Buying property with tenant inside - what must seller disclose?

Question

Hey guys, rookie investor here. I'm looking for my first investment property and several properties I've looked at come with a tenant in place. I'd like to know what the seller is obligated to disclose about the tenant if they accept my offer. Ideally I'd like to see the tenant’s rental application, credit report, background check, all other screening measures the seller took when the tenants first applied, rental payment history, as well as current lease. Are sellers required to give that to me, and to do that in a timely manner that allows me to pull out of the deal if I don't like what I see? Is there standard language that I need to put in my purchase contract to get this info? I'm in Arizona and I've been trying to google this but haven't found anything so far. Any advice is helpful - thank you!

Doug McVinua · Answer

@Kejia Tang In Arizona the Lease coveys with the property so the buyer is legally obligated to honor the terms of the lease in place. Rarely are they long-term leases (more than 1 year) and generally, they are near the end or even month to month so the buyer has options once they own it. I know of no way to screen a tenant when assuming a lease as the landlord-tenant rules (lease) are already in place. Of course, at the end of the lease, it's fair game and I often find it best to change out the tenant as we might be in a value add, raising rent and just wanting to start over. The disclosures often allow us to get a tenant ledger so we can see the payment history and help us moving forward.

Due diligence is very important on the front end. As a Property Manager, Broker, and often Buyers agent I attend the inspections, evaluate the condition of the property, each unit, the disclosure information, the current rents, the projected rent, etc so the buyer can make an informed decision. The strategy works and often in a few months we have made huge gains on the property, the rent roll, and the return. Sometimes it can be soon, it all depends on the leases we assume at purchase. I have one right now where most of the tenants are month to month and the buyer will likely make wholesale changes quickly. We will issue non-renewal notices and turn the units over for considerable higher rent.

Scott M. · Answer

Whatever you ask for in the PA, a sellers disclosure and lead paint.  Honestly, that is it.  If you don't make it a requirement to see the lease, ledger etc the seller has no obligation to show you.  Granted, very few if anyone would buy it but there is no "must disclose".

Ask for everything you want in the PA

Nathan Gesner · Answer

You should specifically ask for what you want, even if you think it is already included in the state contract. Be specific, just like you were here, and that should be sufficient.

Your offer to purchase should also require the Seller provide an estoppel certificate (also called estoppel form or agreement). The estoppel is a form filled out by the tenant, then confirmed by the Landlord, then accepted by the Buyer. It's supposed to ensure there are no surprises after closing. For example, I often see Buyers purchase property thinking there is a $1,000 security deposit but then the tenant claims it was actually $2,000, or they paid last month's rent, etc. By having the Tenant, Seller, and Buyer complete an estoppel, you eliminate these surprises.Some things it may include:1. Tenant name, contact information, and address2. Occupancy date3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate4. Are there any modifications to the written lease?5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?6. Current lease term (expiration date, month-to-month)7. Current rent rate8. Rent due date9. Security deposit amountYou can find plenty of examples by searching for "tenant estoppel certificate doc" or exchange "doc" with "pdf" for more options.Here is an example and explanation: Sample EstoppelSome have a lot of legal jargon but this document does not need to be so detailed. This is an important tool for anyone buying a tenant-occupied property.

Doug McVinua · Answer

@Kejia Tang The most commonly used contract in Arizona is the Arizona Association of Realtor contract, developed and kept current by the Association. It's a solid contract that covers the common disclosures in a purchase, and then we add the Income Addendum which covers the lease, move-in checklist, rent roll, etc for an investment property.

Very few will ever provide the screening documents, in my case it is against the agreement I have to be able to screen parties. It would be a violation of the agreement and could result in losing my privileges to pull credit, screen for criminal and eviction, etc.

Caleb Lane · Answer

Whatever information you don't get you can ask when you're the owner/landlord. If they don't meet your criteria, you can always start the eviction process.

Jeremy Fenceroy · Answer

Excellent info @Nathan G. Thanks for sharing!

Scott M. · Answer

@Joseph Hummel  you may not get what you asked for but even less of a chance of getting it if you don't ask.

Joseph Hammel · Answer

My experience is a lot of sellers are to unorganized or lazy to get you all this information. Is it just a SFH?

Chad McMahan · Answer

Hi Kejia.

GREAT question. Firstly, if you want to discuss it, I'm happy to help- call me up and I'll give you some pointers- no strings.

Next, make sure you ask for a clear list of what you want/need, as soon as you are in contract, and get it all before you end the inspection period. I would even say put the list of what you require in the additional terms and conditions section of the purchase contract.

That's the short version. I hope this helps. Happy hunting.

Kejia Tang · Answer

@Doug McVinua the income property addendum is very helpful, thank you! Does the rent roll contain record of past rent payments (e.g. whether tenant missed payments or were late)? I looked at a few online and it seems inconsistent what they contain. And how would you advise an investor solve the problem of not knowing the tenant? Would they create a tenant screening contingency and screen the tenant themselves? It seems a large and unnecessary risk if a buyer has to simply accept a tenant and trust that the previous landlord did a good job of screening.

Buying property with tenant inside - what must seller disclose?

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