How to handle a new to me occupied rental property

Question

I just went under contract on a multi family property. The current tenants have been there for years. The current landlord has let the tenants run the show. There are numerous lease violations.

I have not purchased a property before that came with tenants. They are currently on month to month leases. For whatever reason, the landlord returned the security deposits to the tenants during the pandemic.

My initial plan is to get new leases for the tenants, background checks on all adults, get security deposits, and verify who is living in the units. There are obviously more people living in the units than are listed on the leases. There are more pets inside the units than allowed by the lease. They have also assumed control of a detached garage on the property.

What have you all done before when knowingly purchasing a headache property? Any suggestions are appreciated.

Patrick Drury · Answer

@Craig TeRonde Do the exact opposite of what the previous landlord did. Definitely put your foot down, hold firm, and don't let them play games with you. If they play games, give them lease violations (like late fees, etc). It sucks, but if you have to evict them, definitely do it sooner rather than later so you're not 2-3 months of no rent and with them telling you we will pay you everything next month (this happened to me!). You will be waiting forever for that next month to post a 3-day notice with them telling you that they will pay everything if you don't file an eviction.

Drew Sygit · Answer

Did you get tenant drivers licenses, social security numbers, paystubs and bank statements so you can file collection/garnishment cases if needed?This sounds like a Class C property with Class C tenants. In our experience, they do not react well to new rules. Many will leterally move and pay higher rents elsewhere than abide to new management - it makes no logical sense.Would also recommend you send them a "Welcome Package" with a Tenant Questionnaire as they know the building better than you. Here's an example, pardon the formatting as just copied and pasted ours.Home Address*Occupant Names*EmailCell Phone*Home PhoneWork PhonePreferred Contact Method*Preferred Contact MethodPortalEmailCellHomeWorkHow much is your rent? (in $)What is your current Balance Owed? (in $)Day of the month your Rent due?Date Your Lease Expires?What type & number of pets do you have?What day is garbage pickup?When’s the last time the property was inspected by someone?Appliances in your lease? Stove Fridge Microwave Dishwasher Washer DryerNumber of Smoke Detectors?Number of Ceiling Fans?Number of Garage Remotes?Are there any amenities that you’d consider paying additional rent for?Would you be interested in renewing/extending your current lease? Yes NoHow would you rate the prior management? Poor Fair Average Good Very GoodAre there any leaking water pipes, sinks, faucets or other plumbing problems? Yes NoAre there any roof leaks, water dripping from a ceiling or basement water leaks? Yes NoAny toilets running all the time? Yes NoAre all the smoke detectors in your home functional? Yes NoHas any siding or shingles been damaged? Yes NoAny rotting wood issues with decks? Yes NoAny handrail issues? Yes NoAre any windows broken? Yes NoIs the heat & a/c working satisfactory? Yes NoAre there any electrical issues? Yes NoIs there anything else we should be aware of, or do you have any additional comments?

Bjorn Ahlblad · Answer

I think the seller is lying to you about the deposits and who knows what else. You need to get Estoppel Certs signed by tenant and LL to make sure. Ordinarily the deposits get paid to the buyer at closing. You have to make sure all rents are being paid. The Estoppel certs will show that too. Don't close if this is not completed by seller and tenant.

Mike D'Arrigo · Answer

@Craig TeRonde I think you'll be inheriting a nightmare. It's going to be hard to correct bad behavior that the tenants have been allowed to get away with. It's next to impossible to turn bad tenants in to good ones. I'd be skeptical whether the landlord really did return the deposit to the tenants. Do they have anything to document that? If not, the tenants can come to you for their deposit back when the move out. If they have, good luck in getting the deposits back. I see a lot of problems with this.

Allen McGlashing · Answer

@Craig TeRondeSounds like a shit show I would end their lease once you close on the property and start the process over. You will be able to vet your own tenants. Sounds like the selling landlord was in stress and couldn’t deal with them anymore. A huge red flag is why did the old landlord return the security deposit?

Craig TeRonde · Answer

Ian, thanks. I just closed on the property and dropped off the new month to month leases with the tenants. It is about as bad as I expected so my purchase price turned out well. I offered low enough that I could put in a new septic system as well as a full remodel. I raised the rents. Right now I have $108k into the deal with $1775 in monthly rents. Taxes and insurance are $405/mo. I am expecting some higher than standard maintenance costs initially. There has been neglect. Now to consider a cash out refi. I am a bit hesitant as I am not sure if I am looking for another rental This purchase doubled my doors to four. I work full time and do not trust property management so I will have to see how the workload is.

Ian Walsh · Answer

Stick to the current lease or see if they will sign a new one. The background check and stuff won't really matter as they are already in there. If they are paying and aren't causing issues, I usually just let it play out when dealing with that.

Craig TeRonde · Answer

I have confirmation of the tenants rent payments for the last 3 months. Multiple late payments but all rent monies were paid. I have never heard of a landlord returning security deposits during a lease term. Perhaps an inexperienced landlord who was threatened with a lawsuit? The property is structurally sound. Mechanicals are functioning. My gut says that this landlord thought he could manage a rental property from afar and then got in over his head with low quality tenants. I have Estoppel Certificates for both rentals (thanks Bjorn) stating the security deposits were returned The certificates also state that there are no other verbal/written agreements (free rent, etc) between the landlord and tenants.

Craig TeRonde · Answer

Patrick, Thank you. In Illinois, I cannot evict a tenant right now. But since the leases expire at the end of October, I can simply have them on a month to month. If they are unwilling to abide by my expectations, I will not renew the lease and then can start the rehab earlier. Either way, when the tenants leave, the property needs significant rehab. I am requesting evidence of payment by the tenants to ensure they are not simply squatting due to the eviction moratorium in Illinois.

Craig TeRonde · Answer

Bjorn, I agree the security deposit issue is sketchy sounding. That is why I told the listing against that I needed proof. The seller said they would provide a signed letter from the tenants and seller stating that the deposits had been returned to the tenants. In my state, I have 5 days to walk away from the contract with no penalty. I asked the listing agent about an Estoppel Certificate. Thanks.