Inherited tenants that don't meet screening criteria

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Inherited tenants that don't meet screening criteria

Ben D.Pro Member
Investor · Milwaukee, WI · Member since 2020 · 10 posts · 0 votes

I recently bought a duplex in Milwaukee, WI, which came with long-term tenants (6+ years in each unit). Upon further qualifying them (I goofed and was not aware of estoppal agreements at that time), I have discovered one of the tenant's income does not meet my "3x rent" rule. The seller passed away (I bought from an estate), so it's hard to verify info, but from my knowledge the tenant has paid on time and been a good tenant.

Given the current COVID situation, how would you handle the situation? I'm worried that rerenting the unit may be difficult given everything that's going on. I'm inclined to have my tenancy qualifications included on new month-to-month lease, but then just let it slide as long as payments are coming in on time. That way I'm covered if they ever have an issue paying, and/or if I want them out for some other reason. I can just not renew their lease.

What would you do? Thanks!

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Anna Sagatelova
Property Manager · Cleveland, OH · Member since 2019 · 446 posts · 566 votes
5y

If they are paying, just keep collecting. I don't know what market your property is in, but in Cleveland, we have had a very busy leasing season. If it slows down, it would be due to more inventory opening up, not due to COVID. Keep them M2M for a while longer and just see how it goes. If you are confident that they are solid tenants, you can get them on a longer lease, but you can't screen/qualify tenants that are already living there (check your own state and local rules - this is based on my own experience and consultations with attorneys in Cleveland).

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    5y

    @Ben D. - are they currently on leases?  You can't do anything until their lease expires.  I would personally sign an MTM and let them stay.  I have buildings I bought in Milwaukee in 2015 that still have the tenants and they were long term tenants when I bought.  Some of my easiest properties to manage!

    Especially if you get rid of 1, the other will likely move too.

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  • David Clay
    Real Estate Investor · Chattahoochee, FL · Member since 2014 · 133 posts · 107 votes
    5y

    As long as they keep paying on time I would simply honor their current lease agreement. If you are more comfortable with a lease that you created (b/c you know it's a good one) that shouldn't be a problem, but a MTM would be sufficient with a note that you are waiving your normal lease requirements due to their long history of good tenancy etc. I only mention the last part to help protect you a bit. This way you can say you have always been consistent on your lease requirements, but made some allowances for inherited tenants who had a good rental history etc. 

    Essentially, I wouldn't try to fix something that is already working adequately enough. If they're not causing problems and they pay on time, let it be. 

    1Reply
  • Christine L Zezza
    Member since 2020 · 2 posts · 0 votes
    5y

    HI @Ben D.- I am interested in how you went about buy at an Estate Sale? I am looking for my first investment property, while trying to learn as much as I can on the go/hunt. Would love some insight.

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  • Mike Mocek
    Property Manager / Licensed Realtor · Toledo/Columbus, OH · Member since 2019 · 244 posts · 262 votes
    5y

    I would just keep them as-is, it is a rough environment right now and you do not want to portray to be one of those landlords.  Also, if they pay on-time, let them stay there, you may have to pay more to renovate the unit after they leave, are they under market rent?  When their lease comes time to renew have an open conversation and let them know your plans, from there, your conversation will evolve.

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  • Ben D.Pro Member
    OP
    Investor · Milwaukee, WI · Member since 2020 · 10 posts · 0 votes
    5y

    Thanks for the quick responses. I guess I neglected to mention that they are both currently month-to-month, that's why I have a little flexibility. No need to rock the boat, but also don't want to miss out on income potential. Sounds like my plan to play the long game and keep things as they are is the right path for me.

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  • Anna Sagatelova
    Property Manager · Cleveland, OH · Member since 2019 · 446 posts · 566 votes
    5y

    If they are paying, just keep collecting. I don't know what market your property is in, but in Cleveland, we have had a very busy leasing season. If it slows down, it would be due to more inventory opening up, not due to COVID. Keep them M2M for a while longer and just see how it goes. If you are confident that they are solid tenants, you can get them on a longer lease, but you can't screen/qualify tenants that are already living there (check your own state and local rules - this is based on my own experience and consultations with attorneys in Cleveland).

    3Reply
  • P Baxter Hudson
    Cleveland · Member since 2020 · 16 posts · 5 votes
    5y
    ...bird in hand...turnover kills overall return - if you have paying tenants.  Unless they are renting at 40% of market rate or lower OR you are super itching to do a reno over the winter, keep those guys there and take the check until they roll or you need to execute your property update.
    1Reply
  • Ben D.Pro Member
    OP
    Investor · Milwaukee, WI · Member since 2020 · 10 posts · 0 votes
    5y

    @Christine L Zezza I found the property on the MLS. I wasn't targeting an estate sale, but there are some advantages and drawbacks in my experience. Advantages being the sellers weren't as emotionally connected as owner would likely be, so they were agreeable to my negotiations/concessions originally and again after inspection. The biggest challenge has been lack of paperwork or records that the estate might be missing. Since the owner is deceased there's nowhere to go to ask more detailed questions.

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  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    5y

    @Ben D. if it's not broken, don't fix it! Make sure you have good leases, check out Milwaukee Legal Blanks if you have not already! I agree with Brie, sign them on a MTM and keep it rolling.

    3Reply
  • Ben D.Pro Member
    OP
    Investor · Milwaukee, WI · Member since 2020 · 10 posts · 0 votes
    5y

    Thanks @Marcus Auerbach for the Legal Blanks referral. 

    0Reply
  • Steve Smith
    Member since 2020 · 217 posts · 167 votes
    5y
    With 6 years of history KEEP THEM. They must be doing something right. And, there's an argument to "groom" them a bit an keep them for another 6 years. Thanks them for taking care of the property you bought, ask them what they need, perhaps fix it up a bit. And tell them that you're glad to have them there, but mention since you've taken over, you'll do a better job for them, but expect the rent to be paid right on time or even early, and you have no flexibility in that, plus the late fees will be expensive. Train them so they will pay on time and take care of the property. They're probably great people.
    1Reply
  • Christine L Zezza
    Member since 2020 · 2 posts · 0 votes
    5y

    @Ben D. Thank you for the insight - super helpful! 

    0Reply
  • Corina Eufinger
    Rental Property Investor · Oconomowoc, WI · Member since 2016 · 996 posts · 431 votes
    5y

    There's already been some good points made here so there's not much to add.   @Brie Schmidt is correct that you have to honor existing leasing that aren't MTM.  As long as they are good paying tenants, keep them. Keep them as MTM until Spring I recommend.  Heading into winter it will be harder to rent units in general and who knows how COVID will affect the market in the winter. 

    0Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    5y

    @Ben D.. An inherited tenant is "qualified" if they keep paying you rent on time and do not trash your place. I have never required an inherited tenant to fill out a rental application, nor have I ever run their credit history. 

    1Reply
  • Chaim Lampert
    Milwaukee, WI · Member since 2019 · 54 posts · 44 votes
    5y

    @Ben DeBruin

    The 3X guideline is only a guideline. If the previous owner/management says they always paid, then you’re good.

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  • Daniel SmythPro Member
    Rental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes
    5y

    So, you bought a property and figure you can proactively decide if they can qualify?

    Sounds a bit petty. Shoot the tenants that don't meet your income guidelines, even though the rent is paid.

    If you have a rent increase planned, coupled with a Value Improving renovation, you may have to get new tenants. If I had a landlord that judged me by my pay check, and not by my meeting my obligations, this would not bring us together.

    I don't see an issue if the rents are paid.

    I am one of these people that somehow manage to pay the bills when the money is not as easy as I would like it to be.

    Its important to know the income of prospective tenants because the risk seems better. I would have no issue worrying about the bank statements of existing tenants with a record of on time payments. 

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  • Brock Mogensen
    Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
    5y

    If they are staying current with rent payments I would let it slide.  No reason in kicking them out if they are paying rent.  But for new tenants I would enforce your tenant criteria. 

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