Fully occupied 4plex under contract, now what?

Question

I have a fully occupied 4plex under contract in Atlanta metro area. Inspection, appraisal, title all look good. I am likely to close on it in next 2 weeks. I am a bit worried because I have never bought a tenant occupied property before. I have experience in buying vacant single family properties (then fix and rent). What are the things I need to do to ensure a smooth transition? Tenants don't know that property is being sold. Seller has provided me with the following documents:

a) proforma,
b) rent roll,
c) tenant leases,
d) list of repairs and improvements

Thanks for your help / advice.

Marcia Maynard · Answer

In addition to what was shared by others and based on the raw experience of another BPer, if the property has a coin-op laundry, find out if the machines are sold to you with the property or if there is an outside company leasing the laundry and doing business there. When we bought our 8-plex with existing tenants, one of the tenants asked to see our ID and proof that we were the new owners before she would talk to us or let us inspect in her home. Remember, it will be your property, but is still someone else's home. Be respectful of this. We now introduce ourselves and show our ID at the same time when we first meet existing tenants. It puts them at ease. With occupied properties, write a letter of introduction to all of the tenants. Tenants often have fear when a new owner takes over. The greatest fear is a change in their rental terms. #1 Will they ask me to leave? #2 Will they raise my rent? #3 What will happen to my security deposit? #4 Did they know these damages were here before I moved in and will they try to charge me for them? #5 Will they let me keep my pet? #6 Will they still allow me to smoke in my home or on the property? #7 Will they ........ (fill in the blank). In the letter of introduction we tackle some of those fears straight on. Even if the rents are below market when we purchase, we tell the tenants we will not be raising the rent at this time. With one of their greatest fears relieved, they are more likely to open up and be cooperative. Second, we schedule full inspections of each unit. This is different than the inspection done at due diligence time. In this inspection we are looking for deferred maintenance items to put on a fix-it list and we are looking for things that we would like to upgrade. While we are doing the maintenance and repairs and upgrades, we are talking to the tenants and building rapport. If they feel comfortable around you, Tenants will often "spill the beans" about the property and their own character. We give the tenants a copy of the new rental agreement that we will be asking them to sign, allowing them a few days to read and understand the new documents. All of our units are month to month. You may be needing to take over a longer term lease, which you will need to honor until you can legally use your own. When we introduce new terms and new property rules, we take the time to explain them to the tenant. We describe our management style and set the foundation for communication. We will sometimes "grandfather in" existing pets, even though we strive for "no pet" properties. But for smokers we will not bend our "no smoking" rules. Some tenants will choose to move on their own once they understand how the change in ownership of the property will affect them. Some tenants are "keepers" and will stay if you listen to what they say, address their needs and show some flexibility. All within reason of course. Hope this helps!

Wade Sikkink · Answer

I'm going to assume the numbers work and you have insurance, etc... We bought a 14 plex that was fully rented. Prior to closing we worked with the seller to do 2 things, first, a professional building inspector did an inspection of the entire building. We then did a walk through of every unit with the inspection report in hand so we could see everything ourselves. On the day of the closing, we delivered a letter to all the tenants introducing ourselves and basically saying that in the short term nothing would change (put their mind at ease, particularly about rents going up). In the letter we also said that the next Sunday afternoon we would be coming by to introduce ourselves and asking everyone to sign a new lease. Of course, those with existing leases didn't have to sign a new one, but all except 1 tenant did. We also gave them an opportunity to tell us anything that was wrong with their apartment and needed fixing. We immediately addressed a couple big items from this list as a way of showing that we're going to be taking good care of the place. Overall it went very smooth for us. Good communication is the key.

Jerry W. · Answer

Way to go @Kazi R. !. The things I would do is get copies of all existing leases, a list of the damage deposits of each tenant, a copy of all documentation of condition of the property when each moved in ( how can you prove that carpet was not stained with red koolaid when they moved in?). Date monthly rent is due for each tenant if they are not the same. There should be a proration of rents. you also need the history of rent payments. Hopefully all are current and none need evicted, that could really hurt cash flow. I would make sure you know who pays what utilities, water sewer, gas, electric, etc. Some of those bills will be yours if there are common areas. try to find out all you can about each renter especially if you will be managing it. It would be nice to see the books for several years to get an idea of what repairs were done and where problems are. Where and how are rents collected? you may need a letter changing where they mail payments to. Good luck.

Jerry W. · Answer

@Kazi R. just a suggestion, but after I used BP for my first deal, I upped to a plus membership. It helps pay to keep the site open. Free is nice and I love the huge amount you get for free, but when you use it as a tool to make money it feel\s good to give a little back.

Sharad M. · Answer

Hi @Kazi R. congratulations on getting the deal under contract!! Are you comfortable with the numbers on the deal? The numbers fit the minimum ROI per your criteria? As for buying a tenant occupied property, there shouldn't be any issues as long as you have done all your due diligence, which sounds like you have with inspection, appraisal, etc. I have bought both vacant and tenant occupied properties and have not really come across any major issues with tenant occupied properties as long as I do my due diligence. Some things I would do: 1) Review the leases to make sure there are no surprises. For instance, utilities responsibility, etc. 2) Get rent estoppel letters from tenants to confirm the information the landlord has provided 3) Make sure you get correct rent and security deposit proration on the HUD statement. 4) Confirm with the building department that all units are legal and fully conforming 5) Call your insurance company and give them the address of the property and sometimes they can tell you if there are any issues with the building Best wishes for your continuing success.

Kazi R. · Answer

@Jerry W. I will consider it. Thanks.

Kazi R. · Answer

Thank you everyone for great advice. This is going to help me out a great deal. :) @Jerry W. I did get all the leases, but seller's property management company hasn't been able to provide me with move-in inspection checklist for any of the tenants. Apparently they took over the management responsibility from another management company and didn't get the checklists from them. All the utilities are paid by the tenants. BTW, I met a maintenance guy (during property inspection) who the tenants' contact if there are any issues with their units. I took him out to lunch and picked his brain about the tenants. I feel I know quite a bit about all of them. :) I would love to get books for several years, but seller is unable to provide me that due to change in property management company. @Sharad M. I am comfortable with the numbers, especially happy with 30 year fixed rate of 4.625%. I don't know what others are getting on similar deals, but this seems pretty good to me. Regarding estoppel letter, I can't really approach tenants because seller doesn't want them to know that the property is being sold. I do have the lease agreements though. Shouldn't that be sufficient? @Marcia Maynard Thank you for sharing your experience / process. The units have washer dryer hook-ups, so all tenants have their own washer and dryer. I accompanied property inspector during inspection of this property and met all the tenants (they were all home because it was supposed to snow on that day in Atlanta, and we all know how good we Atlantans are dealing with snow! :P). They were told that property was going through insurance safety inspection. Long story short, I do have a list of fixes that tenants would like to have (I asked them while chit chatting) and plan on getting those done as soon as I close on the property. I am planning on sending them a letter of introduction (is there a template somewhere?) and stopping by afterwards to allay their fear as you suggested. @Wade Sikkink Thank you for sharing your process. I feel I already have built pretty good rapport with all the tenants, so the process to reintroduce myself as their landlord should be pretty smooth. I wasn't planning to ask them to sign a new lease as existing leases last til Aug/Sep of this year, but now I am considering it. @Will Wiest I used a multi family purchase and sale contract (suggested by another BP member) that has language for security deposit transfer, proration of rent etc. I should be good with these issues. @Brandon Turner This is a great site! Thank you for everything you do for us.

Brandon Turner · Answer

Congrats @Kazi R. ! Let us know how it turns out, and let us know how we can help! Looks like you've been given some good advice already, so I won't clog the thread too much :) But congrats!

Will Wiest · Answer

I have done the same thing in the past, and one thing to think about in addition to all the other good advice above, is things the old landlord has still and will not return. Deposits is usually an issue, and any other type of other agreements in the lease that the tenants are still on.