Tenant with 3 years lease - what are my options?

Question

Hello everyone,

I'm looking into buying a 4plex in Buffalo NY and two units are rented below market value, one unit with a year lease (Will end by Jan 2020) and the second will end by Jan 2022.

They seem like good tenants (Though I did not run any screening yet) but it's rented for 250$ below market value for each unit.

What are my options once i buy the property? Do i have to honor the current lease or can i cancel the lease and increase the rent as the lease is between the tenants and the previous owner?

Thomas S. · Answer

You are stuck with them till the lease is up. Obviously you are dealing with buying from a hobby landlord that has inadvertently backed themselves into a corner and seriously devalued their property. What ever they are asking for the property it is over priced. This may be a opportunity to buy smart and benefit in the future. Problem is you need to get the seller to understand what he has done and why he is going to have to lose money. The problem he has present you will end up being his problem.

Depending on your market you should be achieving a minimum 1% rent to value and should be making your offer based on those numbers.

Give us some info on the rents and asking price and you will get some valuable advice.

Depending on your market you should be achieving a minimum 1% rent to value and should be making your offer based on those numbers.

Give us some info on the rents and asking price and you will get some valuable advice.

Thomas S. · Answer

Make a offer with the condition of vacant occupancy if you can afford to buy with the building empty. That would be my first option. Because the tenants are family and friend he may be able to put them out. There is no way you should carry them if you buy

Two vacant and rental income at $1000, this seller is going to take a beating. Make a low ball offer and be prepared to walk.

Pearly Tan · Answer

If you are that adamant to get them to break the lease, maybe cash for keys is an option. I'd make sure you research all your local laws to ensure you are covered with whatever option you decide to choose.

Brian Ploszay · Answer

You have a lease and the lease most likely survives a sale of the property.

Steve K. · Answer

@Jo Weiss the lease survives the sale UNLESS it says differently in the lease, so get a copy of the lease and see if it has a clause about sale of the property (unlikely to be the case but worth checking). If not make your offer based on keeping the existing tenants until the end of their leases. Most sellers won’t entertain an offer contingent upon being delivered empty because often the reason they’re selling is related to them not having the heart to raise rent or get rid of long term renters, and they can’t make the tenants break their leases legally anyway so they’d probably have to buy them out of their leases. Tenants don’t always know their lease survives the sale and are sometimes open to renegotiating with the new owner, but not always and I certainly wouldn’t bank on it.

Anthony Wick · Answer

Like others have said, you need to make an appropriate offer based on current rents. And if the seller doesn't like it, then he will need to find another buyer.

JJ P. · Answer

I'd work on the two empty units and get them fixed up and rented at market price, meanwhile, the low but steady income is flowing in.  When the leases renew, you can evaluate whether to upgrade them.  We wouldn't want to upgrade with a tenant in the unit, if we can avoid it, so at that point would be facing a termination of the lease at renewal, or a moderate rent increase that would delay the need for upgrading because the current tenants would stay.  In the meantime, keep your upgrade cost monies in your pocket.

In California, the lease absolutely transfers in its entirely with a sale.  If I wanted them out, I'd leave it to the current owner to negotiate with his friends and family and provide it vacant as a condition of the sale.  The seller can offer cash for keys, if he'd like, and maybe you'd negotiate that with him.  Open up a discussion with him about it, if he's motivated to sell, he'll be your best ally.   But once you close escrow, the headache is all yours.   If you want the place vacant, it should definitely be a discussion that is opened up during the escrow period.  If your plan is to close escrow, then negotiate to get them out, the tenants may feel railroaded, short changed and pissy.  It could get ugly.  Ugly = costly. Why forego the chance for an excellent, in place ally with personal ties to the tenants and extreme motivation?  Get the seller to do it!

Kelly N. · Answer

Make an offer that will cash flow with those rents as they are, and as if you were filling the empty units at whatever you feel you would get for rent.

Once you have it, offer cash for keys to get them to move on, or offer to make improvements to get them to agree to a higher rent.

Jason D. · Answer

@Jo Weiss I would not buy this property under the present condition.

One a family member and one a friend, one long term lease $250 under market?

I would either see if the current seller can get his family out, or significantly reduce my offer based on the long term loss in rents that you will incur due to his/her mismanagement

Jo W. · Answer

@Thomas S.

Thank you! if the lease survives the sale it will not be a good deal for me (with the current asking price It will still cash-flow $300 a month but it's a 4 unit so for me that's a no).

Asking price is 179k 2br 1 bath each unit. Will need cosmetic updates for all of the units (About 40K) Rent before cosmetic update should be 700- 750 (currently 2 vacant and 2 are 500, after cosmetic updates it should be 850 -900)

Taxes about 3k insurance about 1500 vacancy 8% repairs 10% CapEx 10% management 9% Water about 2k a year

ARV after cosmetic updates would be about 230K

@Kyle A. That's exactly the situation! one tenant is a family member of the seller and the other one is a close friend.

In the summer i can find good tenants pretty easily but in the winter it's harder. Their lease will be up in Jan so that's another point to consider.

Tenant with 3 years lease - what are my options?

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