Issues With Inherited Tenants To Prepare For

By on December 10, 2016

Inherited tenants simply refer to existing tenants of a property that you are buying. In this scenario, you are buying from another landlord and the house(s) already has tenants inhabiting them.

Sometimes, even homeowners (non-investors) rent out a room or part of their house for a second income. And by selling the house to you, the tenants becomes your responsibility.

Although inherited tenants provide the benefit of immediate cash flow to look forward to, they can also come with problems that you did not foresee when acquiring the new property.

  • They were not screened and approved by you
  • They might be used to loose house rules… which they don’t even follow
  • They might be paying rental much lower than what you would charge
  • The binding tenancy agreement they are on does not even slightly resemble your standards

However, there is also every likelihood that they’ll be great tenants. The type that you’d give an arm and a leg for.

You won’t be able to predict or categorize your tenants until you start working with them. And taking into account that sellers and agents are the best at “lying without lying”, what you thought was a good acquisition could eventually turn out to be your worst nightmare… at least until the existing lease expires.

Estoppel Agreement

The first step you can take in the due diligence process is to review the existing lease agreement.

Verify the rental that the seller claims by sieving through documents meticulously and conducting a basic interview with the tenants.

An Estoppel Agreement is a simple form with fill-in-the-blanks fields for tenants to answer basic questions about their understanding of their current lease.

You might want to include the below when conceptualizing your document.

  • Names of tenants and other inhabitants
  • Binding period of existing lease
  • Monthly rent amount and due dates
  • Security deposit amount
  • Utility bills are who’s responsibility?
  • Appliances are who’s responsibility?
  • Existing problems with the property
  • Unique and special agreements with outgoing landlord
  • Are pets allowed? What animals? How many?

This process can sometimes be a shocking experience. But you have to go through with it nevertheless.

Should seller refuse to allow contact with soon-to-be inherited tenants and attempts to prevent you from reaching them, don’t ignore that fishy smell that your nose has suddenly picked up.

Because you could be dealing with a lying seller who’s afraid of getting caught.

Don’t close a deal until you are satisfied with the information that you intend to collect. Real estate are big ticket purchases and deserves your every attention. They are not low-priced groceries that you can throw in the bin with little remorse.

Empathy

Understand that the tenants are most likely as edgy about having a new landlord as you are about taking over inherited tenants.

In fact, they could very well be more nervous than you.

To avoid a rough start to your new business relationship, it’s best to make a proper introduction of yourself and reassure them about your benign intentions.

Since you have your hands tied due to the existing terms of lease, you might as well make friends with the people who will be putting cash into your bank account.

On raising Rental

The instincts of any worthy landlord is to seek every opportunity to justify a raise of rental. And I won’t believe you if you state that this is never a topic on your mind.

But this is a move that you should tread carefully.

If there’s anything tenants loathe more than roaches and noisy neighbors, it’s the notice of increased rental sent by a smirking new landlord on the block.

Remember that just because the average market rental in the area is $100 more than what the existing tenants are on, does not mean that a rent increase is justifiable. There could be various reason why this might be so.

At least consult the seller on why he has been charging a low rent.

If you are buying a multi-family property, do put serious consideration into your rental hike strategy. In the worst scenario, every tenant might refuse to renew and leave due to a rent increase.

Consider:

  • How differing dates of lease expiry can affect your cash flow
  • How timelines of remodeling works can affect your vacancy rate
  • The time required to secure new tenants
  • The added value you bring to the table with increases in rent
  • etc

Sometimes, it could be a wise move to leave everything as it is in the short term and only make your play a year or 2 later when tenants get more familiar and acquainted with you. Just treat this opportunity cost as an investment for the long term.



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