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

[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

[Nathan Seltzer]

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.