Updated: Mar 7
In the real estate investing realm, it is not uncommon when you purchase a rental property that tenants are already occupying the unit(s). It is up to you whether you want to inherit those tenants or not. I often decided not to purchase a property simply because of how shady business seemed to be between the landlord and the tenant. My goal is to inherit a tenant who will have a good landlord-tenant relationship, not inherit a headache. I am sure you would agree with not receiving the latter. I have come across some lessons learned as a landlord. To ensure I inherit good tenants or set a standard with a tenant who had loose policies between them and the previous landlord, my peers or I have applied these methods.
Review Existing Leases With Rent Rolls
Often I have requested a current lease for the property I would like to purchase, and I get rent rolls instead. If the landlord can not provide a lease, then RUN! But let’s say you get the rent rolls and leases. The rent rolls need to match the lease amount. For example, the lease says $900 a month, but the rent rolls show $800. Then you have a problem. Often the rent that’s advertised or discussed is what the current landlord “believes” the rent should be. If the numbers still make sense based on what the lease says the tenant is supposed to be paying, you can have the tenant sign an Estoppel Agreement.
An Estoppel Agreement is an easy to read one-page form that the tenant fills out, letting you know what the tenant believes is their agreement with the current landlord to the best of their ability.
An Estoppel Agreement should have (but not limited to) at a minimum:
* The tenants’ names and who resides in the unit (any subletting)
* The lease term (including start date)
* The rental amount due each month and the due date
* The security deposit amount
* Tenant or Landlord pays which utilities (water/gas/electric)
* Who owns the appliances
* Are any pets on the property
* Are there any issues or repairs needed
* Are there any other agreements with the landlord that are not annotated on the lease
I recommended both you and the tenant sign this agreement along with having it notarized. This protects both you and the tenant (mostly you) from any “he said, she said” situations in the future. Keep this agreement on file so that issue won’t go too far.
Keep in mind If the current landlord does not let you speak with the tenants and distribute Estoppel Agreements, you might be dealing with a seller trying to hide something. Most eager sellers with nothing to hide are more than willing to be very inviting and accommodating. If discrepancies are found after the Estoppel Agreements are signed, I recommend you settle those issues before closing.
To have a template of the Estoppel Agreement, please click here.
You do not have to have the same lease the previous landlord had. If late and holdover fees haven’t been inputted in the current lease, make the change. If there needs to be an early termination fee amount annotated in the lease, make it so. Some of the tenants may be in the middle of their current lease, so honoring that live agreement will not only be in good professional taste, but it is also illegal to change their lease. Once you take over as the landlord or 60-90 days before the end of their lease, I recommend submitting what your new standards will be under the new lease. For example, if you plan to increase the rent or start to charge a landscaping fee. This gives your inherited tenants time to adjust to what the new lease will require or prepare to part ways and find a new place to live. If they are great tenants, use the time between when you took over and the end of their lease to identify how you can keep them in your unit.
Worst Case Scenario
Worst case, you need to buy the inherited tenants out of the property potentially or, as it’s called, offer cash for keys. If you desperately want this property because you are thinking long term this deal is worth it, then consider this option. Decide how painful these tenants may be. After interacting with the tenant, having them sign the Estoppel Agreement, and viewing their units carefully, consider if they are worth keeping. Compute a dollar amount you could offer them of that amount if they vacate. If you know, it’s going to cost you thousands of dollars keeping these tenants because you know they don’t pay rent on time or at all due to reviewing the rent rolls or their pets are going to damage the carpets beyond repair, this just might be your option.
You could offer them free rent for a month, plus you cover the security deposit on their new place of residence. Maybe it’s just 50% of their rent if they vacate at the end of the month. Deciding what will be the fastest and least painful for you is the mindset you need to be in. If an eviction costs $1,500 and could involve three months ($1000 monthly rent) of not receiving any rent-paying the tenant, $1500 could be a big win saving you $3000 overall. Your property is the asset. Do what you can to protect it.
Going into each deal, always provide yourself contingency plans to protect you from losing money and legal issues. There are enough red flags that will show their ugly heads before you are at closing. Do not ignore those warning flags because you are too emotionally attached to the deal. You will be happy you backed out of the agreement. I also encourage you to be creative on some yellow flags that can be handled before closing. The deal isn’t lost because of some discrepancies that are identified.
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