Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
Hi all,
I need the brains trust together on this one. I am looking at a rental. The owner who inherited the house awhile back wasn't quite sure what to do, so she leased it at $500 a month, market is $1400-1500 a month. The lease is for a year, just signed a month ago.
Apparently tenant says they will vacate for $2000, I just don't see why they would. Is there any recourse for a ridiculously low lease on a house that was sold soon after? The house is a great deal, but I don't want the tenant dramas to ruin it for me. Even if they signed an agreement to be out by a certain date, how enforceable is that in CA? Would I still be in for a full eviction if they changed their mind? Could they just reneg on the agreement to vacate?
Investor · North Wales, PA · Member since 2013 · 116 posts · 44 votes
13y
Tom Goans, I think you may have mis-read the direction that the $2000 would be flowing. Andrew would be paying the tenant to leave so that he could re-list the property for closer to market rent with a new tenant.
Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
13y
Can you have them sign a new lease before you buy the house? Have the new lease void the past lease and have the clause: landlord can give 30 days notice at any time. Tenant must vacate immediately and will be compensated $2,000. If this is legaland and the tenant and current seller are amicable about it. I would do it thjs way.
Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes
13y
Andrew O.,
Are you allowing greed to cloud your judgment? You do not understand why a tenant would vacate after the threat of quadrupling the rent? How would you feel if this was done to you? How would a similar increase in the cost of where you live affect your life?
You may have in place the best tenants on planet earth.
Before you turn this into an adversarial situation, which is best: working with the known tenants, or dealing with unknown new tenants? A higher rental rate on a piece of paper does not always translate into greater profit.
If the present tenants are a more desirable situation, be careful you do not poison the relationship by giving the impression you are a greedy person.
Remember, tenants go to work every day to enhance your life and make your business venture successful.
Investor · North Wales, PA · Member since 2013 · 116 posts · 44 votes
13y
Tom Goans, I think you may have mis-read the direction that the $2000 would be flowing. Andrew would be paying the tenant to leave so that he could re-list the property for closer to market rent with a new tenant.
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
13y
Can you make it an addendum to the contract? Buyer will place $2000 in escrow (with proof sent to tenant), tenant to vacate by walk-thru, escrow company will release buyer's $2000 to tenant immediately after closing is completed? That form signed by buyer, seller, and tenant. Not sure of legal aspects, but if everyone is in agreement, it might work. If not, is it worth it to let them stay for the year? Haven't ever done anything like that, but could be an option.
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
Wow, there were some replies I did not expect. Read the original post again.
There is a 1 year lease signed, for $500 on a 2000 sqft 4 bedroom house in great condition, which would rent everyday for $1400-1500. If I buy the house I can't just break the lease, it must be honored, but I don't want a year of someone paying 30% market rent.
It must be nice to be able to run a charity Tom, should I offer to pay their utilities and perhaps buy them a car, because they may be great people? I can't just threaten to "quadruple" their rent, there is a lease in place. They could be the best tenants in the world, but I wouldn't take a $1000 a month haircut just to keep them in the house.
Can I rent one of your houses? You won't hear a peep from me, I promise. Just remember when we are negotiating rents, I will be the best tenant on earth, so long as you don't get greedy, I'm thinking a 60-70% discount. Great, thanks.
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
That's kind of the standard way of doing it Lynn, cash for keys. But this person is saving $1000 a month on rent, I don't know why they would go ahead and void a lease where they stand to save $12000 a year for a one off payment of $2000.
I'm hoping the current owner has some kind of relationship with the tenant, I can make the sale of the house contingent upon the house being delivered vacant, the tenant may be more responsive to the current owner than me.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
13y
If the tenant doesn't want to leave, and continues to pay on time, unfortunately you're stuck abiding by the terms of the lease and you have to honor the below market rent.
As for paying the tenant to vacate early, that could be an option if the tenant does in fact leave. However, I think you'd have a problem enforcing it if the tenant decided to renege and did not move out.
In California, if a tenant gives notice that they are moving and then doesn't move out, you can immediately file an unlawful detainer action without giving any further notice on your part. However, I don't think that would apply in this case because the tenant isn't really giving you notice. They are merely agreeing to your request to move out prior to the end of the lease. Consequently, I can't think of any legitimate reason you would be able to use to justify an eviction if they didn't leave, assuming they were still upholding their end of the lease. As a matter of fact, a judge may see an unlawful detainer action as retaliatory on your part due to the tenant's obvious below market rent.
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
13y
Andrew O.
We've been in a similar situation - acquired a property with a tenant (long-term tenant in our case) where the rent had not been raised in 16-years and was woefully under-market {though not to the degree in your situation}. Their particular unit also suffered from deferred maintenance and pets (3 dogs).
My first inclination was to get rid of the existing tenants, rejuvenate the unit and list it at market rent. This would mean a loss of the current revenue stream; at least one month of vacancy for the renovations - likely more by the time it was rented;the cost of the renovations themselves (which would be fairly extensive); and the purchase of new appliances (tenant provided their own appliances). When I tallied it all up, I could be out-of-pocket 9-12K, by the time I was receiving "market rent"
A few days later on my morning run, I worked out how long it would take for me to recover the delta between the rent being paid by the current tenants (who had been there 8-years) and the 'cost to get to market rent' {which was ~$200/mth more} ... that number was someplace between 3.75 & 5 years {more if I had an extended vacancy after renovation}.
Along with that revelation, it also occurred to me the current tenants would be very aware they were paying below market rent.
So we all sat down and talked it though.
We first dealt with the elephant in the room and discussed their current rent versus market rent. I proposed two rent hikes spaced a few months apart that would take them halfway to market rent ($100). They were happy and relieved as they were expecting a larger and more aggressive increase and feared they would have to move.
Next we discussed the deferred maintenance in their unit - they had a shopping list of things they had been trying to get done by the previous owners. I made it clear what we would be willing to do and what we would not address given the three dogs (and 2 cats) {i.e. we would put down new {commercial} grade vinyl floor, but would not upgrade the laminate flooring to hardwood as we had done in another unit}.
Now, a year later, the tenants are paying $100/mth more in rent; we've replaced windows. This autumn we will renovate the bathroom and put down new vinyl in the bathroom & kitchen. Everyone seems quite content.
So, perhaps have a meeting with this tenant and talk about your elephant and how you are going to tame it ;)
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
I was figuring as much Kyle. I would probably have to make the deal contingent on delivering a vacated property, or lowering the offer price to reflect loss of income.
Maybe if I go through the lease there may be actions that would void the lease (dog inside etc)
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
Good points Roy, if the tenant is agreeable with gradual rent rises there may be a solution that allows them to stay in. However these people aren't long term, so possibly they not super attached to the house and will just be happy with cheap rent for a year, something legally they are entitled to. Good food for thought though.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
13y
Originally posted by Andrew O.:
Maybe if I go through the lease there may be actions that would void the lease (dog inside etc)
Andrew
That probably wouldn't work for a couple reasons. First, something like an unauthorized pet in the unit wouldn't "void" the lease. You would have to serve a "cure or quit" notice, which gives the tenant the opportunity to fix the problem. If they do fix it, there's not much else you can do regarding that issue.
Secondly, there is such thing as a "quit" notice (with no option for curing), but those are only for really egregious violations (i.e. drug dealing, threatening or assaulting other tenants, etc) and if you tried to use one for a minor issue I still think that a judge would see through it and you would not prevail in court.
As for your offer and/or your negotiations with the seller, I would operate on the assumption that you'll be keeping this tenant. And then if you later happen to strike a deal with the tenant and get them to agree to terminate the lease and leave early, that'll just be icing on the cake.
Real Estate Investor · Saint Petersburg, FL · Member since 2013 · 1k+ posts · 951 votes
13y
It's a new tenant that's only been there a month, not a tenant that's lived there for 20 years at below market rate. So any assumption that this some sort of great tenant that needs to be taken care of seems pretty flawed. Get a signed agreement from the tenant to vacate for the $2k, no reason to keep them there.
If they don't vacate then yes you'd still have to evict because you can't just drag them out of the house based on paperwork that they signed. Anytime someone refuses to leave a rental for any reason you'd have to go through the proper legal process.
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
Tom, I still wouldn't offer the best tenants in the world that large a discount, I have bills that need to be paid. I also have a private CD that would pay more than this place grosses in a month. I also know my tenant would go through a stricter qualifying process.
I'm happy to drop $100-200 a month for perfect tenants, but not what is currently on the table. I'm sure I will eat humble pie for asking this, but how many cash flowing properties do you own? I wish I could just become a habitat for humanity, but then I would need one of my own houses, because I don't think my landlord is interested in charity.
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
Patrick, I would have no legal right to try and evict them.
I'm hoping the current owner has a good relationship with them, if they offered the money the tenant may be inclined to help them out, especially if the current lease lowers the selling price, or sinks the deal all together. The owner wants enough $ to cover the private note on the house.
Investor · Oklahoma City, OK · Member since 2013 · 54 posts · 11 votes
13y
The tenant's been there for 1 month, and will probably pay another month's rent by the time you close, so there will only be 10 months left on the lease.
The tenant is paying $500/mo for a house that should bring at least $1400/mo - a difference of $9000 for the next 10 months.
You said you would be willing to drop up to $200/mo for perfect tenants - that's $2000 for the next 10 months.
What about asking the seller to drop the selling price by $7000 to make up the shortfall in rent for the remainder of the lease?
Real Estate Investor · San Clemente, CA · Member since 2011 · 209 posts · 47 votes
13y
Voice of reason, I like it Jim. I'll see how I go, I am basically paying off the mortgage for this owner, so to convince her that she will need to either have some of the private debt forgiven or that she will need to make up the short fall might be a little challenging...but a challenge I will be happy to discuss; the deal is worth it.
Dallas, TX · Member since 2011 · 308 posts · 59 votes
13y
I'd try to get something in writing saying that they will vacate for $2k. If that fails, I'd try to negotiate with the seller and tell him that you're effectively losing $1k every month and would like to be compensated. 11 months left = $11k reduction in price. You may not get all $11k but it's a starting point.
Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
13y
Originally posted by Andrew O.:
Voice of reason, I like it Jim. I'll see how I go, I am basically paying off the mortgage for this owner, so to convince her that she will need to either have [b]some of the private debt forgiven or that she will need to make up the short fall might be a little challenging...but a challenge I will be happy to discuss; the deal is worth it.
Andrew
If the deal is a great deal. Why don't you go both ways. Have the seller put $9,000 into an escrow account. If the house is vacant on move out $2,000 goes to the tenants and the $7,000 goes to the seller. If they don't move out, the entire $9,000 goes to you to cover the rent differential.
Honestly this looks like it could work out best. If the tenants later defaults you can move them out and still keep the money. This strategy would also show the seller why her rent deal wasn't the best idea.
Residential Real Estate Agent · Broomfield, CO · Member since 2013 · 390 posts · 125 votes
13y
Sounds like you pretty much know the answer and the options. Either buy and raise rents when the lease runs out or enter into some agreement with the tenants to vacate early voluntarily (which will probably involve you paying them some money, assuming they know they are way below market). If you enter into an agreement then they refuse to vacate after you have paid them the agreed sum, you will have to evict them.