Buying with tenants in place

14 Replies

I am in negotiations on a condo with tenants in place. They are paying rent around $100 below market. Sellers don't want to deal with tenants or negotiate anything with them and spelled it out in the contract. 

My plan was to meet with the tenant during the inspection period and hash out a new lease with him bringing the rent up some, maybe $50. Once I am in escrow, while I don't own the property I do have some interest in the property. I assume I would be able to negotiate a lease with the sellers permission. If I put in a line that the lease would only be effective once I take ownership I should be good right?

How do security and deposits get handled? Turned over through escrow to me or handed back to tenant then to me?

@Justin Owens I would be very careful in this situation as things can go sour very fast once you close. I had a similar situation where the tenant stopped paying her rent the day I took over. We ended up evicting her. What I would do to limit your risk is ask the owner for their application. Review her credit report ect and determine if they will meet your standards as a tenant. Also definitely go and meet the tenant. If you think it could work then negotiate a lease. Otherwise I would add an addendum to the contract that the tenant must vacate the property prior to close.

Originally posted by @Justin Owens :

I am in negotiations on a condo with tenants in place. They are paying rent around $100 below market. Sellers don't want to deal with tenants or negotiate anything with them and spelled it out in the contract. 

My plan was to meet with the tenant during the inspection period and hash out a new lease with him bringing the rent up some, maybe $50. Once I am in escrow, while I don't own the property I do have some interest in the property. I assume I would be able to negotiate a lease with the sellers permission. If I put in a line that the lease would only be effective once I take ownership I should be good right?

How do security and deposits get handled? Turned over through escrow to me or handed back to tenant then to me?

 If they are in a year long lease right now, they sure aren't going to negotiate to increase their rent.

I think the smart thing to do, if you're going to do this deal accepting the tenants in place - is to assume you will have to evict them.  Your seller basically has told you they are a PITA.  

And yes, get a copy of their lease and get their deposit money in escrow.

Tenant is currently month to month

Originally posted by @Justin Owens :

Tenant is currently month to month

 Perfect!  If you can afford it, I'd immediately give them their 30 day notice when you take over the property.  Or however many days you are required to give them.  For instance, in CA, if a tenant has lived in a unit for over 12 months - regardless of M2M or lease - you have to give them 60 days.  If they're Section 8, it's usually 90.

Then, just get them out, do whatever clean up, painting etc., you need to do, and get new tenants in there who think it's a great deal at top market rate.

Because it sounds like these guys are a pain, and honestly, whenever you inherit tenants, it's usually difficult.  They will want to argue about any changes, etc., at minimum.  Starting with new tenants that you vet yourself, is eons better than inheriting tenants, in my experience.

In fact, just in case they end up being holdover tenants - in your 30 day notice to terminate the rental agreement, include a clause that says that if they holdover and must be evicted, the rent rate will be $__________ as of _______________ (next rent due date).

I'm not seeing where @Justin Owens said the current tenants are being a pain. Once you take ownership, you should meet with them and have them sign a lease that is either month-to-month, or for a specified period of time. A lease covers much more than the rent amount. It covers payment terms, pet policies, smoking policies etc. If they don't agree to any of your terms, you can give them notice. You can try to get them to sign a one year lease with the rent amount increased by $100 per month. But it's more likely that they'd want to continue with month-to-month with an increase like that.

If they aren't a problem, and are paying, I wouldn't be in a hurry to evict. Unless the place needs work. Then offer them a bonus to move and not put up a fight.

I figure if it's in decent condition, I'll let him stay if he meets my requirements. It's a free tenant with no paint or flooring. We'll see. I have a counter out to them and hope to hear back shortly.

Then when he does move out I can fix/replace whatever needs.

Originally posted by @Curt McClements :

I'm not seeing where @Justin Owens said the current tenants are being a pain. Once you take ownership, you should meet with them and have them sign a lease that is either month-to-month, or for a specified period of time. A lease covers much more than the rent amount. It covers payment terms, pet policies, smoking policies etc. If they don't agree to any of your terms, you can give them notice. You can try to get them to sign a one year lease with the rent amount increased by $100 per month. But it's more likely that they'd want to continue with month-to-month with an increase like that.

 I'm basing my opinion on the tenant being a PITA  because the seller doesn't want to negotiate with the tenant or deal with them in any way.  I can't think of any other reason for that, except they expect that to be difficult = PITA.

Maybe not, but in my life experience, you're way better off to deduct the reason is because the tenant is a PITA than some benign reason that equates to the tenant not being a PITA...

And to anyone who is tempted to say something like, "Well, maybe the tenant is great, but the seller has cancer or whatever ----- my answer is, really?  Let's assume the obvious and go from there, please.  If getting the tenant out was going to be a walk in the park - the seller would have no problem doing it.

Originally posted by @Justin Owens :

I figure if it's in decent condition, I'll let him stay if he meets my requirements. It's a free tenant with no paint or flooring. We'll see. I have a counter out to them and hope to hear back shortly.

 What do you mean by "it's a free tenant with no paint or flooring?"

Sue Kelly Justin Owens I'm with you Sue. Investing/ buisiness is about survival. I picked up on the tenant issue when I read the Origional post I would approach that tenant with caution. I have however bought 5 doors with tenants. 3 were/are great. 1 moved out when I raised the rent 25 dollars. Number 5 boarders on eviction most of the time for late rent. I have only owned this unit 3 months. I've served notice to cure or quit one time. We accepted rent for that month. If he's late again he's out period. I have the tenants all sign an estoppel agreement prior to closing. I guess what I'm saying is the tenant needs due diligence the same as expenses and finances. Communications is key and if you can't learn to see past the smoke a little bit you likley won't make it very far.

If tenants are a problem then yes, now would be the time to make the move. I read, "Sellers don't want to deal with tenants or negotiate anything with them and spelled it out in the contract" as the sellers just want to sell and not do any extra work as part of the sale. Which ever way it is would be clear to Justin.

Sometimes when sellers don't want to deal with tenants, it just means they are tired of calls on Sunday, at night or during vacation, when the tenant wants something fixed immediately. If you are not interested in being a landlord, this gets old really fast. This is one of the biggest reasons I have so many property management clients who live and have properties in AZ.  I wouldn't do anything until you get the property under your ownership. One it's yours, send the tenant a letter (both certified and first class mail) detailing that you need to get the tenant signed to a new lease, include what the rent and terms will be. Let tenant know that if he/she does not wish to accept these terms, that this letter will serve as their 30-day notice to vacate. 

Dawn

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