Rookie Reply: Informing Inherited Tenants of a Change in Ownership

Ashley:
This is Real Estate Rookie episode 110. My name is Ashley Care and I am here with Tony Robinson. And today is a rookie reply. We have pulled a question from Facebook for you guys that we are going to go over. Tony, What is today’s question?

Tony:
All right. So today’s question is, and I’ll have to look up who it’s from. It’s from Rhetts Miller, Rhetts posted in the Real Estate Rookie Facebook group. How do you inform an inherited tenant of changes in ownership after you close on a property? So all of my long-term rentals, they came vacant or I bought them vacant, then we rehabed them. So I’ve never actually had to deal with inheriting someone else’s tenants. So Ashley, the queen of property managements, tell us your experience. What do you think of this?

Ashley:
I’m not sure if I actually hold that title, but between me and you, I will take it. So the first thing is something that can come up is when an investor or anybody is selling a property, they may not want the tenants to know that they are selling. I have a property under contract right now, and the owner does not want the tenants to know because of fear that they’re just going to stop paying rent, or I don’t know, what bad things he thinks will happen, but he doesn’t want them to know.
But the first thing you should do is try to negotiate with the seller that you can send estoppel agreements to the tenants. And this would be before you have enclosed on the property. So this could be done during your due diligence period where you’re sending them a sheet of paper and it basically has them put their name, their lease terms such as what are they paying for rent? Do they have any pets? When does their lease expire? Do they do the snowplowing and landscaping, or is that not included? So there’s different things that you want to ask on this form, but it’s things basically you’re verifying their lease agreement and then asking other conditions too. What utilities are they paying? It’s just giving you that check that whatever the landlord is saying is the same as what the tenant is saying.
And another big one too, is the security deposit. Make sure they’re both on the same page about the security deposit. It definitely helps if you’re getting copies of the lease agreements so you can make sure what they’re saying is true, because basically you’re really going off the lease agreement and not really what anyone said, but a lot of times these mom and pop landlords, they don’t have lease agreements. It can be just a verbal agreement or no detail at all in the lease. So that’s a great time to send these estoppel agreements so that you’re on the same page.
And then as far as when you purchase the property, so you at least want to let them know the day of when you close, when you have taken over ownership of the property and a great way to do that is to put something in writing. So that could be you could be dropping these off at the doors. You could be mailing them out so that they arrive the day you close. But I think a great way is to actually tape it to their door, hand deliver them. So you know that they’re getting and then send another copy certified mail or something like that. If it’s property that has some common areas, you can post like a notice. Here’s the new owners information. This is how you contact them. This is what you do for maintenance, different things like that. But I really like to put everything in writing. I’m pretty sure if they try and call the other landlord, the other landlord’s not going to answer because they’re not the landlord. They don’t have to deal with that property or they will, and they will just forward on to your information.
One thing you might not want to happen, which has happened to me is one tenant did not receive my information correctly. And the owner gave them my personal cell phone number and I’ve always used a Google voice number. So there was a little mix up there which can be avoided with providing your information right at closing as soon as you take over the property. So what other things am I missing that you’d want to know, Tony?

Tony:
Yeah, no, there’s so much good information there. So with this estoppel agreement, what happens if there’s no lease in place, right? Let’s say it’s a super mom and pop, like you said, it’s all verbal. When you go out and try and fill out this estoppel agreement, what if they’re like, we never talked about any of these things? Can you force a new lease on that tenant since they haven’t signed one or what’s like, and this will probably vary state to state, but at least where you’re at, like, what’s the process if there is no lease?

Ashley:
Yeah. So if there’s no lease and they’re considered month to month, but you still have to give them notice if you’re going to increase the rent. So I don’t know offhand what it is, but in New York State, it’s something like if they’ve lived there less than a year, you give 30 day notice. If they’ve lived there less than two years, you give 60 day notice. And I think beyond that, I think it’s a 90 day notice maybe. So you would have to follow rules like that. So the day you’re closing, you could also negotiate in your contract with the seller that they give notice to the tenants so that in New York State, it takes 30 to 90 days to close on a property anyway. So you could always negotiate that they’re giving notice for that rent increase to cover some of that time period too.

Tony:
And then do you like actually shake hands and introduce yourself when you buy a new property? Or is it just like mailing them the information, the estoppel agreement or the new leases?

Ashley:
Yeah, I’ve always just mailed. In the very beginning, when I only had a couple of properties, I was there working on the properties and I was there for the showings and things like that, and they would know that I was the owner, but other than that, after that, I tried to see myself more as the property manager than as the owner. And I would mail things and try to limit as much time so I didn’t have to go to the property as often.

Tony:
Have you ever had any issues trying to enforce new leases with some of the inherited tenants?

Ashley:
No, not really. Because something I will do, there was this woman that had lived in her apartment for 30 years. It was a two bedroom, one bath. Everybody else was paying $500 a month, which was still below market. And she was paying $300 a month. So what I did with her was I did a gradual increase. So I think over six months we increased it to I think 425, because she was the only one paying her own water, but to kind of even out. So I try to work with people to do it that way, instead of just like, oh, next month your rent’s increasing to $525. And then I’ll also do comparables. I’ll show them that I’m actually bringing their rent up to market rent. So I do a letter that states comparables in the area. So this apartment is listed online for this amount of rent. It’s the same as yours, two bedrooms, one bathroom. The same amount of upgrades to it. And this one is 800 a month and I’m offering you still 750 or something like that. So I try and show them that I am not being unfair. I’m not being outrageous. It’s just they’ve gotten a great deal for so long. And I’m just bringing it up to market rents.

Tony:
Last question. Do you often have tenants vacate when they get the notice of the rent increases or would you say maybe it’s like 50/50?

Ashley:
I really don’t have anyone that has vacated I don’t think because of a rent increase ever actually, because I try and do it so fairly where it’s not a huge amount. But no, I haven’t dealt with that.

Tony:
Man, you made it sound easy.

Ashley:
Which is good I guess.

Tony:
You made it sound super easy.

Ashley:
I mean, I still have had vacancies where I get people to leave, but never for a rent increase, I guess.

Tony:
I would just think maybe that’s part of Rhetts’ logic here as well is like, Hey, if I buy at this place and then I try and increase the rent, am I going to end up with four empty units? But it sounds like as long as he does it in a kind of fair and consistent manner, hopefully it’s not too much of an issue.

Ashley:
Yeah. And it also takes time for people to find housing too. So it probably wouldn’t be immediate because they have to give you a notice that they’re going to be leaving and the chances of them all leaving. But also you can do a walkthrough with them and say, I would like to increase the rent to this. And maybe there’s a couple of things they would like done in the property that you can show like, okay, I’m going to fix this for you, make this nice, and your rent is going to go up to this. So definitely communicating with your tenants and listening to them, just like we always talk about with a seller, why are they selling? Same with a tenant. Why would they want to move? Why do they want to stay? Things like that, especially your first properties.

Tony:
Yeah. Well, love it. Ash, I feel like we hit Rhetts’ question or not we, I did no heavy lifting in this episode, but I feel like-

Ashley:
You asked great questions though.

Tony:
I feel like you Rhetts’ question so well, so I don’t know. Any final closing thoughts?

Ashley:
No, I don’t think so. Thank you for interviewing me for this episode.

Tony:
Doing my best Oprah impression today.

Ashley:
You get a card, you get a card.
Well, thank you guys so much for listening to today’s rookie reply. I’m Ashley at Wealth from Rentals and he’s Tony at Tony Jay Robinson. And we can’t wait to see you guys in New Orleans at the BiggerPockets Real Estate Conference.