Buying a Property with Multi Decade Tenants In Place

[R. Phil Lewis]

I've been searching for a multifamily property in NJ that I can house hack for some time. I'm finally in a good cash position to make a move and have found a property with what looks like great potential. 

I was able to get the seller to accept my price near what they were asking . The seller had some additional terms such as cleaning up the site with old debris that I was okay with accepting because the property needs ALOT of work anyway. When I looked at the property and when I submitted the offer I made it clear that I need the property vacant because we are going to do the work that the seller doesn't have the money to complete. The seller agreed and accepted my offer. 

**Added Context** The seller is an elderly woman who inherited the property from her now-deceased husband. The listing agent claims she knows nothing about the property and just wants it sold. When asked about leases they said they dont have any leases and have been month to month for some time. Allegedly the seller has notified the property is for sale but hasn't served them a Notice to Quit.  2 of the 3 tenants have been there for more than 30 years. The other tenant has been there for 3 years. The current rents they are paying are 50% below market because of the old worn down condition of the property and probably also because they have never raised rent in 30 YEARS!

This property is so mismanaged....

Moving Forward: Once we got into attorney review I had my attorney make it clear that I WASNT taking possession of the property until all tenants were removed. (To me it makes no sense to take on a mortgage while I'm also paying to get tenants out!)  Well....This kicked up quite the storm with the seller's attorney (a divorced attorney) and he basically scared his client into the horrors of getting tenants out, so the seller outright canceled the Transaction. This was after she agreed to my offer and the listing agent allegedly explained what was required to remove the tenants.  For the past few days the listing agent has been trying to find a way to keep the deal together. 

The listing agent suggested that the Seller will serve a Notice to Quit to tenants, See how they respond, if they all decide to leave in 30 days we will close in 30 days and be done. If they decide to dig in and stay the seller still wants to close and I would be responsible for taking on the 3 eviction proceedings. 

Questions: 

1. Is this scenario common in Multifamily real estate? 

2. How long could the eviction process be? 

3. How much would the process cost? 

4. Why do you think the seller won't just serve the tenants with a Notice to Quit? The tenants contracts have expired for sometime.

5. Should I keep pursuing this or let it go? 

6. Any other cost-effective strategies I could propose to the seller?

Potential ARV is about $900k-1.2m

Potential Rents: $2000-3000 per unit

Construction cost: about $150k-200k

[Will Fraser]

Welcome to the forums, Phil;  You've come out swinging!

1. Yes, among incidental or accidental landlords it is all too common.  Especially among those in the late fall season of life who have been "mailbox money" fans throughout their earning years, it is not uncommon to see rents MASSIVELY below market value and those same people boasting in their lack of vacancy.  (umm. . . .  lets do the math?)

2&3. Totally depends on your state and a solid New Jersey Property Manager or real estate attorney should be an asset to you here.  For my money I'd give All County Lehigh Valley Property Management or ( a text and run through this with them.

4. The Notice to Quit is THE process for ending a MTM lease. Either the current tenants' leases didn't expire but rather converted to a periodic tenancy (Month To Month here) and they have been rolling with that for a long time OR they have established Tenancy at Will by continuing to live in the property and pay rent.  Either way the tenancy will continue to renew unless acted on to stop it and unfortunately (because of the name of the document) a Notice to Quit is the most effective way to make a periodic tenancy stop renewing.

5. Sounds like it has a lot of potential, yet Caveat Emptor

6. Totally depends on what your current contract is with the seller. 

For example, if I knew the seller was okay with $600k, then I would want to offer them $800k with them contributing $200k to repairs and I would fund this with a commercial loan.  Then, after completing repairs and stabilizing the tenants I would refinance onto permanent financing.