Should I buy a foreclosed home with tenants that come with it?

Question

I recently found a three family foreclosed house on the market in NJ, a tenant friendly state (being sold as is). It is undervalued and in an B+ neighborhood with great schools, etc. One of the three units is occupied and would come with the sale. The other two units are vacant. It is a bank owned property and they aren't letting anyone on the premises. On the exterior, it looks ok- maybe would need a new roof soon. But, I wonder if there are red flags that I am missing. Perhaps the tenants that are coming with the property are bad tenants? There is no more information I can get on it. Any advice? This would be a first time home purchase and I don't want it to be a complete money pit. Can I get an inspection before finalizing the sale? Is there a way I can find out about the tenants that come with the property? Any help would be greatly appreciated!!

Natalie Schanne · Answer

@Yolanta Kornak - @Jason Hirko gave you some good advice. Be friendly and talk to the current tenants/occupants. Always factor in the holding costs and damage from acquiring an occupant or tenant (1.5x rent max security deposit, mortgage, property taxes, trash & water for 6 months for that unit, extra repairs you don't know yet, cash for keys payout). Laws are different from state to state. I'm an agent in NJ and I just bought an occupied property from auction.com & wells fargo, as-is, inside unseen. I'm going to use a CASH FOR KEYS contract (google it) to get the occupant to vacate the premises and leave it in as good a condition as it currently is (minus their stuff). How much is subject to negotiation. If they won't take my money, I'll pay the neighbors to make sure they don't loot my property and You never know if an angry tenant who also hasn't been paying rent for months will trash your new unit on the way out if he/she has to be evicted... so factor that in unless you've already talked to them and they seem reasonable. If a property is foreclosed, it is likely that this person doesn't pay rent on time. The bank may or may not have tried cash for keys. In PA, it's 6-12 months to eject a former owner occupant. A tenant would be sent a 10 day notice to vacate for non-payment of rent or 30 days notice to vacate/not renew the lease. You may be stuck with whatever lease is signed on the property assuming it's not unreasonable (20 years for $1/mo). Read the landlord forums, A LOT of inherited tenants are trouble and headaches and not someone you would have picked if you had received the application. If you buy the property, get the tenant to fill out a new application and lease with you. Make sure you file to evict them at the first sign of non payment or trouble. Talk to your realtor and/or check out craigslist to figure out if the rents are below, at, or above market rates. Another way to encourage a tenant to move on is to keep raising the rent by 5-10%.

Jason Hirko · Answer

Most are fine talking to you. Don't start with 'can I see your place?' I usually lead with "I'm looking at buying this complex and was wondering if you could tell me how well the current owner is meeting your needs?" That usually gets them to not stop talking about all the problems they have with the owner, and gets them on your side real quick.

Yolanta Kornak · Answer

@Jason Hirko thank you very much for your insight. Were those tenants receptive to you? Did you have any strategies to help the tenants be open towards your questions?

Yolanta Kornak · Answer

Thanks @Natalie Schanne for the really helpful advice!! I can see why the cash for keys contract could be a great strategy for getting them out. Do you know what would happen if they don't take the cash and refuse to leave? How long could they potentially stay on the property living rent free?

Patrick Philip · Answer

I don't think you can buy human beings. I'd have to check the law, though. But I'm pretty sure.

Jason Hirko · Answer

@Yolanta Kornak I have bought foreclosure properties with tenants still in there before. I bought an 8 plex with 3 units occupied once. It depends on the bank, but in my case (and most cases with REOs), they wouldn't provide any information on the tenants or leases and did not allow access for an inspection. This however, did not stop me from going to the 3 tenants and knocking on the door and asking them about their leases and the property. Once I bought the property, I had the current tenants sign estoppel certificates. It is a risk when buying one of these, but it is pretty easy to identify the costs of evicting them if they are bad renters and make sure those costs are reflected in your maximum offer price.