Buying Properties With Tenants In Place
Tenants aren't a bad thing, you just have to be aware of what you need before closing escrow to lower the risk of the tenants being a liability and costing you a tremendous amount of money.
Even rehabbers buy properties with tenants because either the lease ends soon and you'll collect rents while you wait for the expiration date, or you plan to offer the tenant "cash for keys" so that move out before their lease expires.
There are a number of potential problems if you don't prepare.
First, as soon as you take title to the property they may stop paying their rent and they won't move.
I've had this happen.
You don't get the rental income you were expecting and you now have to pay to evict them.
On top of that, they may very well destroy your property on the way out; in my case, they did destroy the property.
Maybe you're plan is to offer them cash for keys so that they end their lease early.
That doesn't always work and you can't expect that they will accept.
You need to always plan for the worst case scenario and be sure you can live with that; then do your best to put the odds in your favor so that you never have to experience that worst case scenario.
I had a home I was going to buy to rehab.
The tenants had at least 5 animals that I saw and they were concerned about finding another place that would allow them to have all of those animals; and they were right.
It was going to be very difficult for them to find something.
Cash for keys meant nothing to them.
They wanted a new home for the family which included all of their animals.
Their lease ended in 3 months so one option would have been to hold out until their lease expired.
But again, because they may not find a place to move to, they very well may have stayed in the home well beyond the lease expiration date.
Never assume they will honor the lease expiration.
Here is what you can do to put the odds in your favor when buying a property with tenants in place.
Always get the original lease.
Be sure it includes the rent amount, the security deposit amount, all pages initialed by both parties, and the last page signed by all parties.
Read the entire lease to be sure you understand it and can live with the terms.
Look to see what it may state when the home is sold and someone else becomes the landlord.
I've gotten copies of leases in the past but it's very easy for someone to white out different things to make the lease look better then it really is.
That's why I like to see the original.
I also get the tenant's phone number so that I can verify that the rent and deposit amounts listed in the lease match what they say.
If they don't then I get the current owner and the tenants all together with me so that we can find out the truth.
Many times the owner/seller has already spent the security deposit money and they don't have the money to transfer it to the buyer at the close of escrow.
If they don't have the money needed, many times they'll try and say that they didn't get a deposit from the tenants.
Then when the tenants move out, you'll find you owe them if they've left the place in good shape.
This is why it is important to confirm everything with the owner and the tenants before the close of escrow.
If I don't get the original lease or I don't like something in the lease, then I'll ask the tenants to sign a new lease with me.
I always have this done and signed by all parties before the close of escrow.
I also need the original tenant's application and any credit checks or background checks done.
Do not close escrow until everything is settled with the tenants.
I've backed out of many deals because I wasn't getting what I need or I didn't like what I found.
I knew the liability was going to be high.
In the purchase contract add a contingency worded so that it doesn't expire until you get everything needed and you are comfortable with the results.
I will only buy a home with tenants in place IF there is a properly filled out lease that all parties agree is correct, a reasonable security deposit that I will get transferred to me at the close of escrow, and that they have descent credit that they don't want ruined.
It's all about leverage and it's the only way to protect yourself.
Otherwise the risk is too high.
One last point.
If a property walk through condition form isn't available, then be sure to walk through the property with the tenants the day after you close escrow.
Fill in any damage to the property and have the tenants sign the form.
Then when the tenants move out, if you find more damage you'll be able to prove it was the tenant that caused it and you'll be allowed to pull the needed repair amount from their security deposit.
Copyright © 2011 / Michael Gier & MHVProperties.
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