Buying a property in AZ with no leases, is it a bad idea?

Question

In the process of buying a 4-plex in Phoenix, AZ. Fully occupied but no lease in place. The seller did send me some old expired not signed leases. These leases do not hold if challenged in court. I am no lawyer but this makes me nervous. What if the tenants decide not to vacate, the rents are much lower than the market rate- what is our recourse? We are not getting a steal on this property, Phoenix being an amazing real estate market we did not expect it anyway. Please help!

Dan Schwartz · Answer

@Shel D. bookmark this document and read it thoroughly.  It's a big portion of your owners' manual.

https://housing.az.gov/sites/default/files/documents/files/Landlord-Tenant-Act-ADOH-Publication-July-2018_0.pdf

33-1375(B) The landlord or the tenant may terminate a month-to-month tenancy by a written notice givento the other at least thirty days prior to the periodic rental date specified in the notice

If they cannot produce valid leases, then they are month-to-month tenants.  Give them a 30-day notice to end the tenancy if they don't sign your new leases.  If they don't vacate, start the eviction immediately.

In Arizona, it takes less than two months from the date of close/30-day notice to the sheriff escorting them out of the unit.  I certainly hope it doesn't come to that, but that's your timeline if you follow everything properly.

Good luck!

Ryan Swan · Answer

@Shel D. I've done dozens of MF deals in the past few years, and I've never had a seller who was willing to provide notices to vacate during escrow because it's not in their interest to do so. What if they provide notice to all four units and then you drop dead (god forbid) before closing? Then the seller could be stuck with zero income and a vacant property.

Additionally, you don't want to kick out what could be solid tenants just because they are paying below market rents. You can always offer them new lease terms with 30 days notice after closing and get them paying market rents. This could avoid vacancies and the cost of placing new tenants.

Getting the estoppel agreement is the best advice, but it's easier said then done with what sounds like low income tenants. Tenants like this are already skittish during a sale, and getting them to sign another official document can be problematic, especially if English isn't their first language.

Tim Winter · Answer

As Colleen suggested, I would get estoppel from each tenant as to their full understanding of the lease terms and monies involved, as an agreement for your contract before you close or even get out of inspection period. If all tenants are M2M and you want to keep them, then that increases your out of pocket and lowers the value of the asset.

As mentioned previously, in AZ if their leases have ended, then by law they transition to M2M unless the previous lease stipulated otherwise.

For me as an investor in Phoenix, and you know the current tenants are below market rents, and that Phoenix area is such a hot rental market right now this would actually be a positive for me from an investor stand point. If you don't want all of the tenants to leave immediately or all at once, I think your Realtor's advise should be brought up and challenged.

As for damage, that is what the security deposit should be covering. Verifying with the current owner how much each tenant has secured against the property. If it's in the low rent areas, and the damages go beyond the security deposit, you most likely won't have much luck collecting on the balance and have to write it off as a business expense.

I believe given we are just coming out of winter season here in Phoenix, if you have tenants in all 4 units I would treat the current tenants with kid gloves.. all except the worst one. The worst one would be the one with the lowest rent per size, and target that one for immediate notice that rents will be increasing, due to cost of insurance, taxes and on going renovation efforts (etc...) and upon turning that one and re-renting it, target the next lowest, rinse and repeat until you get full turn over.

Best of luck with your deal, and let me know if you need any more advice!

Colleen F. · Answer

Get an estoppel agreement with the tenants. This confirms the current terms, M2M, current rate  and any security  deposits on the lease. This is like a one pager.   A lawyer can write this up and the tenants and you sign them.  This is done relatively close before closing.  Your real estate lawyer should know.

Shel D. · Answer

Thank you Dan Schwartz, Pamela Sandberg and Ralph Justiz. This information was really helpful. My realtor is suggesting that we ask the seller to give current tenants a notice to vacate, right after BINSR is signed. Our realtor says that this will protect us. I am not too sure about this. We are scheduled to close way before the tenants actually move out with 30 days' notice. My concern is that if the tenants move out but damage the property, what is the recourse? Based on your experience, would it better for us to give the tenants notice after taking possession of the property or its better for the seller to give notice. Please advise.

Pamela Sandberg · Answer

@Dan Schwartz is right on with the law - if there are no written leases in place, they are month-to-month tenants. I would double-check that there isn't actually a more current written lease agreement in place. (This seller doesn't sound like the most reliable record keeper.) As long as there isn't, you can give notice to quit as they are MTM tenants.

Ralph Justiz · Answer

Depending on your local landlord-tenant act there maybe some provision that outlines what these tenants would be considered. In OK tenants are considered month to month after their lease expires. If that is the case in AZ I would recommend you make all tenants sign a new lease agreement. If they refuse to sign a lease you can recommend they move out.

Buying a property in AZ with no leases, is it a bad idea?

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