Closing on rental soon, existing tenant behind on rent

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Closing on rental soon, existing tenant behind on rent

Raven Parmer
Architect · Louisville, KY · Member since 2014 · 94 posts · 47 votes
We are under contract on a new place, a duplex with a separate garage apartment. The owner passed away, and her daughter is selling the property. From what she can tell there is no lease, and the tenants are unofficially month-to-month. we are buying this house to live in and convert to a single family. We plan to keep one tenant - "the guy" - for at least a year. The seller says the other tenant - "the girl" - is often late on rent and is currently $2000 behind (July rent -$850- has not been paid). We have asked the seller to give her the 30 day notice before we close so that we can have a clean break and not have "the girl" in the house at all. The seller doesn't want to do that because she thinks that might hinder her chance of getting her money back. But, if we close, and "the girl" is still in the house, we won't have any kind of lease or security deposit. I guess we would immediately give her 30 days notice, and hope she pays us for the month she's there? And hope she doesn't trash the place. Because if she's $2k behind, there's no way she can come up with rent+ security for us. Our agent has been speaking with a real estate attorney but I wanted to see if you guys had any good advice too! Thanks!
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Chris T.
Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
10y

I would not close on this property until this is resolved. Is this one of the reasons why the seller wanted to sell? Once you close, the seller's headache becomes yours. I would have your attorney delay the closing until they move out. If not, have your attorney calculate the potential loss rent, eviction costs, and potential damages to the property, and have the seller credit you at closing. You still hold all the cards, unless this is a screaming good deal. And you're prepared to deal with the headaches. 

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  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    If the owner has a security deposit from the tenant, that must be transferred to you at closing. After closing, you need to send a certified letter telling them they have x days to vacate and that you have terminated their MTM agreement. They may damage the place and there is really nothing you can do about that. You COULD offer the bad tenant cash for keys to leave. That occurs often and can be LOTS cheaper than an eviction process.

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  • Levi T.Pro Member
    Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
    10y

    The seller is clearly never going to get their money back, so I have no idea what they are thinking because it's silly. They should have removed the tenant a long time ago. If they don't remove the tenant I would require them to convey the security deposit and one months rent via the HUD, even if the tenant does not pay it. Straight up credit. If you really want to push hard also ask for credit for legal fees related to having to evict the tenant.

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  • Chris T.
    Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
    10y

    I would not close on this property until this is resolved. Is this one of the reasons why the seller wanted to sell? Once you close, the seller's headache becomes yours. I would have your attorney delay the closing until they move out. If not, have your attorney calculate the potential loss rent, eviction costs, and potential damages to the property, and have the seller credit you at closing. You still hold all the cards, unless this is a screaming good deal. And you're prepared to deal with the headaches. 

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  • Robert Smith
    Real Estate Consultant · Knoxville TN · Member since 2011 · 112 posts · 81 votes
    10y

    Ditto, do not close. Unless it is a screaming deal and you can afford to replace the 2K, 5K, 10K worth of damage she could do out of pocket. I would have put that in the original offer to purchase, or at least in the amendment after the inspections, you hopefully knew about this by then. If they damage the home for the current owner they should be taking them to court already. Without at lease they should receive a 30 day notice then have to move out. It is an unfortunate situation with the death and such but they should have their application and information on file to be able to go to serve notice and evict if needed. 

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  • Raven Parmer
    OP
    Architect · Louisville, KY · Member since 2014 · 94 posts · 47 votes
    10y
    Thanks for all the replies so far. I'm doing this on my phone so I can't go back and tag specific names, but I'll try to answer questions as I remember them. If I am understanding the first responder correctly, and the security deposit has to transfer to me upon closing, then it would be in seller's best interest to have her out before we close. She would at least get 850 out of her 2000. Which leads me to the second responder, and I agree. If the tenant is this far behind, she's not going to be able to pay the seller back (specially if she's about to have to come up with a first, last, security for a new place…). I don't understand her reasoning either, but this is just what our realtor is conveying to us. I believe the third response asked why she was selling – it is to settle an estate. The original owner had many rental properties, and the daughter has been selling them off. We actually just found out how far behind the tenant is on rent. All we knew up until this point is that she was sometimes slow to pay. We were planning on terminating her "lease" all along, within a month or two of closing, but with this knowledge, I just want her out before we move in. I don't want to deal with her. And as far as doing damage – she actually seems like a really nice girl – so I really don't think she will do anything. I would just feel better having all my bases covered. This house needs so much work, I doubt there's a much damage she could do that we wouldn't be addressing eventually anyway. As far as how good the deal is, I think it's a pretty good one. It's a turn of the century house in the Highlands in Louisville, Kentucky, in a great neighborhood. It's fairly large and has an unfinished attic that we are going to finish out to add square footage. With the Carriage house in the back we will have some rent income the whole time we are there. We are purchasing for 280 K, will put 80 K in it, and we will live there for five years-ish. We do 90% of the work ourselves, as my husband is a general contractor. We hope to sell for 450+. This isn't a typical house hack or flip, as far as the BP community goes, but this is how we apparently do things. It's almost like a hobby. My goal is that we could we can to do faster track projects on the side. We are just finishing our first house, which we did in similar fashion. Once we sell it I'll post the results. Thanks again everyone!
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  • Erik HitzelbergerPro Member
    Investor · Louisville, KY · Member since 2011 · 331 posts · 278 votes
    10y

    @Raven Parmer I agree with most of the above comments. I've 'purchased' several problem tenants in the past. Dealing with the situation can be time-consuming and costly.  If the deal doesn't account for that, delay the closing or renegotiate.

    One quick note is that the seller doesn't have to send a 30 day notice in this situation.  She can send a 7-day  eviction letter demanding payment in full.  This might expedite the process. 

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  • JR T.
    Financial services executive · Frederick, MD · Member since 2015 · 609 posts · 341 votes
    10y

    Okay so since you just discovered the seriousness of the delinquency you have an equitable title claim and can renegotiate. I'd tell the seller that based on the true condition of the  financials you'd typically be looking for a 15k price reduction to take it with a seriously delinquent tenant. In this case since your plan is to convert to single family anyhow you'll take 2000 to cover your costs getting them out provided she starts the process immediately so you can both prevent losing more money. 

    Make sure you get your security deposits and pro rated rents at the closing table.

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  • Kelly N.
    Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
    10y

    We had a similar situation on a house we purchased last year.  The tenant's lease ended, they stopped paying but stayed in the apartment.  The seller had started the eviction process and and we insisted they be out prior to closing.  When we took possession, the apartment had been vacated except for the large amount of trash they left behind, and the fridge full of rotten food, so be prepared for that type of scenario, but in our case having the seller handle it rather than restart the process once we closed was the way to go!

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  • James DeRoest
    Investor · Century, FL · Member since 2015 · 950 posts · 603 votes
    10y

    Unpaid rent is the problem if the soon to be ex owner. 

    Personally, I would move closing to the first of the month so no one has to hassle over unpaid pro rated rent, the deposit needs to more to you at closing, and take it from there. If the tenant pays rent, then great, if not, give whatever notice to start the eviction.

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  • Joe Marcum
    Rental Property Investor · Georgetown, KY · Member since 2014 · 78 posts · 55 votes
    10y

    I'm not sure how it works in Jefferson county, but in Fayette, Scott & Franklin counties, you can't even file an eviction until the deed has been recorded and shows in your name which may take a month or more. This can drag out the process considerably, possibly taking 2-3 months while you wait for the deed to be recorded and then file the eviction. I'd ask for a cash concession from the seller at closing (in addition to getting any held security deposit) and offer the delinquent tenant cash for keys.

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  • Rob McGahen
    Pensacola, FL · Member since 2016 · 50 posts · 51 votes
    10y

    You don't want to deal with this tenant. I'd either have the seller get rid of the tenant prior to closing or make sure you have a local attorney assist you with getting everything ready to have them out if they are still living there post-closing. Good luck!

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  • Account Closed
    Investor · Buffalo, NY · Member since 2016 · 668 posts · 209 votes
    10y

    The seller expects the girl to stay current with your rent going forward and pay her back rent as well? She has lots of faith in human nature. Eviction and judgement, either she does it or compensates you to do this job.

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  • Josh Braun
    Investor · Nashville & Chattanooga, TN · Member since 2015 · 182 posts · 138 votes
    10y

    I've dealt with similar situations.  Unfortunately when there is not a "contract/lease" this creates problems for both the landlord and the tenant.  When encountering these situations, first thing is to get a signed document in place.  Never go off assumptions or verbal agreements.  I would suggest giving your preferred lease agreement (or estoppel agreement) to the existing landlord and have them and the existing tenants sign it.  This has previously worked for me about 1/2 the time.  If you can't get that to happen then I would: 1) make sure to get a further discount on the property 2) get the tenants to sign your lease/estoppel agreement on the day of closing.

    I've had situations where existing tenants started paying on time and consistently once a formal lease was in place.  It is surprising how some previous landlords just didn't treat it like a business agreement and relied on he said/she said agreements, which can cause confusion and misalignment on expectations.  Additionally, I have had situations where tenants didn't pay and when offered cash for keys, they agreed to move out.  Make sure you have a cash for keys agreement and get signatures/dates/amount to align all parties on what is expected.  I've found that coming in as a 3rd party and approaching the situation in favor of the tenant allows for an easier conversation.  Good luck.

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  • Teresa F.
    Residential Real Estate Broker · Clinton, MD · Member since 2008 · 297 posts · 178 votes
    10y

    Hi Raven --  The ideal scenario is to insist that this tenant be gone before you close.  However, I want to offer a second option just in case that won't work.  Ask to meet with your "new tenants" before you close.  This is an opportunity to introduce yourself, assure the one you plan to keep what your plans are and what your expectations are regarding rent, maintenance, etc.  For the one who is behind, tell her she needs to leave.  Explain that since she has not been your tenant (yet) you won't have anything negative to say about her and that if she leaves quickly and leaves the unit in good condition, you would be able to provide a positive reference regarding how she maintained the unit.  Best, Teresa

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