What To Do with These Tenants?

[Clay Manship]

Here is what is going on:

I purchased a 4-plex on September 11, 2014. 2 of the 4 units came occupied, so I inherited two different families as tenants.

I am utilizing FHA 203k financing on this property, so I would ideally like to start with a clean slate, and have the place empty for the contractors to get their work done. That being said, there have already been some happenings with these tenants that have made the hair stand up on the back of my neck. So I wanted to see the best way to proceed:

With the lease that they are under, it clearly states NO PETS. However, when I was touring the property the day of closing, Unit 1 had a dog inside and Unit 2 had a dog cage on their back deck. Further, Unit 1 and Unit 2 have both been very difficult to reach when trying to get them to sign their estoppel. To date, neither tenant has signed one after multiple attempts and leaving documents in their mailboxes.

Now comes the fun stuff. The other day when I was around with a contractor, Unit 2 came outside and asked me who I was. I introduced myself and asked to speak with the person who was on the lease. Come to find out, the man who signed the lease DOES NOT LIVE AT THE PROPERTY, and only his sister does. She even stated "I am trying to figure out why his name is on there and you are looking for him..." Not to mention, the woman smelled greatly of marijuana.

When I attempted to walk next door to Unit 1, she informed me that "you won't find them there," and, "I think they said they are moving." If they are to leave, that is fine by me. One less person I have to take action against.

A day or two earlier I had spoken to a person who was at Unit 1, and that person would not give me a straight forward answer as to who he was and where the person who is supposed to be on the lease currently resides. ????????

I am considering approaching both and letting them know that they are in default of the lease, and therefore I can evict them. After doing that I would offer cash for keys, in an attempt to get them out and make both parties happy(ish) with the situation. I think this is the best way to proceed but am not sure. Would appreciate ANY insight...many thanks.

[Joel Owens]

Hi Clay,

Have been there before but on a much larger level.

You should have counted ZERO cash flow in your purchase price. The fact that they will not sign an estoppel tells it all.

I would have factored in the average length of time for eviction and estimated repair costs and taken that off of the purchase price of the property or had the seller give a credit held in escrow. The options before closing are more limited with 4 units or less because it is residential and they put restrictions on how you can set things up. In commercial of 5 units or more you can get a lot more creative.

The fact is you have already closed. I would get them out right away unless the area is very high crime. You do not want a vacant building close to the holidays and 3,000 a unit rehab becomes 10,000 because someone breaks in and steals all the copper and plumbing etc.

Make sure you DO NOT over improve the  units for the area thinking you will get higher rent. You can make it nicer but do not overspend as you will no get those back dollar for dollar  with your investment. Being a 4 unit you will be at the mercy of the other quads around you. Hopefully you have investigated what those investors purchased those for, if there are foreclosures or short sale hitting the market, etc. All of that will affect your surroundings. The people buying for cheap will reduce market rent rates to lease up fast bringing the market down permanently or at least for 3 to 6 months. If other investors bought at the height of the market look for them to have shady tenants in where the rents are reduced rather than plowing thousands into the units. If the landlords are barely paying the mortgage they would rather reduce the rent by 100  a month then spend thousands on evictions and repairs.

Since you are rehabbing anyways and it's the slow time of the year with the holidays you might just want to evict them instead of giving them cash since you are repairing. Depends on if your area has long eviction times and landlord or tenant friendly laws for your state. If you have not sat in for eviction hearings yet for your county you need to take a few days. It's an enlightening experience and you will learn how the court system works.

No legal advice.