked through the property currently to see how the unit looks? Rent rolls, promises from the seller, et al, should all be taken with a grain of salt.
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Joe P. Just checked on bankrate.com and I see the 269 there as well! Perhaps I typed something wrong in my analysis.
I’ll be doing the walkthrough tomorrow, so we will see how that goes.
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
Just checked a different website and it had the 215! Very strange, I will definitely confirm with the lender when I speak with her today!
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes6y
@David Bowles I’m probably missing something but where is the owner financing part? It looks like you have a conventional lender?
It’s thin for that level of house but you would learn a lot and you don’t have too much exposure, as you pointed out. Is the work ok or lipstick? I don’t know that asset type very well. I think your capex and repair numbers are low though.
And the tenant you have won’t get better and is pretty much judgement proof so your life will be mentally easier if u start fresh.
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes6y
@David Bowles oh the seller is financing 15K? At the same terms as the bank? Must be really wanting to get out of this thing....
- Specialist · Charlotte, NC · Member since 2016 · 111 posts · 95 votes6y
@Nick W. Graham’s
I agree... even if you give her a month to month lease... you want YOUR LEASE in place on all of your properties!!! When u go to court— it’s always interesting to see how many independent landlords don’t EVEN KNOW THE TERMS OF THE LEASE IN PLACE... I though they were just ‘careless’ but I’m sure it’s more likely they inherited a tenant and lease. Live and Learn : )
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Jonathan R McLaughlin I had originally been speaking with the seller to do 30k down cash then pay him back over (terms TBD). He then mentioned he would be ok with me getting financing for it. I only currently have about 45K saved, so I felt that my potential risk was lower going with a traditional loan. At least this way, I still have the cash in my pocket to pay the loan down if I choose. Does that make sense?
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Lisa Hoover Thanks for your input Lisa! I definitely plan to put my own lease in place, even if it is month to month!
- Specialist · Charlotte, NC · Member since 2016 · 111 posts · 95 votes6y
@Sue K. Hi Sue,
That law background definitely shines thru in your post. I’m a long retired pm too. Amazing education in working with the public🙄.
I’m following you : )
- Specialist · Charlotte, NC · Member since 2016 · 111 posts · 95 votes6y
@David Bowles
First— I’d do the deal. Secoond— Is keep the tenant : )
The key here is the price point..you find a tenant that takes care of a $45k house... keep her... she’s smart enough and responsible enough to be there 4 years. Keep her— but also on month to month.
One thing, please:
Always hire a licensed home inspector on ANY purchase... on rentals the current owner doesn’t know the TRUE state of the property.. it’s a rental!!
That’s why on PROPERTY DISCLOSURES on a regular sale the landlord/owner must choose N/A
because they don’t know the current state of their own property because they don’t live there.
I’m not saying you’d back out of the deal or ask for repair money... NO INVESTOR buys a property without a home inspection just so YOU KNOW what repairs are coming— and that any work done the correct permits were pulled etc.
You can also call YOUR NEW homeowners INSURANCE co and ask them to pull a CLIO report of any prior claims... that can be a big help to.
Good Luck with your new property!
- Investor · Midwest · Member since 2019 · 333 posts · 225 votes6y
@David Bowles...@Corey Hawkinson is talking about me.
I allowed a tenant to pay late and rarely enforced the late fee. I sold the property to a friend; he raised the rent and has collected the late fee EVERY month without issue.
Lesson: Set the expectation early and follow through on what you expect / what the lease says.
When we purchase a property our policy is everyone starts w/ a clean slate. Tenants may have had an issue w/ the previous owner, and / or he may have had an issue with her. It's a relationship and you don't know where it broke down.
Give her a chance and base your actions solely on what she does or fails to do.
Glad you did a rent comp search. If you can get $750 then I'd give her 60 days notice (or when COVID ends) that the rent will increase. I would give her 30 days to decide if she wants to sign the new lease with the new rent amount. One day 31 the new lease would be executed.
If you've done the numbers, and YOU are comfortable with the deal & terms then execute. We can all pick apart things we like or don't like about a deal. Execute and you'll be better for it.
- Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes6y
@Carl Millsap Thank you for that great advice! I especially like your advice in dealing with new/inherited tenants. I agree that no matter which way I decide to go with her, it will be a learning experience!
- Rental Property Investor · NY · Member since 2020 · 118 posts · 54 votes6y
@David Bowles...... In the past meaning with the previous owner as well? Does she communicate with you to let you know she’s going to be late or do you have to reach out to her to find out when she’ll be paying the rent? Are you on edge every month about whether you’re going to get the rent from her or do you know you’ll get the rent but it’ll be late?
I have a tenant that signed a year lease with me in October 2019... they have been consistently late since November. They are not days late, they are always weeks late. I give my tenants a ten day grace period before charging a late fee but that apparently isn’t sufficient. I always have to reach out to them to find out when they are paying the rent and they always respond with, “oh it slipped my mind” or “I didn’t even realize”. I did nothing just dealt with it and told myself that when their lease is up I’m not renewing. Fast forward to March 18, 2020, I reach out to ask when they will be paying the rent their response, “oh, I didn’t realize, next Wednesday I’ll have the whole thing.” March 27, 2020, I still hadn’t received a payment, I reach out to them again and they say, “as soon as I get it the corona virus has shut my job down.” I had to remind him that he has been consistently late since November and the corona virus hit long after his rent was due. Not only that but his job hadn’t shut down he was just taking advantage of the corona virus, which unfortunately a lot of tenants will do.
I say all of this to say if the tenant communicates with you regularly, takes great care of the place and you’re not worried about whether you will get the rent or not just that it will be late then I would keep that tenant. If the tenant doesn’t communicate with you and you’re worried every month about whether you’re going to get the rent or not I would say let that tenant go but unfortunately unless that tenant decides to leave on their own you’re going to have to wait until this eviction moratorium is over.
- San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes6y
@David Bowles I still don't understand why you'd agree to buy a $45K property, yet get a loan for $60K.
Something that hasn't been mentioned yet - when you buy a property for $60K, you will then set the tax value of that property at $60K. The assessor isn't going to care that the seller actually gave you back $15K. So, going forward, you will be paying taxes on a $60K property.
Also, how do you deal with this $15K "gift" from the seller, as far as your income taxes and the IRS?
I'm not a tax expert, but I see this all as a problem.
Why would the seller agree to pay the agents fees on a $60K sale and then give you $15K?
How are you going to actually collect that $15K from the seller? Are you sure you will?
I just can't think that this is anything but you being railroaded. It just doesn't make sense.
Imagine someone you love explaining all of the above to you and telling you it's a great deal. Would you think so? Try to remove yourself from the story and really look at it from the helicopter view.
I think this just stinks to high heaven. Something is really wrong here and I think you will be really sorry if you go through with this deal.
- 6yJosh C.Pro MemberProperty Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
Sometimes I wonder if anyone on here wants to make money providing quality housing or just wants to be the boss and control people. You have a tenant that “takes great of the place and been there 4 years” and she is all caught up but the last 20 days. You would be insane to kick her out in general times and absolutely manic with curtain conditions.
What do you think a turnover cost is on a place that hasn’t been turned in 4 years? How long will that turnover take? Add those two numbers up and decide if a great long term tenant who pays a little late and probably extra rent with late fees is worth that. Plus you have no guarantee your next tenant is any good and won’t trash the place. Penny wise and pound foolish. Long term tenants are typically a little entitled yes, but no turnover cost are well worth the super nominal headache. Tell her kindly you need rent by the 5th or whatever the lease says and go from there. If she leaves because you played hard ball you probably cost yourself 5-10 grand at least over the next 5 years in added turnover costs and vacancy. Especially, this being your first one and not having a good handyman or GC or anything for that matter. Just silliness.
At least in Indianapolis you want long term tenants paying you rent and to lower expenses like turnover costs. That equals cash flow. But if being 100% in charge is more important than cash flow kick her butt out and you can tell your friends like Will Farrell did “Gator don’t play”
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