Reduce Your Risk, Use An Estoppel Agreement (Free Form Included)

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Buying an investment property always means calculating the expected return and evaluating the potential risk. Running the numbers is one way we investors calculate our expected return and attempt to evaluate risk. When buying an investment property with existing tenants, the tenants are one of those risk factors. Most tenants will be prompt paying, honest and respectful of other’s property. But we all know there are some bad eggs out there. So how can you reduce your exposure to this tenant risk? You can use an estoppel agreement.

According to The Free Dictionary, Estoppel means “A legal principle that bars a party from denying or alleging a certain fact owing to that party’s previous conduct, allegation, or denial.”

What that means to us landlords is that we get our potential future tenants to spell things out on the front end before we purchase by filling out an estoppel agreement, thus preventing them from claiming different circumstances down the road.

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What Should An Estoppel Agreement Include?

An estoppel agreement should reiterate the terms of the lease currently in effect, but at the very minimum should describe:

  • Names of all tenants and occupants in the unit
  • Lease term with both start and end dates
  • Rental payment amount and when it is due
  • Security deposit amount
  • Who pays utilities
  • Who owns the appliances
  • If there are any pets
  • If there are any problems or repairs needed
  • If there are any other agreements with the landlord

The tenant should fill out the Estoppel Certificate, and both the seller and tenant(s) should sign the agreement before you buy the property. This important step should be close to the top of the list on your Due Diligence Checklist. You want to know what you are getting in to, before you travel down that road for too long. Once you review and sign it yourself, you should provide the tenant with a copy for their records.

Why Should I Have Tenants Fill Out An Estoppel Agreement?

You now have a legal document that will prevent the tenant from claiming something against you after the deal has closed. For example, tenant claims such as “I paid 6 months rent in advance,” or “My security deposit was $1,000 not $500,” or “I own those window AC units and I am taking them with me,” can now be refuted with the estoppel agreement. Knowing the current property owner will see the Tenant Estoppel Agreement should prevent the tenant from providing false information.

Simply reviewing the existing leases (if there are any) may or may not give you the full picture. Believe it or not, there are unscrupulous tenants and landlords out there. They will try to take advantage of the ownership changeover. The estoppel agreement can stop these folks cold and can even be used in court if the need arises. It is a spectacular example of “an ounce of prevention being worth a pound of cure.”

Protect your investment and reduce your risk when buying properties with existing tenants by using a simple estoppel agreement. Know what you are getting yourself into and save yourself future drama. To get you started, I have posted a copy of the one I use here.

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.

26 Comments

  1. When investors buy a home that comes with tenants, this can take a lot of risk from the transaction because the buyers don’t have to wonder how long it will take to find a renter or how much the home will actually rent for. However, it can also become a headache if these items you list are not clearly stated in writing. Save yourself (and your clients) the headache by getting these ducks in a row before closing!

  2. This information came at the perfect time. My husband and I have a duplex under contract that has one renter in place. This is the first property that we have purchased that has a tenant. Tomorrow is the Tenant Estoppel Statement deadline. I wasn’t sure what this was. We appreciate the info. Thanks you.

  3. Jeff Brown

    Hey Kevin — This post has the potential of saving many investors from many sleepless nights and much anxiety. Been using estoppel agreements so long I can’t remember when I first started. I think it might’ve been when Carter was in office. 🙂 Thank God for my mentors, as I certainly never deserved them.

    • Kevin Perk

      Jeff,

      I hope the post helps folks out. The agreement has been a valuable tool to us. I guess one day I will get to say “been using them since the Bush II administration.” 🙂

      Thanks for reading and commenting,

      Kevin

    • Jeff & Kevin.

      Do you guys recommend getting the estoppels yourself from the tenants, or at a minimum having one of your representatives perform the task, and not having the landlord do it? I’ve heard some landlords may have less than stellar tenants and don’t want you to find out about them.

      Also, at what point during escrow do you do the estoppel? Thanks guys!

      • Jeff Brown

        I’d have somebody besides the owner/landlord. At the very least, Sharon, I’d have your agent or somebody else present. The tenants need to know that what they’re saying will have negative consequences to them if untrue.

      • Kevin Perk

        Sharon,

        It is in your best interest that these forms get filled out and back to you before you close on the property. We have given them to the current owner to get filled out but most times we end up going around and getting them completed. This allows us to be sure that the tenant has filled it out and it gives us a chance to meet and talk with our new tenants.

        I think Jeff also offers good advice to at the very least have an agent present.

        Hope this helps you,

        Kevin

  4. Great article and thank you for providing your agreement.

    I have yet to buy a place that was tenanted but this is a great example of the old “you don’t know what you don’t know” adage!

    Having something like this in place makes so much sense it is almost embarrassing that it had never occurred to me!

  5. Tina Miller

    Hi Kevin,

    I am a new REI investor and new to BP, thus, I have been overdosing on the wealth of knowledge provided.

    I am scheduled to close on quad in January, will forward to my Agent to present to seller and the current tenants.

    Excited about learning everything REI!!!!

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