Existing tenant is jeopardizing sale... what are potential ways forward?

[Blake Cox]

Hi all,

I am in the contracts phase on a 3-family building, which I intend to use as a primary residence while renting out the other two units. The deal is exactly what we're looking for -- we've negotiated 8.3% off the asking price, and with market rents we should be cash positive soon after closing; and market value for these buildings are about 20% more than what we're paying. All is in our favor, with one exception -- one occupied unit with a TAW/ no lease tenant paying ~43% under market rate. We have not met personally with the tenant, but they have not been easy to work with -- very slow to reply, cancelling inspection appointments, etc. We wanted to give this tenant the benefit of the doubt, but the deal is starting to feel more risky the more we move forward.

The property is the perfect opportunity for us to plant our roots in a neighborhood we love, with a profitable building that will quickly appreciate. But we're stuck with this very risky tenant situation. We have not met the tenant in-person.

We've outlined a few scenarios:

1. Offer a new lease with a 50% rent increase, but still 15% under market. This would maintain an immediate cash flow upon closing, versus spooking the tenants with a 75% increase and risking 12 months of non-payment if eviction proceedings are necessary. We want to avoid eviction at all costs -- mentors have warned us that eviction proceedings in our area can take up to 12 months, and a non-paying tenant for that time would severely hurt our mortgage payments.

2.Offer cash-for-keys for the tenant to vacate. This means more money up front, but could pay for itself within the year once we are able to bring the unit up to market rate. Is there a scenario where we can handle this CFK process through the current owner, before closing? We can provide the funds to help the tenants vacate, but moderated through the seller. Ideally we would have all three units vacant upon move-in. 

3. Try to negotiate a vacancy clause with the seller's attorney. This might be near impossible, as the selling price reflects the tenanted unit, but could still be an option. Again, we are willing to front the CFK cost to sweeten the deal.

Has anyone navigated this scenario, and can you offer any tips? Will the eviction process actually take up to 12 months? Is it worth offering the CFK option before we close? Is this a totally volatile deal that we should avoid? We'd like to pull any and all levers to have them out before move-in. 

We are first-time home buyers, so appreciate any and all feedback.