Checklist for Buying Tenant Occupied Properties

[Sam Kahl]

Hi everyone,

I'm working on a blog for What To Ask For When Buying A Tenant Occupied Property and here is the list I have so far. Am I missing anything?

Ask to see a copy of the lease and look for the length of lease, current rent amount, tenant obligations like paying for utilities and adhering to house rules and look for Landlord obligations like things the landlord may currently being paying for (like trash and water)

Make sure to have an assignment of the lease and clear language on the security deposit WITH interest shall be transferred to the new owner at settlement.

Consider tenant quality - what’s their payment history looked like, obtain rent receipts or bank statements from the seller to review on-time payment history. Ask to see the sellers Schedule C to see that the income reported matches the payment history. Ask for the application and screening reports like the credit report, background check and application.

Check the property conditions - ask to see a copy of the lead certificate, rental license and rental inspection. Get a new home inspection done to identify any serious issues. Review the seller’s maintenance records to identify any existing issues or potential problems.

Do your financial analysis to factor in the current rent, estimated vacancy rate, maintenance costs, property taxes, and insurance to determine the property's projected cash flow. Does the income cover your expenses and generate a positive return on investment?

Thanks for your thoughts!

[Charlie Corn]

Sam, nice list so far. Here in New Mexico we use a special form to address this very problem. Our form focuses on any kinds of unknowns that a buyer may not know about during the purchasing process. You cover a lot of good topics already.

A few things to consider from your list: Copies of the rental agreements ought to be attached as a requirement via addendum in the original purchase agreement. The rental agreement should cover cost items that the tenant is responsible for paying - consequently any cost left over is covered by the owner. Some leases are written to NOT be transferable. We usually have the tenants execute a new agreement with the new owner that has the exact same terms and expiration date. Existing tenant quality is subjective, and unfortunately, obtaining existing credit reports from prior owners may be hard to obtain. The company we use for credit/background checks will not allow our company to share that information with anyone else, not even the property owner (when we are acting as the property manager). There's not a whole lot you can do, except rely on the owner about the current tenants. Conditions and compliance of the property code would be taken care of during the sale of the property. Most standard inspections will cover those items during a customary sale. Be sure to get information about the age of the capital expense items (roof, HVAC, water heaters, and sewer line as well).

Financial analysis should be undertaken as the first step. You are correct in your formula to make sure income covers expected costs. When purchasing income property there will be two sets of pro forma: one set using current (actual) data, and one set using new (projected) data. Compiling current data is simple in context, but you will need an honest and straight forward seller to get this done correctly. Your projected pro forma will use your updated costs (such as increases in property insurance and taxes, upcoming repairs) and income (increased rents or added income streams). I think it's best to project both sets of numbers and see how they align. A buyer will be stuck with tenants for a short while, mostly likely earning less than expected returns until rents can be stabilized at the projected numbers. The first few months of new ownership can cause a bit of sticker shock while the bumps flatten out.

Hope some of this helps!