What should I do with inherited tenants that had verbal leases with prior owner?

Question

(We're in Seattle.)

This is my first post on BP!

I'm closing on a triplex on July 31st that currently has tenants. The tenants are all month-to-month but two units only have verbal leases. Repeat: NO written lease. We want to raise the rent by about 15% for each. I was going to raise the rent 9% after 30 days and up to 15% after 60 days. The part I'm confused about is if I need to sign a lease on day one, or if the current verbal agreement is sufficient. We did sign estoppel agreements with all three tenants. We do not have previous applications from the tenants.

How would you handle this? Thanks a lot!

Brandon Turner · Answer

Hey @Matt Bowers welcome to BiggerPockets!

A few thoughts:

1.) I know Seattle has some more strict Landlord-Tenant rules, so I'd do some research on that before raising the rent too much. It should be fine - but I don't know Seattle laws well.

2.) I would definitely sign a new lease with them if you'll be keeping them.  But like others have said, they'll probably leave soon. You may wanna start with just one tenant at a time, so you don't have 3 vacancies at once!

3.) I wouldn't raise it gradually - I'd tear that bandaid off quick, but that's just my opinion. I Think they'll leave anyways.

4.) I believe Verbal Agreements ARE fine in WA, but if you are going to raise rent, I would put that in writing. I think you need 30 day notice (maybe 20) but in Seattle it might be 60 days or even 90. Check on that.

Finally, I'd highly recommend joining the Washington Landlord Association. They are only like $50 a year and can help a lot with questions like this!

Best of luck Matt!

And thanks Kristine Marie Poe for the shout out! You rock!

Account Closed · Answer

Don't close on it until the seller agrees to credit you the $1600 in deposits.  If the tenants said they gave him that much, you need that much to be credited.  The estoppel letters are all the proof he should need.  That money should come out of the seller's proceeds and credited to you.

Mitch Dowler · Answer

I have properties in Washington and I am also a Rental Housing Association of Puget Sound member.  A verbal rent contract is never, never a good thing thing.  Landlord tenant law is strictly enforced and favors the tenant in this state.  For that reason a solid rental contract with all addendums may exceed 30 pages.  Use those RHA contracts and all addendudums that apply.

Have these tenants fill out new applications if their current lease is not expired.  This authorizes new background checks and the RHA leases allow them to be repeated periodically.  Raise rents uniformly across the units to avoid the appearance of discrimination.  I would expect your tenants to move with that high of a rent increase.  When I had this situation of rents way below market I incrementally raised them while also making improvements to the property.

Bill S. · Answer

If you raise the rents 15% you will be getting new tenants whether you want them or not. Your current tenants likely can't afford that kind of increase so they will either move or you will have to evict.

The standard approach would be to meet them the day you close, put a lease or month to month agreement in front of them and have them sign it (after they have time to review it of course). If they won't sign it, you give them written notice to move. If they don't move, you evict.

Your lease or MTM agreement would have the rent increases built into it that you plan.

This doesn't allow you to screen the tenants but it does give you some control that the current verbal agreement does not.

You can require that they complete the background check if they stay as well as executing a new lease. Remember this, you are completely changing the management style of this building so it's not likely that they will mesh well with your new approach. Be aware.

I bought 4 units on a Friday and by Monday I had 3 vacancies. I was surprised to say the least. Apparently, they could see the handwriting on the wall by the way we processed the purchase.

Matt Bowers · Answer

15% would bring it up to market rent for the area.

Matt Bowers · Answer

Thanks Kristine Marie Poe and everyone else as well. I'll update the thread when we close and maybe again later with how everything is going.

Hopefully everything works out... will be an awesome learning experience either way.

Matt Bowers · Answer

Thanks Joel - just saw this now. Super helpful to think about it this way. We did some more evaluation and for one of the properties, market value is $600 higher than they were paying. Some real numbers behind the rent increases which we settled on:

Unit 1: was 900, going to 1150.

Unit 2: was 1150, going to 1750.

Unit 3: was 1300, going to 1750.

So, making the change is a huge part of our cash flow plan even including vacancies. Hopefully in our market it will only be open for about 30 days. I just rented out another unit 40 days in advance, and there will only be 5 days of vacancy!

Update for everyone else - I delivered an info packet the day after we got the property, happened to be August 1st. All of the tenants were courteous and good people. Happy to have them there for now. I gave them 60 days notice of the price increase, as is required by law. As many of you suggested, they've all indicated they'll be leaving. We'll see how it goes! We're starting to plan the upgrades so we can get top $ rent.

Joel Owens · Answer

Hi Matt,

You have gotten some good info on the nuts and bolts process.

Make sure BEFORE you close that you have properly valued the property with the purchase price.

What I mean is I see newer investors all the time say to themselves:

" It will be easy to raise rents on these under market tenants so I will pay XX for this property. "

" These units do not need much work so I will only spend XX fixing them up. "

" I can get these tenants out fast if they do not agree to what I say so the cash flow will keep coming in to pay my mortgage on the property."

There are many more but what usually happens the tenants take a long time to leave and evict. Your rent losses and repairs to fix the units up are very high etc. If these tenants are month to month but have been good tenants I wouldn't necessarily get rid of them. You will have  a lot of cost fixing up that unit.

Say the option for  unit is to fix a few thing for 500 bucks and raise rents 50 bucks a month. The tenants have been living their for example for 5 years. It will take you ten months to recoup your repair investment and start making that 50 extra a month.

Conversely if you go 100 a month increase and then tenants cannot afford and leave. You lose 2 months rent let's say at 800 a month to carpet, paint and get your higher rents of 100 a month but have to put 2,500 into new condition for a tenant then you are at 4,100 in costs. At 100 a month increase you are talking 41 months ( a little over 3 1/2 years) to get a positive of the 100 a month back.

Now increasing rents and reducing expenses will usually grow your equity and resale price. The numbers I gave above were just very loose for a broad example. You need to count for large reserves and a mass exodus if you want to raise rents to market. You need to look at what units are like that are getting top market rents. Is everything new? Better location and parking than your building? Amenities etc.?? Great tenants want VALUE. If they feel they are getting a good price to live in a standard location they will stay. If they feel this new guy is coming in demanding top market rent to live in a so, so complex they will leave.

This is all a science to it but generally property managers are doing this on a larger scale I see with hundreds of units.

Wade Sikkink · Answer

We bought a 14 plex with tenants in all the units.  On the day we closed we delivered a letter to the tenants introducing ourselves and stating that the next weekend we were going to come around to all the units to meet everyone and have them sign new leases with us.  These were all 6 month leases and we told everyone that we didn't want to disrupt anything so nothing was going to change during the first 6 months.  Nebraska has 30 day notification of rent increases, so 30 days before the 6 month point we issued everyone rent increase notices.  We were in a similar situation that the previous landlord had not raised rents in a while.  We raised them 18+% in one shot.  We didn't lose any tenants.  I suppose that's because they knew the new rent is really the going rate for this kind of apartment.

As for the deposits, we had the tenants fill out a condition report at the time we closed and that became the document their deposit was based on.  Not ideal, but probably the best you can do if the previous landlord didn't have one.

Good luck!

Matt Bowers · Answer

Thanks for all the feedback everyone! I appreciate it a lot.

• I've joined Puget Sound Rental Housing Association - anyone familiar with that?
• I did learn that in Seattle you can't raise rent more than 10% unless you give 60 days notice. So we're okay to raise like that.
• We're thinking we'll give them an info packet with new rules, a list of things we're going to fix for them (they wrote requests in the estoppel), the rent they can expect.
• We're going to try to sign them to month-to-month leases on day 1 with a 60 day notice of rent increase.

One question I still have is about deposits. I think that the previous landlord took deposits illegally - there's no evidence of a condition report given or received. But there are about $1600 worth of deposits acknowledged on the estoppels. How can I bring those back to legal status? And should I be asking for more deposits for the new month-to-month leases?

If anyone has something to add, please let me know.

What should I do with inherited tenants that had verbal leases with prior owner?

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