Buy a property with existing tenant, what should be cautious?

Question

Hi everyone,

I'm a newbie to the real estate investing arena, with no rental property management experience before. Currently, I'm considering to purchase a fourplex with existing tenants in 3 units. I'm wondering what should I be cautious?

1. Is that allowed to run a background/credit check on existing tenants? Just in case the seller wants to sell the property to get rid of the headache tenants.

2. If seller includes an estoppel in disclosure, is that trustable?  Should I reach out to tenant directly for that?

3. May I sign a new lease with the tenant? I know it's ok for month-to-month lease, what about the long term one? I think it makes sense to put my name on the lease

4. For the COVID situation, is that ok to ask tenant to provide income and job stability proof? I'd like to evaluate the capability for the tenants to continue paying rents.

I'd also like to hear any tips or suggestions for this. As a first time investor, I'm kind of scared to get existing tenants who are under qualifications, or potentially dragging me into some headache process, like eviction.

Thanks for any reply,

Nuo

Nuo Shi · Answer

@John Alosio

Thanks for the suggestion, I'm also tending to keep the existing tenants as long as they pay on time and has no red flag in renting history. I also prepare to accept below market rent for the first year, since I feel buying property and immediately increasing rent will cause unstableness, especially in current rental market plus my limited experience.

John Alosio · Answer

@Nuo Shi

Both houses I've purchased had leases in place with a built-in clause regarding the sale of property. It states that upon sale, the purchaser holds priority over the lease. Meaning that you may choose to end/change/create a new lease after closing. Personally I would avoid scaring everyone away from all unit. And try your best not to come in swinging, asking for background checks for everyone. Tenants are already on guard during a change in ownership. No need to upset them off the bat, unless it's warranted.my first property I accuired a ttenant paying below market rent value on month -to-month. I offered the option to either sign a new monthly lease with increased rent or a one year lease at the same low rate, just to guarantee income security for the first year while I cought my bearings.anyway, read their current leases and weight out your situation

Hope this helps

Nuo Shi · Answer

@Calvin Stewart . One unit is in long term lease till June next year, and the other two are month-to-month. I think I will go for a new lease for the month-to-month one, well it's a good idea to transfer the lease using "lease assignment agreement", which I don't know before.

Ya, it's a good idea to ask seller to provide the payment history, thank you everyone for the suggestion!

@Pedro Jean. Thanks for reminding to check the living habit for existing tenant as an indicator!

Pedro Jean · Answer

@Nuo Shi

If you are going to live in the property as well, that makes it even better for you to kick out any bad tenants especially if it’s a month to month lease. You can always ask the seller to deliver whatever unit you want to be vacant upon closing.

I’d go in each unit to see which tenant takes good care of the property. Those who don’t take good care of the property need to be out. Ask the seller to give you a statement of the rent payments for each tenant for the last 5 months. Charge extra for pets. Make sure you don’t have any unauthorized guests living there.

James Mc Ree · Answer

I wouldn't push too hard on trying to screen the tenants. It is more important to know they are paying rent on time. They are protected from eviction until at least the end of the year, so be sure to check rent payment history.

Drew Sygit · Answer

@Nuo Shi you can ask for anything, but can only do what tenants agree to it what is on the lease.

This includes background checks.

Why don't you ask the seller to provide proof of tenant payments for last x months?

Calvin Stewart · Answer

@Nuo Shi purchasing a property with existing tenants certainly has it's risks, but it seems like you are asking a lot of the right questions to mitigate that risk.

As it has been stated many times before, existing leases come with property, so what are the terms of the existing leases? Month to month or fixed terms? And when do the leases expire?

1. You can background check and credit check existing tenants.

2. If each estoppel cert is signed by each of the residents in each unit, then it seems like there should not be too much of a concern there. You should not reach out to the tenants directly unless the seller gives you permission to do so. Likely, this process will be coordinated through your agent and the sellers agent or your attorney and sellers attorney. This blog post will help you confirm all the necessary information is included in the estoppel certs provided by the seller: https://www.biggerpockets.com/...

3. You may ask the tenants to sign a new lease, but they may or may not agree to do so. If they agree to it, then go for it. You do want to have a 'lease assignment agreement' completed to transfer the current lease to you as the new landlord.

4. You can ask, but the tenants may also not provide that if they are under an existing lease. You should ask the seller for the 'current rent roll' for the past 2 years for each unit with existing tenants to understand when the rents were due and when the rents were collected. This will indicate whether or not these existing tenants are paying every month and paying on time. You then should talk to them after you close to understand their personal situations.

If it has not already been provided, then ask for the lease to each unit to compare with the estoppel certs. You can always have your agent or attorney ask the seller if you can talk with each of the tenants before closing, ideally this would without the seller present.

Hope this helps and best of luck during the due diligence process of the 4-plex.