Buying Investment Properties with Existing Tenants

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As a buy and hold investor, tenants are the lifeblood of my business.  They pay our bills plus give us a little extra to put food on our table and gas in the car.  There are many tenant horror stories out there, but most of these can be avoided with proper tenant screening techniques and a strong lease.

We generally like to buy vacant distressed properties.  But sometimes we also buy properties that are not distressed and have existing tenants in them.  These are tenants that have not been though our screening process and are not under our lease and thus can pose a risk.  What should you know about buying a property with existing tenants?

The first thing you should know is that the existing tenants have rights.  You as the new owner cannot modify their lease without the tenant’s consent.  That means you cannot kick them out six months into a year lease.  Nor, can you raise their rent.  Plus you have to honor what ever other clauses or agreements are in the lease.  Basically, the lease stays in place and a change in ownership (except foreclosure) does not void it.

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Inheriting Tenants: Both Good and Bad

Existing tenant’s can be both good and bad.  On the good side, you can purchase a property with paying tenants.  This should mean instant cash flow to you, without the hassle of finding and screening new tenants.

On the negative side you could be stuck with some rotten eggs.  The seller could have loaded up the property with anyone who could fog a mirror to claim “100%” occupancy.  Or, several of the tenants may not have paid the rent in a while and the seller just wants out.

You as the buyer can protect yourself several ways.  Get copies of all leases and agreements as part of your purchase contract.  Review and approve them before you close.  Search for the tenant’s names on various databases to see what appears.  Do not pull their credit reports, you do not have that permission unless it is specifically granted by the tenant to you in writing!

Next, review the property’s income and expense statement for the past two years.  This review should give you a pretty good idea of what is going on and if you have any deadbeats.

What If There Are No Leases?

Finally, if there are no written leases (or even if there are), use a one page estoppel agreement.  An estoppel agreement is a short legal form that outlines contractual terms.  Get every tenant to fill one out, detailing the amount of rent paid, the amount of the security deposit, term of tenancy, which appliances are theirs and if there are any other special agreements.  Get each tenant and the seller to sign and date each one.  This agreement will protect you and clarify the property’s financial condition.  But it can also serve another role as we shall see.

From the tenant’s perspective you need to understand that the sale of a property equals change.  People generally do not like change, especially existing tenants.  All kinds of things will be going through their heads.  “Am I going to get kicked out?”  “Is my rent going to go up?”  “Will the new landlord be a jerk?”

You can make the sales and ownership transition process a lot easier on yourself if you do some legwork upfront and immediately upon the sale.  Talk with the tenants if you can (get permission from the owner first).  Use the estoppel agreement as an excuse.  Sit down with the tenant and help them fill it out.  Explain who you are, what you do and what your plans are.  Explain that all existing leases will be upheld.

Upon closing, have an info packet ready for the tenants.  In this packet provide your contact information, what to do if there is an emergency or a repair and explain when, where and how they should pay the rent.  See that each tenant gets a packet as soon as possible after the sale closes.

So there you have it, what you should know about buying a property with existing tenants.  It is not as easy as buying distressed properties without tenants, but with a little effort the sailing can be made as smooth as possible.

Photo: Éole Wind

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

23 Comments

  1. I’ve purchased 3 units (one duplex, one single-family) with existing tenants. Two of the units had good tenants, one paid right away but then tried to get away with the whole non-paying thing she was doing to the prior landlord. She was quickly out and we got in some good tenants. All in all it has worked out well for me. It’s good to meet the tenants before buying.

    • Kevin Perk

      Dawn,

      Yes, it is very good to meet them if you can before buying, so you can get things started off on the right foot so to speak. We have had several tenants that this or that was done with the previous landlord. We simply pull out the estoppel agreement and ask “Why did you not say that here when asked?” That usually stops it.

      Thanks for reading and commenting,

      Kevin

  2. “Basically, the lease stays in place and a change in ownership (except foreclosure) does not void it.” – THis depends if the lease is month to month or year long. If its month to month, you can certainly override it with your own lease agreement upon the end of the month after you close. If the lease was a year long lease, then yes, you would have to live with that lease till the end and then introduce your lease agreement.

    – FYI – Just purchased a triplex by the beach in san clemente, fully tenanted with all tenants at least 3 years of continuous tenancy.

    • By the way, I had a packet of info which included the new lease agreement, erentpayment.com sign up for online rent payment and a pet addendum. I got all three of my tenants to sign it through docusign (online document signing).

    • Kevin Perk

      Sri,

      You are correct and thanks for the clarification.

      However, even if the lease is month to month, you generally have to give 30 days notice of a change to allow them to either accept or move on.

      Congrats on your purchase, may you have many happy returns!

      Thanks for reading and commenting,

      Kevin

    • Sri wrote:
      “If its month to month, you can certainly override it with your own lease agreement upon the end of the month after you close.”

      Sri:

      That will depend on your jurisdiction and how long the tenant has been in residence. Here in, New Brunswick, if a tenancy is under the “default” month-to-month lease of the Residential Tenancies Act, you would be effectively serving them a 1-month notice when you introduce your new lease.

      If the tenant has been in residence five years or longer, they fall into the category of “Long Term Tenant” under the Act and their lease terms are month-to-month regardless of your lease document. You can still introduce your lease to bring them under your house rules, etc., but there will still be legislative constraints on what you can do with respect to raising the rent or serving notice.

  3. Good info.
    A lot of sellers don’t want you talking to “their” tenants and don’t have payment history or documentation including leases.
    Also, getting the tenants to read and respond to your paperwork can be a challenge at best, impossible at worst.

    If you can’t get documentation from the seller (especially) and the tenants, Buyer Beware.

    Thanks for the post.

    • Kevin Perk

      Karen,

      We make it a point, we are going to see the numbers or talk to the tenants or we will adjust our offer accordingly. We have to because if we do not see the numbers or get to see the tenants the risk factor has just increased.

      Thanks for reading and commenting,

      Kevin

    • Estoppel is only done prior to purchase as a way to legally confirm the existing rental agreement with the seller. Its normally asked for by the lender. In my case, the lender was happy with the current lease agreement. Once you own the property, the older lease is no longer valid and you need to get the tenants to sign a new lease agreement ASAP.

  4. Good tips Kevin, thanks. We are in contract to pick up a tenant occupied property and have two more offers out on tenant occupied properties as well. I’ve used the estoppel certificate before and it sure helps to get the tenant and us on the same page beforehand.

  5. Great article. How about purchasing property from foreclosure auction with existing tenants? How do you find out the lease,security deposit or how do you evict?

    • Kevin Perk

      May,

      Thank you for the kind words.

      Buying a property at a foreclosure auction usually means that you are buying it as is. In other words, buyer beware. You will most likely not be able to review any leases or any other information for that matter at a foreclosure auction. You may not even be able to get in and see the property before you buy. So, to bid at such an auction you need to know what you are doing.

      Make sure you have run your numbers and bid on a sort of worst case scenario. Because in such a case, the tenants may not have paid rent in months and you really have no way of knowing. In your favor however, the foreclosure usually will void any leases (check your state and local laws here), which puts you in a favorable position to get good tenants to renew on your lease. But, you may just as well be heading down to eviction court right after your purchase to get bad ones out.

      I hope that answers your question. If not let me know.

      Thanks for reading and commenting,

      Kevin

  6. Hello, I came across this blog and was hoping to get a few answers. I am interested in buying a townhouse in NC as an investor which has an existing tenant. Their existing lease which I have in my possession expires next summer. I am waiting to hear back from my realtor with more information about the tenant. If the tenant’s review is favorable and I wish to keep the tenant – My questions are as follows:

    1. It was mentioned above that current existing tenant leases will continue until they expire unless I expect to move in, which I don’t. However, without any legal document between myself and the tenant is the tenant legally required to send me the future rent payments and meet the other terms of the lease? Additionally, the existing lease has a low security deposit which I would like to increase.
    2. Should I add language in the purchase contract that the purchase is contingent upon a new lease signed between myself and the new tenant – with a new security deposit given to me and first months rent prior to the closing? Is this even permitted?
    3. Additionally, Can I make the purchase contract contingent upon my satisfactory review of the tenants application on file, tenants rental history, and owners credit/criminal background check? And I even allowed to receive this from the owner/management company.

    I just want to make sure that I have a quality tenant that is legally obligated to pay me (meet the terms of existing lease at a minimum or a new lease) on the day of closing. Lastly, it just seems that asking the existing tenant to sign a new lease effective on the day I close and hand me over a check for a new security deposit and first months rent when I don’t even own the property yet a tough thing for them to do? Maybe the funds could be kept in escrow. I would appreciate any insights u have

    Bests

    • Kevin Perk

      Dave,

      1. The current lease agreement continues even if you want to move in. The lease is not voided just because you bought the property. You will be taking over the owner portion of the lease so yes, the tenant will have to pay you or you can evict. You cannot increase the amount of the security deposit unless the tenant agrees to as well. You must abide by the terms of the lease until it expires.

      2. No, it is not permitted. The current lease stays in place and you cannot force the current tenant to sign a new lease.

      3. Yes, I would review payment histories and such. As far as looking at personal info, check with your attorney. I would also suggest you use an estoppel agreement. Please see here: https://www.biggerpockets.com/renewsblog/2013/06/10/estoppel-agreement/

      As for your last paragraph, yes, it would be a very tough thing for them to do. Use the estoppel agreement, check out payment history and you should be ok.

      Good luck and thanks for reading,

      Kevin

  7. Wow, it is so interesting post. Very useful information. I really like this post. I will bookmark and share to everyone. Thanks for posting a great article. Your idea is outstanding. the issue is one thing that not enough individuals are speaking intelligently about. I’m very glad that I stumbled throughout this in my search for something regarding this. I have read and shared to all my friends. Thanks again.!!

    Regards Vern!!

  8. What if according to the (month-to-month) lease, the Property Management Company (having its own contract with the seller) is the Lessor, not the seller. Does the buyer also inherit the PM? How do you get rid of the PM? Wouldn’t that mean the seller needs to write a new MTM lease and give the tenants 30 days to accept or leave?

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