Coup d etat by tenants. What would you do?

Question

Hello bp fam,

Last week I closed on a 12 unit building 100% occupied with under market rents. Market is 1100-1200 currently all units are rented at 750. I sent a letter Stating rents will be increasing to 1000.00 starting August 1st. Local law doesnt require me to give this much of a heads up as tenants are currently month to month. Here is where it gets interesting:

Unit 6 previous manager who is paying 550 decided to not pay and threaten legal action. She brought 4 tenants on with her. Usually When I stabilize a property I would just commence eviction process but here enter pandemic eviction moratorium. I figured I would get some resistance but this is a little more extreme than I’ve encountered before. My plan of action as of today is to tell these tenants 850(100 increase) continuing month to month. The tenants whom agreed to 1000 will be getting annual leases. Local market has waiting list and I own a 40 unit across the street 100% occupied. What would you guys do? How would you handle it?

Theresa Harris · Answer

$250 is a large increase on a $750 rent. I wouldn't have increased it so quickly.

If you are firm on the increase, once the eviction order is lifted, I'd give notice to those tenants.  It could be once the person in unit 6 is gone, the others will agree to the new rent.

Wesley W. · Answer

I may have been a bit less heavy handed in this current climate.  (Heck, even in booming times I would not expect a tenant to be anything less than outraged by a 25% hike, even though it's what the market will bear.)  A popular strategy is to select a couple of units that are the most under market and issue those termination notices.  Meantime, raise the rest of the units a moderate $50 or so.  Once you update the vacated units, rent them at market.  Rinse, repeat.  This will allow the building to still generate revenue while you methodically get everything up to market.  I think you unnecessarily created a crisis for yourself.  It's possible to walk this back, but you will have lost a lot of credibility with the tenants.

You had to have known the prior manager would be trouble.  I would have gotten rid of her before I said a peep to the rest about rent raises.  She wields a lot of power with your tenants and right now is turning them against you.

You kind of "ripped off the bandaid" with your strategy, which will cost you some money in the short term, but may still work out in the end if you can absorb the negative cash flow.

James Hamling · Answer

@Javier D. I would get strategic on it.

I would NOT lower the rents, I would actually raise them more.

I would send notice of rents getting set at market rate, 100%. BUT as it's so few units, I would send with each one that they may qualify for a special exclusive rent discount, good for up to 90% of the rent increase. And to apply for such just contact _____ and let's talk.

This get's a communication going, and creates a co-effort on it instead of adversarial. It places the market rates in their mind that this IS what it will be, but that working with you they can mitigate there out of pocket costs.

I would come up with some form of qualification, an application process for this that actually more so works to quallefy them for the market rates.

I would allow the tenants a tiered graduation of their rent. I would have to feel it out per tenant on how I'd want the time frame set for each step up in rents graduation but I would most likely make it 2 per year (every 6 months).

NOW, the BIG catch is it would have conditions, first being there unit kept in perfect condition, no tenant damages, no tenant complaints, I would frame it that us working with them requires there being an exemplary tenant, just follow all rules.

NEXT I would have some big teeth in it, that would be IF rents are missed for a term of 29 days that all rent discounts are forfeited and the full rental amounts are due on a regularized schedule going forward. So if they default at any time, when you can go into eviction court it will be on those full amounts not half measures.

A very important component is this gets the listed unit rents at full market instantly, so if/when there is a vacant unit you wont have the mess of some tenants way under market making it years until you get to full. It will just be that some tenants have rental discount agreements.

Ujwal Velagapudi · Answer

I'm curious as to why the previous owner would have rents at 50% below market value, that seems to be extremely low and maybe he knew something about his tenants' financial abilities to pay/not pay. Even more surprising if the market rent you mention is for the units as-is, without any updates.

I like something similar to your $850 month to month/$1000 annual lease approach, and think it would've been a lesser blow to the tenants if that is what you had initially came out with. A 33% increase is pretty significant right off the bat, and I can understand from their perspective it feels like a new owner is coming in to get them out.

Personally I would continue to honor the leases that you have inherited, and give them a notice now that all lease renewals will be $X (1100-1200). So this way they at least have the time within their contract that they had signed to use to move and find a new place, or agree to your new terms. It will also give you time to slowly filter out and in old and new tenants. It'll also honor the tenants old lease, so there should be nothing the current tenants should be pushing back on.

Anthony Wick · Answer

@Javier D.

Well, I sure would not acquiesce to their demands. I would immediately terminate their leases, with proper notice. And i would also file a 3 day notice

To pay or quit, regardless if the courts are open and accepting eviction notices. And then, when allowed by courts, follow up with eviction notices and small claims court filings. But, before I did all that, I would send a letter to each and every tenant that is trying to push back against me and tell them how I’m about to ruin their little world.

And I only do this because these people think they somehow have power. They do not. They sure weren’t complaining when they were getting huge rent discounts for months and years.

Matt Devincenzo · Answer

I wouldn't flinch, let them push this to court and then evict if necessary. Even if it takes until Aug, you'll have the units empty then and can fill them with your own new qualified tenants.

I say this as someone who usually will work with a tenant with an issue. But if you go direct to the power struggle option, I don't discuss anymore and it becomes a hardline no more negotiating.

Wesley W. · Answer

@James Hamling

Very clever.  In sales they call this "anchoring."  This would also allow you to collect the personal data on these inherited tenants in case of future legal action.

Coup d etat by tenants. What would you do?

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