Purchasing a new duplex... raise the rent?

Question

Hi there,

I am in the process of purchasing my second duplex.  It's identical to another one that I own right next door.  I am currently charging 1350 / month and most of the renters are college students.  I am closing on the new duplex at the end of this month.  The previous property manager (who is not licensed and her agreements with them are not technically legal) signed contracts for two new sets of tenants to move in starting June 1st (we will close on May 31st).  The two sets of tenants are college students.  They will have to sign a new lease with us any way since their current lease is not legal.  The contracts they signed previously were for a rent amount of 1050 per month.  The market rate is 1350.  The parents of these students are also not on the lease I don't think they were screened properly (credit check, etc).  I would like to have these students (cosigners) properly screened, put the parents on the lease and possibly raise the rent.  I also want to be able to have a good relationship with the parents and the students.  What are your suggestions here.  I want to do what is right for the business but also what is right for the tenants.

thanks,

dana

Matt Devincenzo · Answer

I'm going to add to the vote of tread carefully here. You are at a point right now where you are aware of the situation and have not closed yet. Any contract is between two parties...obviously, and therefore has to be evaluated from both perspectives.

You are focusing on the management side being improperly done and as you said unlicensed. That IMO gives you as a new buyer the right to cancel contracts with that party (any PM agreements ect between you the property owner and them, not the leases). From the tenant's perspective if they have given all the required info and documentation then their end of the contract is "legitimate". While you may be able to cancel it based on the fact that the PM should not have been representing the landlord in the first place, I think you'd be hard pressed to win on those grounds were the tenants to push back.

A judge would look at the situation and say one of two things. First that you knew prior to closing what the circumstances were, and as such should instead have pushed for the seller to correct it. Or second that you should have canceled or amended the sale based on the "new" information you received. Not that you had a right to change the tenants terms after they already agreed and signed leases, which you now inherited.

If I were you I think your better approach would be to get an appropriate reduction in price on the purchase. So if they are $300/mo X 2 too low then look for a $7,500 credit ($600X12=$7,200) to make up for the year where you have the low lease amounts prior to being able to adjust them to market. That will be what I could see you being able to justify were things being looked at from a "legal" perspective.

Bill S. · Answer

Dana Chun they owe you $7,200.

I would also read the leases carefully as you don't know what other undesirable terms are hidden in it.

It's not an uncommon trick in multifamily properties for the seller to cut sweet deals to some tenants just before the sale.

Andrew S. · Answer

Dana Chun I too have some college rental properties and I do understand your desire to have parents co-sign the leases.  However, the same arguments made for the possible rent increases above also apply to this point.  From the tenant's point of view, they have a valid lease agreement and the terms are what they are (apparently, no co-signature required).  You can ask them politely, if they would be willing to revise the contract, but if they say no, I don't see how you can force them.  In fact, I not only rent to students but I also have college-aged kids who rent places in other towns.  I can assure you that I would NOT co-sign your new lease under these circumstances.

I agree with @Matt Devincenzo : if there is anybody you should go after, then it is the seller (ask for adjustment).  Since you are fully aware of the lease situation BEFORE you close the deal, you need to grit your teeth and accept the leases as they are.

In your original post, you say one of your goals is to establish a good relationship with the tenant's parents - well, trying to modify the lease at this point is a sure-fire way to achieve the opposite, in my opinion.

Dana Chun · Answer

Thank everyone for your input.  We have decided not to raise the rent.  We will probably have the students sign a lease with us just so we have a valid lease with them.  We will keep all of the terms the same.  We are getting a great deal from the seller so we will not back go to the seller and try to renegotiate the offer at this point.  The neighborhood in which the duplex is located has two markets, the local market and students.  Housing for students is generally priced higher in this market since the students only stay for one year and they will pay a premium for being able to walk to school (also renting a unit like ours will allow them to each have their own room and is significantly less expensive than living on campus).  Next year we can reevaluate the situation and raise the rent for the new groups of students moving in.  Thanks again for helping us figure out how to handle this situation.

Jean Bolger · Answer

with all due respect, I think you guys saying that Dana is "owed" $7500 are nuts.  The only way I would see any potential for negotiation would be if these tenants have been signed up since the sale contract was signed. And even if it were a situation like Bill described "cutting a sweet deal to new tenants just before the sale" then that activity should have been addressed/prevented in the contract negotiations.

The closing is less than a week away. The due diligence period is over. If the buyer missed or misunderstood some details and wants to back out then they can back out, forfeiting their earnest money. But they can't go back and re-negotiate because they made a faulty assumption. I mean, of course you can always try; but if I were the seller I would be pretty irate if someone tried it on me.

Jean Bolger · Answer

I agree with @Michael B.  that you should tread carefully here. I know if someone told me, a few days that before I was moving in, that I had to re-apply and pay almost 30% more I would be  shocked and angry. I would probably do everything I could to find a different place to live (leaving you in the lurch with a month's unplanned vacancy).  Other folks might decide to see if there was some legal recourse they could take against you. Any way you slice it, that's a terrible way to start out with a new property. I would just honor the leases and move up to market rent next time.

Michael B. · Answer

I would say don't go there.

I'm not sure why you say the lease isn't legal, but it is an agreement. Two parties agreed on the terms and signed it. You inherited the obligations of one of the parties. There may be some term or condition you think is illegal, but just deciding to break a lease because of some technicality is troubling.

It sounds like the previous owner didn't do a good job screening and may not be charging market rent. However that's not the fault of the tenant. They signed in good faith and expect to spend a year paying $1,050. I know if it were me there would be an awful fight to increase my rent above an already agreed upon price.

Good luck, but I hope you know what you're doing. If you have the wrong tenant, this type of move will cost much more than the additional rent.

Annette Hibbler · Answer

Perhaps a little clarification, why do you say the leases with existing seller and tenants are "not technically legal"? Is it because he/she is not a licensed realtor?  I'm not a licensed realtor and yet my contract are in fact legal so long as they are between me and my tenants in my own property.  I cannot manage someone else's property but can certainly manage my own.  As of closing on May 31st, the duplex is still owned by the seller.

I guess you could ask the seller to inform the new tenants that they should instead go through your own application process as opposed to getting them in there on May 30th prior to closing. However, if the contracts are signed prior to closing, then you should in fact, honor them for the full term.  You may be able to use your buying power and negotiate that through your real estate attorney prior to close (if you don't mind purchasing the property with two empty units).  The rent is $300 less than the standard, why is that?  Are they smaller units?  Need work?

Matt Devincenzo · Answer

@Jean Bolger to clarify I wasn't implying the buyer is "owed" that money. Just that if the lease rates were a deal breaker, that the recourse was with the seller not the tenants and that is how I would approach rectifying it. I also assumed that these new leases and their terms were discovered as part of DD and that is why there was a question of how to handle it. Obviously as you pointed out if that information was known at contract acceptance then it changes the dynamic of what the buyer could expect.

Andrew S. · Answer

you are funny, @Jean Bolger ,  but you are of course right!  I think the consensus above is not that the "$7500 is owed" by the seller, but rather that the seller is the only option to recover anything from at this point as the tenants appear to have valid leases in hand.

I agree that it would be most annoying from the seller point of view, if the buyer came back to re-negotiate at this point in the process, but that is certainly an option (may not be successful, but it is an option).  At least there is some leverage, because the buyer can still walk away from the deal (minus EM).   I think that's a much better chance than trying to force the tenants to accept a revised lease, where frankly, I see no leverage at all (other than to say: "pretty, pretty please").

Purchasing a new duplex... raise the rent?

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