Written By Courtney Newton
Some of the best opportunities that exist in the market place are ones where a landlord/owner needs his cash now. They have a wonderful rental with a long term tenant and just want to cash out. They typically don’t want to disturb the tenant or the tenant has been there so long they feel an obligation to find someone to purchase it with the tenant in place. This can be an excellent opportunity to purchase a proven rental property and keep cash out to just the down payment needed to purchase.
Let’s evaluate what buying a tenant already in place on a rental property looks like.
First thing is first, review the current lease, amendments, move in agreements, and rental payment history. Reviewing these can be done during the due diligence process. I usually require it to be provided within 48 hours of binding agreement date to give adequate time to understand what is happening in this property.
Don’t be surprised if the landlord does not have a written lease. This is common in many lease situations. Typically landlords will simply put the first person who has the money to move into the property. There hasn’t been credit, background or any other kind of checks/verifications. Some landlords inherit properties with the tenant in place or it could be a friend of the family and the need to get a lease felt to impersonal so they never got one. Any number of factors contribute to why we don’t see security deposits, written leases, written extensions of leases, or move in agreements as part of the tenant placement.
The key way to protect yourself would be to have the landlord/seller and tenant to sign an agreement with the following points:
1-What the current rent that the tenant is paying.
The reason you would want this in writing is to hold the landlord and tenant to what you know will be able to be collected. This also allows you to prorate the rent as part of the closing documents. Lastly, this will give you an idea of what kind of cash flow you will be able to expect in the coming months of this property. This will also help to understand is this property below, at or above market rent.
If it is above or at market rent it could make sense to keep this tenant as happy and for as long as possible simply because you would see less rent in the future. If it is below market rent, it can be a great opportunity to work on a 12 to 24 month plan for increasing rents to a more fair market value based on condition. Keep in mind when raising rents the tenant has the right to give notice and vacate the property.
If the property is out dated, in need of upgrades the cost of losing the tenant could be greater than the cost of monthly loss. In many cases increasing the tenants rent by $50-$100 a month sounds great but the cost of them vacating and making repairs could cost as much at $5000-8000 to do so would take 4 or 5 years to recoup that costs. That doesn’t seem like such a smart strategy. In my experience, you are better to ride out the tenant and make repairs when they decide to lease the property. A good rule of thumb is to take the rent you believe you are losing and what the cost of the repairs are. If you can recoup your funds in less than 24 months then if makes sense to move the tenant on if it is longer than 24 months then keep them there and save until it is time to do the repairs.
2-If there is or isn’t a security deposit in place? If there is what is the amount and where is it held?
You will want to make sure you are credited with the deposit at the time of closing because it will become your obligation when the tenant vacates the property. If there is not a deposit in place, I would recommend working with the tenant to come up with a way to put one in place over a 3-6 month period. You could increase rent by $25-50 a month for 6 months. You could also run the risk and just say they have been there for so long and there is no move in agreement to prove or disprove any damage so what is the point. Depending on the property, condition of the property and tenant financial situation it may not be feasible to try to get any security deposit. Just know they could damage the property beyond its current condition and you are left holding the bag for the repairs.
3-If the tenant is willing to sign a new lease, continue as a month to month and with what kind of notice to the landlord for vacating.
This is the showing your hand. If the buyer is willing to sign up for the property again under a new owner will determine what is really going on with the property. Is the landlord dealing with a difficult tenant then you will find it out if they are willing to sign an agreement showing their intentions moving forward with this agreement. Be firm on this if they are unwilling to sign a new lease then they should at least be willing to sign an agreement that all parties with proper notice can choose to cancel the current situation. In Georgia, 60 days is considered legal notice for landlord to tenant and 30 days is legal notice for tenant to landlord. One of the biggest components of a lease is how do you exit the agreement.
4-If there is a move in agreement concerning the condition of the property at the time of move in.
As mentioned above, this can be tricky. If you are able to get one make sure you request photos, video or any other pictures to show condition prior to the tenant taking possession. Another example of how to get a move in agreement when one is missing is to get one signed when you take possession of the property. It doesn’t protect you from any damage done from when the tenant initially took possession but it does offer some frame of reference for when you purchase to time of vacating.
Make sure you take a large number of pictures from every room, every angle, inside and outside, get pictures of the electrical box, HVAC, water heater, under the sink, any items that are considered property of the landlord like washer dryer, refrigerator, stove, dishwater, light fixtures, blinds, etc. This may seem like overkill but when you are trying to prove that the property has something it helps. I would also recommend time stamping the photos. Another way this is helpful is with your insurance company they are going to want to see these when issuing the policy and if you were to ever has a claim it is also super helpful.
If you can get answer to those four questions that can cause a lot of headaches to be avoided. It will also protect you in the future. I would advise getting a signed agreement from all parties at closing to reflect all of these answers. This will serve as a way to make sure that the current tenant understands there is a new landlord in town and these are the rules to play by moving forward