Long time renter in home being bought - need suggestions

[Sonu Sharma]

Not sure if this message belongs in this forum but if not, please forgive my ignorance. I am looking to buy a wholesale deal in DFW that has a renter who has been in the home for multiple years paying below market rent. The home is in a good neighborhood and can fetch higher rents. I need your advise on a few things: 1) the current owner has the renter on a month-to-month VERBAL lease - I was told that this is legal in TX. Is this true ? The seller said he can attest to the rent and his verbal agreement as part of the closing. I never heard of this before. 2) The rents in the area show around 1500-1600 depending on the finish out while the tenant is paying 1100. To get a higher rent I would need to put in 10-12k in cosmetic repairs. The home is in a generally good shape with bad carpets and some worn out paints and stains in bathrooms. Not sure whether I can go into conventional the way it is in now. What do you folks suggest I do ? Ask the tenant to leave, rehab and rent it out to new folks or leave the renter, spend nothing on rehab and collect lower rent ? This is a catch 22 situation for me. 3) What does a conventional refi appraiser look for to determine the value ? Do some stained carpets, older A/C, furnace, stained bathrooms affect appraisal values ? There seem to be no foundation issues. Thank you all for your help and advise. -Sonu

[Michael Hayworth]

I disagree with most of the advice above.

1) Cosmetic stuff will not keep you from getting conventional financing. However, you should do an inspection and discuss the results with both your lender and the seller to get seller to make any repairs that will be a problem. (For example, internal cosmetic issues are often accompanied by rotted wood trim on exterior siding, and some lenders will decline to lend based on that.) Also don't understand the comment about fixing everything up front to minimize Capex and maintenance expenses....you said this is all cosmetic.

2) A verbal lease is legal, but you don't want to be a landlord in that situation. Well before closing, I would meet with the tenant and offer the chance to sign a lease. If he declines, have the seller give notice to vacate. Otherwise, you'll have to give a 3-day notice when you close, then go thru eviction. This discussion also gives you the opportunity to clarify any security deposit, so you don't get caught up in he said/she said disputes about whether there's a security deposit and how much. Deposit, if any, should convey to you at closing.

3) If he's a good tenant and willing to sign a lease, I would probably keep him and not touch the house. First, if you got a full increase of $400/mo, it would take you 30 months to recoup $12K in reno expenses - and that's assuming you actually hit that budget. Second, lower rents make the house more rentable, even in cosmetically challenged conditions. There are always good tenants around here trying to get their families into good school districts but on a tight budget. I have a house in Hurst where I've explained to tenants, "I'll fix safety issues, but this house hasn't been cosmetically updated, and that's why it rents for $1150, when most everything else in the neighborhood rents for $1400-1500. The key is, I've never had more than 10 days downtime between tenants on that house, where properties trying to get full market rate will typically have a couple months between tenants.

In short, I'd buy it, rent it, take the cashflow, consistently put money in a repair reserve, and then steadily raise rates $50/mo each year when the lease comes up, citing increased insurance and property tax costs (be sure to content property tax appraisals as well to minimize your costs)_. When the tenant finally moves out, fix the cosmetic stuff, take the appreciation and sell it at a nice profit - by then, you'll be in long-term capital gains and can minimize your taxes and buy two more with the profits.