Seller leased to new tenants 14 days before closing?

[Ryan Fisher]

Good Evening, Sorry for the long post, but I have interesting situation.

We are under contract for a duplex property in Bradenton, FL as of 12/23/2020 with a closing date of 01/29/2021. During the inspection, multiple serious issues (roof, flooring, electrical, hot water heater, replacing knob and tube wiring) came to light. These were brought up to the seller during negotiations and he agreed in a contract addendum to fix them all prior to closing with proof. This appears to be happening per our agent.

There is a tenant in the upstairs unit (2/1) renting for $850/month on a month-to-month lease. (Market rent for this is about $1,200/month). The downstairs unit (3/1.5) was unrented and seller said it could go for about $1,150/month (fixed up market rent is about $1,500/month). Given that it was unrented, we were going to see what additional issues may need to be fixed outside of the things the seller is repairing and then rent for market rent.

However, I received notice yesterday that the Seller just wanted to let us know that he was looking to rent out the downstairs unit and we received an executed lease agreement today (starting 01/15/2021) that states that he rented it out for $1,125/month on a month-to-month contract. I spoke with my agent and he said that this is common and the seller is hedging his bets and if our sale does not go through, then he is not losing rental income and if it does go through, then we have some rental income during this time and can decide to raise rents or not renew their month-to-month lease.

Is this a common situation that you have heard about, for a seller to place a tenant in a unit he is selling 14 days prior to closing? With the current under market rents, the property is at a 3.9% COC return and with market rents, it is a 16.5% COC return. How would it be to go to the new tenant 1-2 months after they signed their lease and tell them that the rent is going up by about 30% or $375/month or their lease will not be renewed? I know that if I was the renter, I would be upset after having just moved in. (I am not sure he told them that the property is being sold.) The upstairs tenants were present during the inspection, so they know property is on the market, but their rent would also go up a little over 30% or $350/month. They were living downstairs and moved upstairs because they could not afford the cost, so they would likely leave.

Is there a good way to go about this or just give notice that the building is under new ownership and this is the rent if you want to stay and renew your lease?Thanks!