Sweetheart leases made days before auction

[Naomi Spira]

We have been flipping houses mainly and started 1 1/2 years ago.

We are up to house #15

I recently bought our first multifamily -  3 family in West New York, NJ at a Sheriff forclosure auction.  It seems that the tenants produced what we consider "sweatheart" leases signed days before the auction at below market rates.  We have not been successful reaching the previous owner, and even if we did - we don't believe he would be honest with us.  2 of the 3 units are occupied by a brother and sister.

Ideally we would like to get them out.  We believe (based on info from other tenants) that sis has been acting as or on behalf of the landlord for years.  

Additional problem - they have been renting the bedrooms out to dormers.  (we met some of those room-mates and they gave us the scoop as to what was going on).

The building is great - brick, newly built, good condition - and based on our comps - each of the 3 bedroom 2 bath units should be renting at around $1800-$2200/month (current condition vs fixed up)

The leases were were given (signed March 1 and we bought building on March 3) are $1000, $1100 for the 3 bedroom units of sis and bro and $1300 of the tiny basement unit rented by non family members.  That is the only unit that is probably true market value.

We considered flipping the building and have some offers - but they want at least one unit empty.

In reality - we would like to keep the building as it has great rent roll potential- but we need to contest these leases.

Any advice?