The day has finally come! There is nothing more exciting than taking possession of your most recent acquisition. But hold on. Did you perform the proper due diligence and review every lease? This article will address what steps you need to take when assuming ownership of a property and how to audit current leases. I will include a letter that we give to our tenants notifying them of the ownership change and what they should expect from us.
Every investor has to realize that when they purchase a property, all of the current leases with the tenants are contracts. They are binding and have to be honored. The same can be said for most contracts with vendors, such as laundry contracts, cable contracts, and elevator contracts. It is vital to review all contracts with vendors to see if they’re fair or if there is a way for you to break the contract if need be.
In our market, it seems as if most mom and pop operators utilize Waste Management as their trash collector. They are by far the most expensive vendor in the market. Read the terms of the contract to make sure you have the option to cancel it.
Audit Your Leases
Let’s move onto the leases. When we are performing our due diligence, we request a copy of every lease and create a schedule that looks like this:
Read each lease thoroughly and confirm the monthly rent, the unit type, the individuals on the lease, the security deposit, the lease expiration, and any utility bill back. As you can see, Uncle Joey is getting a sweet deal. He’s only paying $200 per month and the lease expires in December of 2018. If you don’t catch this, you will be stuck with Uncle Joey for the next two years at a ridiculously low rent.
What can you do if you come across a lease like this? You can either ask the owner to renegotiate the lease with the tenant, or you can ask for a price concession, since this below market lease will affect the value of the property.
The lease audit is a powerful tool that will be able to verify the monthly rental income that the seller provided to you, along with when the leases come up for renewal. Landlords need to be wary of too many leases coming up for renewal at the same time. The objective is to stagger lease renewals, and the audit will give you the answer to what months the leases expire. It does take an inordinate amount of time to examine each lease, but it is much better to be safe than sorry!
The time right after you take over the property is hectic for your staff and for your tenants. Tenants fear that rents are going to be increased and are always uncomfortable with any changes. We try to reassure them with a letter, while encouraging them to visit the office and to call us with any concerns or issues.
Below, I have included a letter that we distribute to all of the tenants right after we assume ownership:
Dear [New Tenant],
The property that you are living in has been sold and is now under new management.
Although most things will stay the same, there are certain items that you need to be aware of.
You rent payments, in the form of a check or money order, from this point forward should be endorsed and mailed to:
123 Main Street
Do not make any future payments to the previous owner. Your rent is due within five days of the due date. Early payment is always appreciated.
A representative from Management will be visiting you within the next few days to inspect the property for any repairs to be made and to gather some additional information from you.
If you have a maintenance problem that needs immediate attention, please call the office at 555-555-5555.
In the meantime, please fill out the enclosed forms and send it back to our office with the enclosed addressed and stamped envelope.
We look forward meeting you.
Finally, reassure the tenants that their current lease will be enforced and nothing will change in the lease until it expires.
Gather all of the leases and contracts when performing due diligence. Examine each lease thoroughly and create a lease audit. Verify all of the information to be accurate, and point out any inconsistencies to the seller. When the closing has taken place, send out the tenant letter with instructions for the tenants.
What does your lease audit process look like? Any questions about transitioning management?
Let me know with a comment!