Tenant Renovation?

13 Replies

Hi Everyone,

Wanted to get some expert opinions.

I just purchased a SFR in Fresno (Clovis actually) with the fix and lease option route. Someone's interested in taking it as is and doing the renovations themselves.

That strategy makes me nervous since I won't really have control and they'll be doing what they want. And if they don't follow through with the option for whatever reason, they'll have more invest and more incentive for legal action for something.

Anyone do this route and can share why it could work? 

Thanks.

Allen

Are you offering it as a rent-to-own property?  Id be a bit leery if they were just renters.  Anything other than paint could get expensive to undo if they are not professionals and they jack it all up.  But if they are planning to buy it then Id say they are much less likely to bail on you once they have their own money invested.

I'm no expert in this field, but if they want to fix up a property for you - why not?

Just make sure it's up to code, unless it's minor stuff, and cover yourself legally via a contract so they have no recourse for the 'upgrades.'

Either way, whether they make the upgrades or not, having invested anything in the property will be an incentive to pursue the legal route. 

I haven't invested in the Lease w/Option to Purchase field, so take this as a gut feeling.

I would stipulate that if the tenant/purchaser plans on making any improvements for which your city requires permits, that the tenant/purchaser go through the permit+inspection process.  That way, if he makes substantial changes to electrical/plumbing/structural items and ends up moving out, you'll be assured those "improvements" were actually improvements and not liabilities.

If the current resident ends up backing out of the deal, you don't want new tenants moving into a house that is unsafe.  And if the house ends up burning down because of unpermitted electrical work, you don't want to lose out on insurance money because of that.

If the guy is just putting down flooring, painting, and doing some landscaping, I say go ahead and let him. 

@Jeremiah Perry

Yes, I'm offering it for sale or lease option. If they lease option it, there's still a decent chance they won't buy it. They might be over estimating their chance of qualifying.

@David G

Thanks, just worry that if they are into it for 20k plus option money, it seems that they'd have more incentive to fight to keep it, both good and bad. If they just have a security deposit and they're just taking a shot at legal action without basis, they'll probably think twice about losing in court.

Why did u buy it?

I train in lease options and NEVER lease option a fixer to a tenant buyer, they don't have title.

@Bill Gulley

I have been inside so many rental properties where the landlord said the tenants were supposed to be taking care of the property, only to see half finished projects sit there incomplete for years on end. It may work for some people, but for me, I have seen the other end way too many times. Lol.

Brian, More landlords trying to pass off maintenance and repairs again? Better check tax laws and with your attorney if it's a residential lease. :)

@Brian Gibbons - my A plan exit is fix, lease option and be out in 18 months.  I could wholesale it though for a quick exit though. 

@Chris Williams - Me too. That's why I was thinking this is a bad idea. It will turn me into a manager making sure they're actually doing something correctly. I don't want to get stuck with a half-a**ed reno.

Lease Purchase then is much smarter

Lease and Sale and Purchase

Buyer forfeits 3 % if they do not close and get financing, California maximum EMD

@Allen Maris

See an attorney

I'm not a lawyer... but the EASIEST and SAFEST solution is to get all terms in writing and signed by both parties. Get it drafted by a lawyer and notarized and you should be just fine.

Maybe offer a slight incentive such as a a few extra bucks when they move out if they don't execute the option to cover a fraction of their costs. It's still cheaper than doing it yourself and might be enough of a payoff to prevent any retaliation down the road. Just food for thought.

Funny how you worded the question "share why it could work".  In Texas, law only allows 6 months lease to buy option but must be longer in California.

I would suggest you make a long list like below.  Probably should have at least 15-20 items.  Then figure out what chance you have in this succeeding and if you go ahead, use the checklist to create the contract using an experienced real estate attorney.

IT COULD WORK IF

1.  The tenant was fairly intelligent

2.  The tenant and you had a clear understanding of the scope of the finished project.

3.  The tenant and you had a clear understanding of the schedule of the project

4.  The tenant and you had a clear understanding of the cost of the project.

4.a  The tenant has the skills or understands his skills and subcontracts.

5.  The tenant completes the project on schedule and on costs.

6.  Clear understanding of the purchase price, rent, project costs affects.

7.  Clear understanding of what happens if tenant does not execute option.

8. clear understanding of why the tenant needs credit assistance and how that might affect project.

9. clear understanding of who owns and makes the final decisions.

10. ability of tenant to get a conventional load during the option period

11.  etc.

12. etc

Sounds risky to me.

@Jon Keeney , Yes, I was looking for reasons why it could work. I've got plenty of reasons in my head why it's not a good idea. But I'm always looking to learn from people that have done something before. Of course they could have had an anomaly, but I'm always open to learning.

Thanks, Brian, thanks, Seth.

Allen

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here