What to do when a tenant vacates in the middle of a deal?

Question

If you had a property locked up that was cash flowing, and the renter leaves after the contract is signed, is that grounds to re-negotiate the offer? Especially if it was negotiated with the turnkey status as a feature of the property? Does this qualify as a change in the condition of the property? Can you leverage the vacancy as a loss in value?

Asking for a friend ;)

Kyle J. · Answer

@Conrad Martin  We only know the limited info you've posted, and obviously haven't read the contract, so it's hard to say for sure.  For example, was the paying tenant written into the contract as an actual term/condition of the sale?  Regardless, I'll give you a few thoughts that come to mind.

If it's a single family property with just the one tenant occupant (which is what it sounds like), then those are typically valued based on recently sold comparable properties (not the income it's generating).  So the loss of the tenant doesn't truly equal a "loss in value".

Second, since you made this post in the "Real Estate Wholesaling" forum category, I'm going to assume you're wholesaling this deal.  If that's the case, have you asked your end buyer what their preference is?  I know many end buyers (like myself) would actually PREFER to take possession of the property vacant so they can start fresh with their own tenant that THEY selected.  Just a thought.

Ultimately, if it is a problem in this particular case for whatever reason though, you should refer to your contract and see if it's addressed in there.  After all, that's the document that controls the terms/conditions of the sale.

Good luck.

Joe Splitrock · Answer

@Conrad Martin it really depends on what your contract says. I have never seen a contract contingent on a tenant being in place, but maybe yours was. Even if your contract says nothing about the tenant, there may be other escape clauses. If there are not escape clauses, you can always try renegotiating, but the seller is under no obligation. Whatever you do, follow through on your contractual obligations. Escape if you can.

Steve Morris · Answer

Well, depends I guess on a few things:

1) Single-tenant net lease deal?  If yes, you're buying the lease so you need the cash flow

2) If its 200 unit apt and that's normal vacancy, nothing more than doing a credit/debit adjust at close.

Depends on how your contract is written mainly.  I've heard buyers do rent guarantees (ie leave part of the sales price behind after close to pay for empties for a lim period), but escrow hates this and banks give it the side-eye.

End of the day, is how hard will it be to refill?  If difficult (ie McDonalds moves out), then I'd walk or ask for fat wet kiss in the form of a price drop.

Kyle J. · Answer

@Conrad Martin  I guess you just have to know what your end buyers are looking for.  Do they want a property that's tenant occupied, or do they not want a property with a tenant in it already?  Like I said, if I was your end buyer, having a tenant already in the property isn't really a selling point as I prefer to select/place my own tenants and have them on my own lease agreement.  So, if anything, the loss of the tenant would make me like the property more.

Not only that, but if someone wanted to do a rehab on the property so they could increase the rents, well you couldn't very well do that with a tenant in there.  Now, with the tenant gone, it opens up that possibility.

Point is, you HAVE to know what your end buyers are looking for and what they want to do with the property.  Otherwise you're just taking shots in the dark.  (In my opinion.)

Hope it works out for you either way.

Conrad Martin · Answer

Thanks for your replies @Aj Parikh and @Kyle J. This is a wholesale deal, and I have cancellation built into it.

The numbers were tight on this deal and the buyers that were interested have almost all but passed. I agree that it comes down to the buyers, but if they bail, I'm thinking it might be best to cut losses?

Aj Parikh · Answer

Turnkey means that the property should be cash flowing from Day 1 and there should be a tenant on the property when you close. If tenant leaves before the closing day, the turnkey company should either push the closing date or provide you the negotiated pro-rated rent until the property management finds a new tenant.

What to do when a tenant vacates in the middle of a deal?

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