Deposit Issue

[Glen Gaidos]

Hey Everyone,

This is my first foray into purchasing a property that is already occupied. I closed on a duplex yesterday with tenants that are currently month-to-month. It has been under property management (I don't think they've done a good job to this point), and in any case, I'm planning on managing it myself. 

I don't like the idea of inheriting tenants that I haven't vetted, but I had met them both during the inspection and diligence process, and they were paying their rent, and generally not trashing the place, so I thought keeping the rents the same, and keeping the status quo in terms of tenancy might make the most sense. Less hassle for me, they get their below market rents, and I'm able to cover the mortgage no problem and cash flow for reserves and improvements. Throw in the fact that I'm a good guy, and I don't want to have people move in a tight market if it can be avoided.

One of the tenants currently in the duplex has been there for over 4 years. She seems to have taken care of her unit pretty well, and is interested in staying on. She had, I guess, actually made a foray towards buying the property herself last year, but it fell apart, according to her words, because of a credit issue caused by a third party.

My plan was to keep the rents the same and have both tenants sign a year lease to get them on the same cycle. To avoid going into a long story, it would be easier to do work in one or both of the units when it is vacant, as in the long term I know I'll need to do a little bit of reconfiguration.

Long term tenancy is good for me, and vacancy is not, so this strategy at first made sense to me.

All good, right?

Well, wrong. Possibly.

We close and I email the tenant about the proposed plan of getting them both on a year-long lease, and mention the fact that deposits will get transferred over to me through escrow. 

So, the long term tenant, it turns out, doesn't have a deposit. The property management company for some reason returned the deposit to her for use towards an inspection and earnest money, and never requested a new deposit when the sale fell through (They have confirmed that this is indeed the case).

And now, the tenant responds to me that a deposit with a new lease isn't possible. She's happy to sign a lease, but can't come up with the money for a new deposit (one month's rent). She says she can make payments of $100 per month until a deposit accumulates, but basically that will be almost the full year's lease to get there. 

Perhaps this is the best case scenario, but I'm rethinking my strategy of getting her on a year lease, and thinking perhaps just keeping her month to month works best, as she may be a difficult tenant to manage, and I don't want to start a precedent for lots of special cases with her and caving on her requests from day one. My spidey sense is that she is being manipulative, and she knows she has a better chance of getting what she wants dealing directly with me, the owner, rather than a property management company. Other interactions I've had with her contribute to that intuition, and so I'm treading carefully and considering my options before making decisions that may cause me issues down the road.

My agent is checking with the title company and the listing agent to make the case that not getting the deposit back from the tenant was their mistake, not mine, so why should I have to deal with this additional hassle?  Anyway, we'll see what comes of that.

I also haven't specified whether I would, in fact, use a property management company, and I have a great one in mind (they're not cheap, though), but it would definitely erase any cash flow on the property. The previous owners definitely lost money on the property on the purchase, and over-paying for management and maintenance on the property. And it's still wasn't taken care of well and has lots of issues that I'm just getting started addressing.

I've just held that card in mind, in case that was the best strategy for managing a direction that would lead to a more sustainable tenancy situation that isn't a high maintenance situation for me.

Phew, thanks for reading my long post, any advice from someone who has dealt with a similar situation with inheriting a tenant likes this is much appreciated!