Buying 2-4plex as OO, existing tennants?

Question

Im curious, are most 2-4plexes sold fully leased or not leased at all?  Is it a mixed bag?  Is REO generally sold with tennants?  I cant imagine the bank likes landlording but Im not sure if they can break leases and throw tennants out.

I would like to get an FHA loan to buy in the next 6-12 months as OO and Im curious if it will be an issue finding a place that I can immediately occupy.  Any thoughts?  Thanks

Dave M. · Answer

As far as existing tenants, it varies. With multi-unit its uncommon for all units to vacate at the same time (staggered leases can be a good thing). If the entire property is vacant you don't have to worry about inheriting bad tenants but you also don't have instant income and have to rely on the seller's claims and your knowledge of the rental market to determine what the income will be.

Banks don't dislike landlording per se, investment properties represent higher risk than OO so they charge a premium. In your case since you intend to live in one unit and rent the rest you may not be penalized.

If the building you buy is fully occupied you do have several options:
1. See if a tenant is interested in an early termination. Sometimes tenants are just counting the days until their move out and are happy to do so. You and they just agree to tear up the lease.
2. Offer tenant an incentive to move. Like #1 but you pay their moving expenses or give them a free month rent, etc.
3. Some states allow you to terminate the lease early. When you buy a rented property and intend to move in yourself, you can legally do this with proper notice. Since the details vary by state make sure you get the particulars.
4. Schedule closing to coincide with a lease termination. Stipulate in your contract that the seller deliver the building at closing with unit x vacated and tenantable (for you).

...there may be others as well

Andrew Isaacs · Answer

Hey Dan, in my market it wouldn't be too much of an issue to find a vacant REO multi-family.  But to better answer your question, it is a mixed bag.  In 2009 a federal law was enacted that protects tenants in foreclosed properties.  Their leases remain in effect despite the foreclosure (as long as the tenant performs his/her end, of course).

Here's the good news for you -- if the Bank sells the REO property to an O/O the buyer can terminate the existing leases with a 90-day notice.  Here's an excerpt from the National Association of Real Property Managers summary of the 2009 Act.

Sean F. · Answer

Hi Dan,

Welcome to BP, it's nice to see someone local to me on here. We share a similar strategy. I'm also trying to obtain a rental property using FHA financing.

Inventories are low and lots of competition from cash buyers. Don't let that discourage you though.

Good luck!

Dan H. · Answer

Thanks, great info guys

Steve Babiak · Answer

The banks will offer "cash for keys" to get the units vacant, under the thinking that it is easier to show empty units than to try and schedule showings while occupied.  Sometimes the bank would prefer to have the units remain occupied, to produce some income until a buyer is found, and to also keep the place from being targeted by vandalism and scrap metal "miners".

So there are advantages and disadvantages regardless of the approach.

Bill Gulley · Answer

Pretty much a mixed bag, bank REOs are usually vacant but could have tenants, especially with the new laws pertaining to hold over tenants from foreclosure. In some areas, a lease can be broken by a new owner if they intend to occupy the property with a 30 day notice, which means giving notice of your intent to occupy prior to buying. Check with your state laws, probably better to just ask your attorney the simple question. Your plan is a good way to break in to the rental business. Good luck.

Edited: I'll default to Andrew's post of 90 days, here in the past it was possible at 30 days, so now it looks like that is covered, probably universal now. Thanks Andrew.

Buying 2-4plex as OO, existing tennants?

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