About to close on first 4 plex, inheriting 3 late paying tenants

San Antonio, TX · Member since 2016 · 48 posts · 36 votes

10y

Let me begin by saying that I'm NOT experienced, but I will get the ball rolling. I won't be even the slightest bit perturbed if you decide not to read my post.

The first thing to address is that (at least in Texas) the estoppel certificates are going to be written into the purchase by the title company, so that the overdue rent is not your problem and is quite frankly irrelevant to you from the perspective of completing your purchase.

My understanding based on Texas law is that if you close tomorrow, the 17th, you will receive at closing credit for rent for the 18-31st of August from all the units (per the estoppel certificates) regardless of whether or not the tenants have actually paid. The fact that the current owner hasn't bothered to collect rent is entirely his problem at closing and will come out of the proceeds from the sale.

That still leaves the problem of what to do about tenants who are (reportedly) perpetual deadbeats. Right now, you don't know if the tenants are actually deadbeats, or if the problem is entirely the current owner's fault, but you do already know that the current owner is a terrible landlord, because he is allowing tenants to fall behind on rent without being evicted and/or charged late fees, etc. So if it were me, I would give the tenants the benefit of the doubt.

I am a car salesman by trade and student of human behavior and it sounds like these tenants have the same problem that many children do when they are not met with firm boundaries: They are doing whatever they want.

As the new owner, you have the fantastic opportunity to lay down the law in a way that the current owner (who sounds like a terrible businessman) really can't (not that he would anyway).

Just like a new babysitter has an opportunity to lay down the ground rules with kids who were previously unruly, you can sit down with each tenant with a properly drafted lease and have a very serious discussion. If it were me, the discussion would go something like this:

"Thanks for meeting with me, Mr. Tenant. I just purchased this property and I am sitting down with all my tenants to discuss your living arrangements and see how I can be of service as your new landlord. First of all, are there any issues or concerns with the property that need to be addressed?"

I would write down everything they say and make a list of any problems and tell them you will be addressing them. Then I would say:

"Do you like living here and would you like to continue living here? Good! Well, I purchased this property as an investment and I run all my properties like a business. In order to do that, I need all my tenants to be in leases of at least 1 year. This benefits you, because you know that your rent will not go up for at least a year after you sign the lease, and it benefits me because I know I won't have to find a new tenant for at least a year. So now I would like to go over the lease with you."

At this point, I would go over each aspect of the lease agreement without much detail. At the end, I would go back to the section on rent and make a special case of it. Remember, they've never paid you late, and you can pretend like you don't know anything about their late payments (a polite fiction, to save them embarrassment).

"As I said before, I run this as a business. Just like you have rent to pay, I have expenses to pay every month. I have a mortgage on this property, I have taxes, insurance, repairs, maintenance, and a variety of other costs. I need all my tenants to pay promptly on the 1st. You have a 2-day grace period. On the 4th, you will be charged a late fee of X plus Y per day. If I do not receive your rent by the 8th, I will start the eviction process and in Texas, that takes 14 days, so that means you will be out by the 22nd. I really hope that never happens, but that is entirely up to you."

Then hear out any of their concerns or questions. My strong suspicion is they are taking advantage of the current weak owner and they know they are getting a free ride that they won't get anywhere else, and that the ride has come to an end. If you need to explain to them that no one else tolerate them being late on rent, then do so.

That's how I would handle it.

6 Reply

Account Closed

San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes

10y

Originally posted by @Chris Rose:

I am about a week from closing on my first rental property, a 4 plex apartment with 1 vacant apartment and 3 apartments rented on a month by month lease. The current owner inherited the 4 plex from his dad after he passed away. The owner's dad was apparently an old school landlord who would take a tenant if he had a vacancy with little or no screening. The new owner has no estoppel agreements or prior leases on file (I don't think his dad used them). I requested the new owner have all tenants complete estoppel agreements so I would know where they all stand when I buy the building and take over.

I get an email from my real estate agent today saying that: Tenant 1 is $150 behind because they had to buy school clothes, Tenant 2 is 2 months $900 behind, and Tenant 3 was behind but has paid up the owed $640.

When I started the purchase process, all 4 units were leased, then after a couple weeks into the process, only 3 units. A couple weeks ago, the tenant that was 2 months behind was given a pay/quit letter but eventually paid up. Now 2 (and maybe the 3rd) tenants are behind. When my agent gave me this information today, I asked if the seller was going to handle his business or leave it for me to handle? The agent then spoke with the seller who stated that "he tries to work with his tenants as they don't always have it as easy as we do."

I was intending to remodel the vacant unit, raise the rent on it with the new tenant lease. I intended to get the 3 inherited tenants to sign a new 1 year lease keeping their rent rates the same as they have been, then as tenants move out, remodel again until I have all 4 units in good shape and the building in better shape. With every tenant either behind or just not paying, I may end up with 4 empty units right off the bat. It was my plan to keep enough units leased to cover the cost/expenses of the building while I complete renovations, but now it doesn't look like that may work out.

I know this is a long post and I appreciate you experienced landlords reading and giving me some newbie advice.

Thanks,

Chris

If you can live with having two empty units at once, I think that's what you may end up with. But, I don't think this may be as bad as you think. However, I think you should play up how bad it is, and get a discounted price because of it :-) Make sure you put in the contract that any money owed by the tenants is yours to keep, and make sure you get their deposit money.

What I'd first do, is keep them on month to month. This keeps you in control. If they don't work out, or just become too tiresome in some way, you can give them 30 days notice when you want to get rid of them. You can also change any terms of your agreement with them, with just a 30 day notice of changes or new rules, etc. I only used M2M agreements.

I think the tenant $150 behind, and the one that just paid up - could end up working out. They have just been getting away with not paying, but $150 is not that much, so they can get caught up and probably learn to pay the rent as a priority. The one who paid up, obviously wants to stay, so very likely can learn they need to pay you on time to stay.

I think the tenant who is still 2 months behind will need to be evicted. I'd give him a 3 day notice to pay or quit for the full amount owing (or whatever the process is where the property is).

You'll just need to let them know that late payments will not be acceptable going forward. What I'd do is send them all a 30 day notice of the new terms of your agreement with them. You don't have to get them to sign an agreement, which they may try to avoid. You can just send them a letter with the new terms of their tenancy. It doesn't have to sound hard a$$. Just make it a matter-of-fact list of the terms. Parking rules, amount of rent, rules on guests, etc.

And, what I'd do is include a section that spells out your late rent policy. Full rent is due on the first. No partial rent payments will be accepted. If full rent and fees due are not received by the 2nd, a 3 day notice to pay or quit will be issued, along with a charge for $_______ late fee. If rent and fees are not received during those three days, then eviction proceedings will be filed and all eviction fees will be charged to the tenant. Something along those lines.

This should get you paid by the 5th at least, along with some late fees, possibly. I do think it's a good idea to at least give them until the 2nd, because it can be hard to get rent paid on the first sometimes, depending on work and life, etc.

But, I think it's quite possible that the two tenants could work out okay.

And, just another thought - you might want to offer the guy 2 months behind the option to pay you the back rent with a credit card. That can be done with PayPal. I would not let him make payments, though. That wouldn't likely work out.

Good luck to you!

1 Reply

Marcia Maynard

Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes

10y

When I buy a tenanted property, I try to save the existing tenancies. The key is winning the tenants over to your way of doing things. Start by introducing yourself to the tenants. Explain to them your management style. Tell them you won't be raising rent at this time (this is what tenants most fear at change of ownership); that will put them at ease and demonstrate good will. Attend to all deferred maintenance, that will serve you and them well. Establish a good lease and ask them to sign it. If they won't voluntarily do so, then you will have to honor the terms of their existing lease. Make it worthwhile for them to sign an agreement with your terms. This establishes a new era for them. Be friendly, firm and fair. Show respect and guide them in what they need to do differently to be successful tenants.

@Nathan Seltzer and @Account Closed make some good points as well. Choose your management style and what feels comfortable for you as you negotiate new terms with the existing tenants. Be aware it will be a big adjustment for them, so be understanding of that. I favor MTM rental agreements over long term leases, as MTM will give you more flexibility.

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Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

10y

When I buy a property with tenants in place I do not care about the tenants, I do not care if they stay or go as tenants are easily replaced in short order with my choice of tenant. What I do care about is that all tenants understand and follow the rules to the letter. Late payment is never acceptable for any reason, steal the money if you must, but do not ever think you can borrow it from me. Pay me in full and on time or find somewhere else to live. Business is about making maximum return with the least effort.

Training tenants is a primary responsible for a landlord and needs to start day one with inherited tenants and during the screening process for new tenants.

Lay down the law in a professional business manner, raise their rents to market and put them all on M2M leases asap. Do not use term leases as that places the tenant in control of the property not the landlord.

If they pay late start the process to evict and if they pay up make it clear the next time their M2M lease will be terminated. They will have sob stories and excuses, simply tell them up front that their personal life is of no concern to you as a landlord.

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Michael Noto

Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes

10y

@Chris Rose Did you factor into your offer as if you are going to have to evict all of the current tenants? Are the current tenants representative of the area you are purchasing in?

Those are the 2 biggest questions for me as I read through your post. If you paid at or even anywhere near market value for this place I would just walk away if the seller isn't willing to negotiate the price again. The bottom line is you are not buying the property you thought you were buying when you came to an agreement on a purchase price.

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Chris Rose

OP

Investor · Burna, KY · Member since 2016 · 26 posts · 4 votes

10y

Thanks for all the responses! @Nathan Seltzer, your recommendation on how to handle the tenants as the new owner by being firm, polite, and professional is what I intend to do. @Account Closed, After working through the numbers on the property, 2 rented units will cover the mortgage and monthly expenses that the tenants don't have to pay (insurance, taxes, and water). The 4 plex is in a B-/C+ neighborhood and after some remodeling of the units and the exterior (roof and paint), I feel like I get another $100 per unit with better quality of tenant willing to live in a nicer home. The property will cash flow positive even if I only have the 4 units leased at the current price, and will come close to breaking even on all expenses with only 3 units leased and paying. I don't know if it matters to this discussion, but I will have this unit on a 10 year note. I'm considering changing to a 20 year note to make the mortgage payment lower in case I need force some evictions or tenants decide to leave and I have 4 empty units to rehab and get rented.

Thanks again to all who have commented!

Chris R.

0 Reply

Annette Schneider

Investor · Pittsburgh, PA · Member since 2016 · 41 posts · 12 votes

10y

Chris-

We purchased a four plex a few years back were the owner had passed, when we purchased it all the tenants were current on their rent and we were given the impression they had been screened. Turns out they had not been screened but were recommended by friends or family type of deal. The price was right and we got into a bit of a bidding war but we won out over a cash bidder because we were promised to not immediately push out current tenants.

Like others mentioned, we set up new leases, new management style. Attended to deferred maintenance and so forth.

One tenant was ready to move already, so we let that one go and remodeled that unit. Having one remodeled unit with three other not so good units isn't working out as well as we hoped. We do get much better prospects and do collect much more rent. There is quite an income gap between the nice unit tenants and the current tenants. It's almost a cultural gap!

Two tenants have stayed in place. Initially, their rents were significantly below market value so we have been slowing bring them up to market value. We kind of hoped they would move on so we could renovate but no such luck. One unit, they can barely afford their rent and utility bills lately. We see the writing on the wall with them.

The other unit keeps popping open when we least expect it and already have a big ticket improvement or renovation going on elsewhere. We have done the spit and polish but not a new kitchen, though its in good shape it holds the unit value down. Therefore, I would recommend setting up your financing for a little more breathing room.

We do work with the tenants if they tell us before hand about rent not going to be on time. We are very flexible in that regards for damn good reasons: job slowdowns, significant illness/injuries or death in the family. That willingness to work with them has reaped some rewards when we need to ask them to follow the rules or when we need to raise the rent. We get no push back.

Funny, its the renovated unit, with well screened good reference tenants that we've had to give notice to and have had to chase down rent for or have other drama with. I think that's where the 'cultural gap' between tenants plays in. They get a lot more indignant and argumentative about payments, following rules and etc. One even stated, well I'm not like those white trash neighbors I have to put up with. Currently, we seem to have a good fit for the renovated unit: someone from the neighborhood who has lifted themselves up a notch with education and a better job that doesn't look down on the neighbors.

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Wesley W.

Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes

10y

+1 on the month-to-month leases. You don't want deadbeats having more rights by giving them a year's lease. If they bawk at any part of your written lease, immediately give a notice of termination. It might be financially taxing in the short term to have a vacant building, but the cost and aggravation of dealing with slow pays and non-pays is going to mess up your operating budget. If they can't be trained IMMEDIATELY, rip off the band-aid.

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About to close on first 4 plex, inheriting 3 late paying tenants

About to close on first 4 plex, inheriting 3 late paying tenants

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