Make sale contingent on renter moving out?

Question

We're looking at a house that has a renter in it who's supposedly paying $1,100/month with a month to month lease.  With a few cosmetic upgrades, the place should easily rent for $1,400.  Based on the pictures online of the house, it looks like the renter has been there a long time (lots of stuff on the walls, etc.) . Properties have been selling super fast, so we'd like to put in a cash offer (possibly full asking price).

What do you think about putting in a contingency that the renter needs to be out before closing?  And should we throw something in there about requiring an inspection for damages after the move out?  We don't want to make our offer unattractive by adding difficult contingencies, but nobody wants to inherit a tenant who's paying $300 under market rent.

Lee L. · Answer

@John TruongDuring contingency, get the seller to fill out a tenant estoppel which spells out all the people currently living there, the rents, how many pets, and how much there is for deposit. Make sure the tenants sign it. Things often change from the time the lease was originally signed. The estoppel helps to keep things current and holds the both the seller and the tenants accountable.

Toby Bergstrom · Answer

I remember a lot of people in 2005 who thought they new more than I did. I still think they were wrong.

If you have good criteria stick to them if you think you have a problem with your criteria find an experienced investor in your market and ask them.

Toby Bergstrom · Answer

I can understand how a deal works at 1400/mo rent and not at 1100 but at some level it seems that the deal might be thin. I remind myself daily that as a landlord I have always gotten every penny for each unit that I could. If you can get 1400 where the seller can only get 1100, what is the difference?  Are you planning to improve the unit? Are you better at finding tenants than they are? Or, are you hopeful?

If you are hopeful, make sure your offer works with the current tenant or at least the current rent. This is what you know the unit is worth.

I remind myself daily that I can only offer for what the property is worth now and what it could be worth is potential upside or gravy if you like.

PS

I've been the seller required to deliver a property empty, and I've paid cash for keys to make it happen. I fully understand the buyers reluctance to take on that particular deadbeat tenant.

Michael Modesto · Answer

@John Truong

It's common practice, but you should detail out all those conditions on the contract.  Minimally, I would request all deposits + proration of rents already paid.

Michael Modesto · Answer

Another question is, does the deal work for you based on $1,100 in monthly rents?

If so, then the upside in rents is icing on top of the cake.

Michael Modesto · Answer

@Leigh Ann Smith

Building on what @Eric Thomson mentions above, I would put value in a proven tenant who pays on time.  If the tenant leaves, it would take 3+ months' worth of the $300 increase in rent collected to recoup the losses from each month loss in rents due to vacancy.

I would first explore ways to increase the monthly rent, before evicting a (presumably) good tenant.

Also, in a competitive market (as you said), having these conditions may negatively affect the chances of your offer getting accepted.  IMHO.

P. Martin · Answer

They were month to month. Raise the rent to $1400 immediately(within the requirements of the law). They would have either paid or not.

Leigh Ann Smith · Answer

Alas, the seller went with another offer.

@John Truong, we did have it written into the contract that the seller would pay us the renter's deposit and pet deposit at closing.  We also stipulated that he had to provide the last lease.  The tenant was living there with no lease, and he could've gone to the landlord and asked to sign a new lease before closing so that the new owners couldn't kick him out.  We didn't want that to happen.

@Toby Bergstrom, that's good advice!  This house needs foundation work.  Because of that, the sliding glass door won't close all the way which means the renters are paying nearly $400 for electricity in the summer.  Also, the tile surround in the master bath had caved in (maybe the builder didn't use greenboard behind the tile?), and the back yard doesn't drain when it rains.  So there are some significant issues that the renter has been dealing with in exchange for paying lower than market rent.  They've been there 5 years, and I think the landlord was good with just letting them stay and not raising their rent rather than deal with getting the place fixed up and raising the price.

We made the offer without any stipulations concerning getting the renter out (just asked for the deposit). I would think that would've been a big plus with our offer, but maybe the other guy offered that AND more money.  Our plan was to spend about $20K on rehab, which would've have gotten it up to the standard for that area.

With the market like it is (hot), it has been frustrating to us as time and time again we get beat out by people who we believe are paying too much for these properties.  It makes me start to question whether they know something we don't know.   Oh well, back to hunting for properties!

John Truong · Answer

Anybody knows if the new buyer should automatically get all the deposits ? Or does it have the be written down in the purchase contract?

Michael Modesto · Answer

@Leigh Ann Smith

It sounds like you have options and a good plan.  Best of luck, and let us know how it goes!

Make sale contingent on renter moving out?

Most Popular Reply