What to do about evictions while a property is under contract

[Annie Dickerson]

We've currently got a 25-unit property under contract. We are just wrapping up the due diligence period, and everything looks great. Low vacancy, below-market rents, very little deferred maintenance, and in a desirable submarket.

However, this morning, there was a wrench thrown in. There's always a wrench, right?

We were just notified that two tenants are subject to eviction, and one other tenant has given notice that they're vacating before we close on the property.

This means that we could potentially be looking at a total of 4 vacancies, as opposed to the 1 vacancy we thought we'd have upon closing. On the one hand, this is a good thing, as we have the opportunity to turn over those vacant units and rent them out at market rates. On the downside though, this creates a much trickier lending situation, given the increased vacancies, especially since the property doesn't have that many units to begin with.

Given that we haven't yet closed on the property, what's the best way to proceed? Should we ask the seller to turn over and rent out the units before we close? Keep them vacant and work out creative financing, either via bridge lending or try to ask for seller financing? Delay the closing? Other ideas? 

Would love to hear your thoughts. Thanks!

[Joseph Gozlan]

@Annie Dickerson there is nothing special about it. Most contracts take 60+ days and in the course of that time the property continues to operate as usual (or at least it supposed to). Just as they will evict, they will need to turn it around and lease it to another tenant. 

If you underwrote the property at 95% or higher, you either over estimated the occupancy over the course of the year or the property/market is very desirable and these units will be leased before you get to contract. 

I hope for you that it's not the former :-)

Make sure to stay in touch with the PM and make sure the seller doesn't tell them not to spend the money to turn over the unit.

Looking on the full half of the glass, these are 4 units you can push the rents on day one instead of waiting for a lease to renew with one of the tenants in the building.