Purchase investment 4 plex fully rented with bad leases

[Jeff Mcardle]

Looking to purchase a 4 unit rental with good financial numbers from retiring landlords.  When I got the copy of the 4 leases,  I about fell on the floor.  They were 1 page leases with most of the information missing.  Some didn’t have property address, rental amounts, SS #, and one was never even signed by the renter.  How should I handle this?  Have seller get good leases in place before closing?  Wait till I own the property?  This is my first investment property and need suggestions.  Thanks in advance.

[Marcia Maynard]

Some of the best deals come from tired landlords who just want out.  Asking for too much just before closing could kill the deal.  Even if the leases are poorly written and/or poorly enforced, once you become owner you will be able to set a new course. I would not ask the seller to do anything more about the leases. They provided you with what's in place, so that will be your starting point. Ask to see an accounting record for each unit that shows the name of the tenant, how much they paid each month for the last three months and on which date they paid.  

Now, for due diligence, make sure you have personally seen inside each unit (or your designee has). This will give you a heads up about deferred maintenance and repairs that you may need to address.  You may ask for a concession from the seller if there is something significant that hasn't already been taken into account.

Also, ask for the tenants to sign an Estoppel Certificate....“signed statement by a party certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different state of facts.’’  Black’s Law Dictionary, 572 (7th Ed., 1999).

If you can meet the seller in person and ask them candidly about their experience with the property, they may be able to shed more light for you.  If you can meet the tenants and ask them candidly about their experience as a tenant you may learn even more. But this may not be possible if realtors are involved and try to keep the seller and buyer from talking to each other.

Once you are the new owner of the property, the tenants will likely be anxious about the unknown. Ease their fears and establish a good landlord-tenant relationship from the start. We usually start with a letter of introduction, which includes a statement "We do not plan to raise rent at this time." and "We would like to meet with you at your earliest convenience." 

When you meet with your tenants for the first time, ask them about how things are and if there are any needs they may have.  You can introduce them to your rental agreement. Even if they signed a longer term lease with the previous owner (which you must honor), they can transition to your rental agreement sooner if they agree to do so.  Make it favorable for them to sign your rental agreement. Make your rental agreement for the same period as their unexpired lease for the same rent. Convince the tenants that your rental agreement is better than the one they had with the prior owner. Include terms that are important for the manner in which you do business.  You can make the rental agreement convert to month-to-month thereafter, which I highly recommend.

Attend to deferred maintenance and improve the property in some manner before increasing rent. Give it three months. The tenants will quickly adjust to your management style and feel comfortable staying or will choose to leave on their own. The key is in the timing. Take your time to get to know the tenants and for them to get to know you. Enforce the terms of the rental agreement (old or new) in a fair, firm, professional, and respectful manner.  If it's not working out, talk with the tenant about a move-out plan. Avoid lengthy and costly evictions, unless necessary.

Congratulations on your purchase! Get ready to learn as much as you can about landlording and human behavior!