BRRRR - Evicting Current Tenants it New Purchase???

Question

Hello BP!

I’m in the process of closing on a 2 flat + living space in a C-/D part of Chicago that is on the outskirts of a very up and coming neighborhood.

- Was on the market for $120k 3 months ago

- Dropped to $100k 1.5 months ago

- I offered $88k 21 days ago

- Negotiated to $72k if we close by the 30th and take on the current tenants (only 1 unit has tenants/other unit is vacant)

The property needs roughly $45k in work which would bring the property’s value to around $150k and would cash flow very nicely whether I go the conventional tenant way or section 8.

Ideally I want to rehab, rent, and refinance in no more than 2 months, but the eviction/tenant situation might slow this down. The seller is in a pinch and wants to sell ASAP and has lowered the price because of this so I would be stuck evicting the current tenants.

I am using a HELOC to finance this deal, but the longer I go without financing, the more I’d have to pay out of pocket to repay the HELOC on top of likely missed rent for the occupied unit.

Has anybody had experience taking on existing tenants and evicting them? Looking for tips, good and bad stories, and anything in between so I can be better equipped to reply to my lawyers.

Thanks in advance!!

Joe Splitrock · Answer

@Freddy Hernandez I never understand why so many people immediately say "cash for keys". It is insane, even before asking people to leave, they offer them cash. I think it is fear driven. I have never once paid a tenant to leave and no large management company would do that either.

First of all, asking tenants to leave is not eviction. Eviction happens after you asked them to leave and they refused to leave. Asking someone to leave can happen two different ways:

1. Thirty day notice to vacate is served in a situation where the tenant is month to month and is current on rent. You notify them that you are not renewing the month to month agreement. This is also called non renewal. You state the property is being rehabilitated and you need them out on XX date. Usually 30 days notice is required.

2. Notice to vacate is given when their is a lease violation. Usually this is non payment or some other rules being broken. You generally give them 5 or 7 days to vacate. You want the notice served by a third party process server and they are notified you will evict if they chose not to leave.

In my experience most tenants will leave when asked. If they don't leave, then your next step is to file for eviction. Eviction is the only way to legally regain rights to your property. Cash for keys gives you no legal right to remove people. You file eviction for named tenants and "any other occupants". Usually whey you go to court, nobody shows up and you get a default judgement. This judgement allows you to remove anyone in the property and their belongings. The problem with cash for keys is someone can leave and come right back again. Or you can end up with a squatter after the named tenant leaves.

The reason professional management companies chose eviction is because it is the legal way to regain rights. But the point is, you should try asking them to leave before even moving to eviction. Tenants don't take their chance in eviction court, because once on their record it makes renting in the future very difficult. So just the threat of eviction will get almost anyone out.

Kenneth Garrett · Answer

@Freddy Hernandez

If they are on a mtm lease then you can give them a 30 day notice.  You do not need to do cash for keys.  If there under a current lease then you will need to honor the lease.  I would request a copy of the current lease to review and request verification whether they are current with rent.  If current then cash for keys makes sense.  Evictions can be difficult in  Chicago.

Crystal Smith · Answer

First thing- We never deal with a tenant directly.  Our offer of cash for keys always comes from a 3rd party; a lawyer or management company.  2nd our offer for cash is firm; non negotiable.  No additional incentives.  And they receive the funds from the 3rd party once we have verified they have moved out and we have secured the property.  We use this approach after we run the numbers and determine if cash for keys costs us less than the eviction process.

John Teachout · Answer

Also, if the tenant has a contract (as opposed to a month to month), you can't just get rid of them before the contract date unless you have legal cause.

John Teachout · Answer

Is the tenant non-performing? ie, not paying rent? If they're paying rent, why get rid of them? Renovate the empty unit for now. Is this a flip or buy/hold?

Frank Maratta · Answer

@Freddy Hernandez

I just went through this. Duplex I was renovating had a tenant on the first floor.  I negotiated a sale price of $100k cash but made the seller keep $5k in an escrow account until the tenants vacated. I gave the tenants $1000 to move out. It worked fine but I’m happy I had the seller keep money in escrow. The tenants children actually had lead paint poisoning come to find out, luckily they went after the seller, not me, and the seller ended up offering them $5000 to sign a release. I was able to convince the seller to put my name on that release form as well.

Sathish Sekar · Answer

Freddy, you may want to negotiate an even lower purchase price. If your acquisition price is $72k and you do $45k in rehab, you are at $117k all in. And presumably the property will be worth $150k after rehab. This provides you with a spread of $33k forced equity. That's not a lot of cushion. Since you are taking on a troublesome tenant and willing to close soon, ask for more of a discount. You should receive a discount for assuming this risky proposition. I would ask for a $60k purchase price and be willing to go up to $65k.

Freddy Hernandez · Answer

@Sathish Sekar

Great information. Yes $33k can go quickly especially if I can’t rehab and refi all while not receiving rent. I am going to ask my attorneys a few more questions before I agree to move forward. Thank you!

Freddy Hernandez · Answer

@Angie Shires

From my understanding they are on a month to month agreement, but I will confirm ASAP and reply.

BRRRR - Evicting Current Tenants it New Purchase???

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