Lease-Purchase Agreements: What If There's an Existing Tenant?

What sounds like a potential headache could lead to a greater payday.

Let’s discuss what you should do when you get a property lead sheet in from your virtual assistant or are making calls on your own and you find out there’s a tenant in the house. Now let’s assume this is a single family since multi-unit properties involve quite a bit more detail and nuances.

A lease-purchase deal with a renter already in the home will be the same as usual, but it’s the details of their lease and the math that matters here. As in every deal, you just need to know how to navigate the terms and become that master transaction engineer.

What does that mean? You’ll evaluate the property and circumstances, and decide whether it’s a sandwich, a subject to, or owner financing.

How to Handle Properties With Existing Tenants

We’ve bought more than one property with a tenant in it, but in this particular example, we started out with a sandwich and later converted it to a subject to. This strategy substantially upped the profit margins, almost like a payday No. 4.

Think about that for a minute. Because we have it subject to (we own it versus a lease purchase with a date coming up to cash out the seller), we’re able to NOT pressure the tenant buyer. They can enjoy the home longer before rushing to cash out.

If they cash out early or on time, great. If they don’t and you have to give them an extension, you’re back in the driver’s seat. You could change the price, terms, or anything else you’d like. That’s where the payday No.4 was just created—additional principal pay down, maybe more monthly, and maybe a higher price.

Be Transparent With the Seller

During the viewing, you should tell the seller your exact plan. Tell them you’re OK with inheriting a tenant, but you need to do the homework first and meet the tenant. Tell them, “I want to view your home while your tenant is there.”

Ideally, it would be a meeting just between you and the tenant(s)—not the seller. That way you and the tenant can speak freely.

Meet With the Tenant One on One

You can pick their brain and get good information, like whether they’re disgruntled or not, whether the property has some challenges. Ask about things you may not hear about if just speaking with the seller.

It’s also good to meet with them to see if you want to deal with them for months or years to come. Are they communicating well with you? Are they keeping up the home or is it a complete mess?

Establish the Terms With the Seller

After the meet and greet, you can let the seller know what you’ve decided. “My term of X (hopefully 36 months or more) begins when I either convert your tenant to my buyer or when their lease ends and I fill it with my own buyer.”

Have the terms start when the tenant leaves or when you’re able to convert them. If you like the tenant, you can convert them into a tenant-buyer using the usual process. If the tenant doesn’t want the home or can’t qualify for your buyer process, toward the end of their lease (say 90 days or so) start marketing the home.

If the home is beat up or unkempt by the tenant, just wait it out. In our case, we had about 18 months left. I typically start marketing for my buyer just before the tenant is out.

The risk here is they back out or sell the property. That said, on the other side of that coin, the tenant could default and leave earlier.

Don’t be intimidated by it. That’s just the business. And when you’re comfortable with deal structuring, you’ll be able to pivot in any direction necessary.

Does my method make sense? Would you have done something differently?

Let me know below in the comment section.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.