Inheriting long term lease with NO safety deposit

8 Replies

I am looking at two duplexes.  The numbers work for me (2.7% rule), are in a part of a city that I like and are priced right.  There is one major issue.  The old landlord signed long term (5 year) leases that don't expire for two years.  The rent is below market but that doesn't both me much because the numbers still work fine.  

The part that concerns me is that there is no safety deposit.  0.  Additionally, the lease actually reads 500 dollars per annum when they clearly meant every month.  This doesn't scare me as much as I assume any court would see that this was a clerical error if there were ever an issue.  Lastly, the wholesaler won't send me the whole lease until I already have an accepted offer. 

The wholesaler is claiming the rent is under something called "lease-option" where there is no security deposit because of labor the tenant put into the property and is expected to handle all maintenance.  

The question I have is: should I even consider a home that has inherited tenants with 0 rental deposit?  I would be concerned about two things: 

1.  If the tenant trashes the property on the way out, I am kind of screwed. 

2.  Does the fact that the tenant was expected to make repairs themselves mean that I would be dealing with a bunch of shoddy work?  Would and inspection cover this?

Sorry for this being so long and I appreciate any and all advice.  

Yes you would be on the losing end if hey trash the place with no deposit.  

Most likely the work they make to the home is sub par.  

This is what you get when dealing with duplex's and other low income property.  Make sure there is no language in the lease that states they make repairs in return get rental discount. Make it also clear when you become the owner that that is not ok and must contact you for maintenance items.  

Good luck

Medium buymemphisnow stacksCurt Davis, Buy Memphis Now | [email protected] | 605‑310‑7929 | http://www.BuyMemphisNow.com

Originally posted by @Curt Davis:

Yes you would be on the losing end if hey trash the place with no deposit.  

Most likely the work they make to the home is sub par.  

This is what you get when dealing with duplex's and other low income property.  Make sure there is no language in the lease that states they make repairs in return get rental discount. Make it also clear when you become the owner that that is not ok and must contact you for maintenance items.  

Good luck

I really appreciate you taking the time to help and answer my questions.  

Is this something I should even touch or is this likely more problems than it is worth?   Is this standard?

Originally posted by @Andrew Syrios:

Whenever you're inheriting a tenant, especially under the circumstances you describe, it's best to assume the worse. It can also make for a good negotiating point.

 Exactly!  Make your offer less a normal security deposit.  You could even rebate to seller if the place is left in good order.l

I'd be more concerned about the lease option ...to buy?  Be sure that is cleared up.  After the end of the lease option the tenant could exercise his option to buy.  Even though your purchase should wipe this out you want to be sure the tenant realizes this.

I have inherited tenants with no security deposit.  They tend to get lost after multiple foreclosures.  One such tenant is still our tenant to this day.

We make sure we are more careful with making sure they keep their rent and utilities paid up, since there is no cushion.

This would not be a deal killer for me.  Security deposits in my area are too low to cover the damage tenants make anyway, so a few hundred less isn't going to swing my numbers much.  You still have small claims court and collections as leverage.

I would do an inspection and get/review a copy of the agreements in the due diligence phase, and back out if you get any sense that things are not what you originally penciled out, but otherwise keep an open mind.

Originally posted by @Andrew Syrios:

Whenever you're inheriting a tenant, especially under the circumstances you describe, it's best to assume the worse. It can also make for a good negotiating point.

 Exa tly!  Just make your offer less the deposit amount.  I'd be concer ed about the lease option.....to buy?  Make sure that deal is not inherited.

Thanks everyone for the words of wisdom.  You have given me a great deal to think about. 

I truly appreciate it.  

What was the incentive for the current owner to sign a 5 year lease with a residential tenant?  Never heard of such.  

Marcia Maynard, Fischer Properties | Podcast Guest on Show #83