Got Inherited Tenants? No Problem When You Follow This Plan!
Congratulations! You now own your first fourplex, and, lucky you, the deal came with built in tenants! Although you haven't met them yet, the owner assures you they are pleasant and easy to manage. You're an optimist and believe him, so you don't push to see leases or payment records. And then the nightmare starts.
The couple who lives in unit A pay the rent- but on their own schedule. You find out the tenant in unit B has allowed two family members to move in without your consent. The tenant in unit C has decided to "improve" your rental by painting his garage door a brilliant orange which results in a fine from the homeowner's association. As icing on the cake, you discover unit D's tenant -who moved in a week before you closed the deal- did so without paying the previous owner the first month's rent or security deposit.
Purchasing an occupied property is risky, particularly if the previous landlord has been slipshod with enforcing the rules. You may have to re-train the tenants you inherit or boot them out. Before you allow your new rental to turn into a motel hell, establish a plan before you buy. Here's how:
Review Tenant Records Prior To Purchase
Always review lease documents, rental payment history and security deposits prior to the sale. Doing so does three things; It tells you what type of lease tenants are on with the expiration date, it helps you decide if you want to renew the lease or start issuing notices, and it alerts you of any terms in the lease that may not be acceptable to you (For example, you may want a deadline to pay rent without a late fee on the 5th, but the old lease states the 10th). Unbelievably, some landlords have their tenants on verbal leases or they download their rental documents from an unreliable online source. These leases may not be in line with current fair housing laws in your state. When possible, put tenants on your own lease that has been reviewed by an attorney or is from a recognized source (realtor associations or Bigger Pockets).
If the owner is uncooperative in providing this paperwork, see this as a red flag - walk away or set aside funds in case you need to get the tenants out.
Meet the Tenants
Once you take possession of the property, schedule a time for you or your property manager to meet with the tenants. If the owner did not provide you with tenant contact information, you can meet them in person or send them a letter introducing yourself or the company. Give them information on how to make rent payments and who to contact for needed repairs. Use this opportunity to let them know their lease will be expiring soon and that you will be issuing a new lease. If the tenant is on a month-to-month lease, check the laws in your state on rent increase limits before setting the new rent in the lease. It is also a good idea to ask existing tenants to fill out an application when signing the new lease so you have their most current information.
Most tenants appreciate being informed of a change in ownership. They want to know they still have a place to live and who to contact in case of an emergency. Be wary of tenants who don't care, refuse to return calls or respond to your letter to schedule a meeting.
Enforce the Rules of the Lease
Once you have your tenants on the new lease, enforce the rules. You'll find there are a lot of lousy landlords who allow tenants to make their own rules with their property. Newbie landlords have difficulty with rental management because they view enforcement of rules as harassing the tenant. They fear the tenant will move out leaving the unit vacant. Don't fall into this trap. If you don't stick to the terms of your lease then why should your tenants? Even the nicest tenants - if allowed - will pay rent at their convenience, invite family members to stay without the landlord's permission, or make unauthorized changes to a property. This is just human nature.
Issue Notices Immediately
Any violations of lease terms should trigger an immediate notice to the tenant. The most common violations which occur for newbie landlords include late pays or nonpayment of rent, subletting to family or friends, allowing repairs or alterations to the property without your consent, or tenant being a nuisance to neighbors, etc. Look up the laws in your state to find the appropriate legal notice demanding the tenant cease action. In California, for example, a landlord can issue a three day notice or quit to a tenant for any violation of the lease term for which the tenant must comply. Check your local real estate or professional housing association to help you use the appropriate notice with proper wording. Keep a copy in the tenant file of all notices issued.
Put Systems in Place
So now you have transferred the tenants onto your lease. You've learned to issue notices immediately in case they violate any terms. The only thing left to do now is systematize the process: put systems in place to handle common events. For example, if your tenant pays rent after the due date, be prepared to issue a late fee for a specified amount. If you do not receive rent after issuing a late fee, send out a three day notice to pay rent or end the lease. If the tenant doesn't pay up, the next step is to issue a 30 or 60 day notice stating you will not be renewing the lease. In most states, this is the first step in the eviction process. This system can be followed by you or anyone else who manages your property. It makes no difference whether you use this system with tenants you select yourself or those you inherit. The important thing is, you will be acting like a landlord and your tenants will respect you for it.
New Note: Another item to add to your list of requested items from the current owner prior to the sale is a dated and signed estoppel certificate from each tenant. Doing so keeps the tenant from claiming different lease terms once ownership changes. Typically the certificate states the current terms of their lease including the security deposit amount, rent amount and resident's original move-in date. This may be the only paperwork you have for the current tenants if the owner misplaced or lost the tenant file. You can request these be provided to you prior to close of escrow. Your landlord attorney or professional housing association can either draw up the form or provide you one to use.