Should I buy a good deal w/ 2 non-paying tenants/squatters?

Question

Hi,

I found this off-market deal in Philly and was wondering whether it's worth it to proceed. I feel like I must be crazy because nowadays everyone is dying to evict their non-paying tenants out but I'm looking to voluntarily take on TWO of them in one property 😐.

This property was previously sold within one day of being advertised by the wholesaler but the deal fell apart as it was supposed to be delivered vacant but they found 2 tenants who stopped paying and are relying on the eviction ban to stay.

I would get about 10% discount from the previous sales price (the most the wholesale/owners would agree to with the squatters), new price being about $110k.

The ARV is at $240k (there is a direct comps from an almost identical property few doors down sold recently).

It would probably cost me about 40-50k to fix it (to be safe let's say 60k to factor in squatter damages).

It will rent for about 1400/month.

Currently the squatters have a lease renting one bedroom each for 500/month with lease up in Sept this year. I think there is about a 50/50% chance that they will both take a cash for keys offer (I plan to offer them a generous amount to increase my chances). Else I will go with the legal route. With the lawyers I've spoken to, seems like this is a 6-8+ months process.

Is it worth it to take the gamble and hope that the tenants will just take the money and go, as this is too good of a deal to pass up (even with the 50/50 chance that I might not gain posession for another year)?

Kevin M. · Answer

I deal with situations like this often in Philly. The lawyer who gave you a 6-8 month timeline- is he/she an eviction attorney? I don't see how you can hit this timeline in the current climate. To evict in Philly for non-payment right now you have to;

EHPA Notice

File for Phase IV Assistance

Eviction Diversion Program

File for Eviction

Receive Court Date

Win in Court

Writ of Possession

Alias Writ

Lockout

No one has evicted a tenant in Philadelphia for non-payment of rent for over 15 months (to my knowledge) but someone is telling you 6 months is realistic? This is assuming you have a valid rental license and all administrative paperwork in order.

From someone with 'boots on the ground' I think things are more difficult than most are letting on when it comes to legally removing non-paying tenants...

Steven Goldman · Answer

In my 40 years of real estate the one timeless rule: Never let anyone other than a paying tenant under lease occupy after settlement. I would to buy a property that has hold over tenants or squatters. Philly is really a difficult landlord jurisdiction. Not to mention the potential problems with utilities and other services. I would pass and look for a vacant property unless you have a law license and are familiar with Philadelphia's utility and landlord tenant regulations. Too much risk and not enough reward.

Joe Splitrock · Answer

The simple act of getting a new owner may cause them to take you more seriously. The danger is if you walk in and start offering them money, they will smell blood and keep asking for more. Your first message to them should be, "I am not a sucker like the old owner and I have a good lawyer. Please leave the property because when this lands in court, you will end up owing me money and have an eviction on your record." Pretend like you have no knowledge of previous discussions with the old owner. If they claim the eviction moratorium, explain only applies to people with COVID hardship and you still need to make rent payment by seeking out rent assistance. Ask them if they have applied for rent assistance or if they are unemployment due to COVID hardship. If the answer to both is no, then there is no COVID hardship. They still need to give you the signed declarations to be covered under the eviction ban. If they don't give you the form or lie when signing it, tell them false statements on the form can lead to additional penalties in court.

Give it a little time and if they hold their ground, just tell them "the old owner gave me your deposit, I am willing to return it to cover your moving costs if that helps. If this goes to court, I will keep the deposit for damages and past due rent. I am trying to help you by not having an eviction on your record. Please don't make this harder than it needs to be."

Your starting offer should be low. If you go in offering thousands of dollars, they will just ask for more. Always keep reminding them that an eviction will make it hard for them to rent in the future. Also remind them that if it goes to court, they owe back rent in a judgment. That is thousands of dollars.

Paul S. · Answer

With deals like this I like to just work out my "no brainer" price.  Assume the tenants aren't going to move out until some far flung date, and work backwards from there.  There is a price that makes it a "no brainer" deal that makes all the hassle worth it.

I would make that my offer.  Sounds ruthless, but this is the time when you beat up a seller because they have a property that is going to be difficult to sell.

I once had a seller that wouldn't let me look inside the house.  I said "...well then I have to offer my I can't look inside price..."  He took it on the spot, turns out him and his family had been hoarding since the 50's.  30 tons of trash later and it was still a good deal.

Jennifer T. · Answer

Thank you all for your thoughtful responses. It really put things in perspective for me. After thinking it over, I've decided that taking on two squatters in the hopes of getting around 10k off the purchase price is not worth the risk for me, especially given that it'll be my first flip.

My wholesaler has actually been very good at communicating throughout this whole thing. I ended up offering him the solution that I will pay the same initial sales price of 120k, on the condition that he gets the squatters out before settlement date by offering them cash for keys at his own expense, and that the property doesn't have additional damage. That way, we will find out if we can quickly get rid of the squatters out before I get stuck with the house. There would be no sale if they don't accept the cash and move out within a few weeks. He would also earn a higher commission than if I agreed to take the squatters for 110k because the C4K offer will be way less than 10k. He likes the plan so we will see what the sellers say.

Furthermore, thank you for telling me that it's not a good deal as a BRRRR, which prompted me to look further into the math (and redoing it with much more conservative numbers), and now I do feel like it's better as a flip. (Both options seem viable in the area). I don't think I will make a huge chunk of profit after accounting for all expenses but I will definitely make some money to make it worth my time, not to mention getting an incredible learning experience. I really had my mind set on holding it for cashflow so I really appreciate everyone opening my eyes up to being flexible.

Lindsey Hughey · Answer

If you can do it for less than 11 grand take the chance.  I don’t like how it could take 6-8 months to evict.  That would eat up your 11 grand discount from the wholesaler.

Rich O'Neill · Answer

@Jennifer T. that is a tough question!

Philadelphia is a VERY tenant friendly city, so that is the part that would scare me.

Is there any more background on the tenants? Have they been paying until recently? Do they have decent credit?

If I was you, I would have a lawyer draft a strong letter explaining what they are risking by going to court (credit, chances at getting another place, eviction record, etc), but then offering them the cash to leave and avoid the headache. Carrot and Stick.

I am sure there are others here who have dealt with this more than I have, but I would prepare for a fight.

Nathan M. · Answer

I've had a decent amount of experience in Philly landlord-tenant court as a volunteer mediator during law school.  I wouldn't necessarily agree than Philly is very tenant friendly, generally speaking.  But it's certainly not easy for small landlords.  The required licenses and inspections are a pain, as are business taxes.  However, evicting a tenant in pre-COVID times was fairly straightforward as long as the landlord had their ducks in a row.

Unfortunately, they've now instituted a completely separate mediation program (no idea why--the program in place was quite good) that is not itself part of the court system.  Our mediated agreements became enforceable judgments entered in the system.  I don't think the mediated agreements in the new diversionary program are.

In any case, the upside to the current situation is the availability of rental assistance, if the tenants are eligible.  If not, you can schedule a meeting through the diversionary program within 30 days, and if that doesn't work you can get a court date.  Once you have a judgment you can evict in 21 days.  So the gap of time in there is the time between the failed mediation and the court date... I have a hard time believing that would be four months.  We just didn't have that much case volume in the past few months.  Granted, it will increase as cases move past this diversionary program.

In any case, though, the deal as described doesn't make sense to me as a buy and hold or BRRRR.  Granted, my underwriting is very conservative, but I don't see the NOI at that cost/rent ratio covering a big enough mortgage payment to pull out your investment in a couple years and still cash flow.  Could be a decent flip if that's your game.

Andrew Syrios · Answer

Non-paying tenants/squatters are part of the deal. The question is just whether it is still a good deal with them or if they make a bad one. This still sounds like a good deal to me although evictions have been tricky over the last year to say the last.

Eric Greenberg · Answer

I dont know what part of the city this property is located in, but recent comps could be over predicting the ARV with the shortage of homes for sale in the area. Since this isnt a flip you may want a more conservative ARV based on pre-pandemic prices just to be safe.

Being close to the 1% rule in a nice part of philly to me is a good deal. But if its the not best area id walk away or negotiate further.

Should I buy a good deal w/ 2 non-paying tenants/squatters?

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