Duplex Non-Performing Tenant -- What would you do?

Question

Hi BP!

I'm under contract in the valley for a duplex and trying to overcome a situation to judge the ability for the current tenant to perform on rent. I intend to be owner occupying 1 of the units and the other is currently occupied & has been for 6 years by the same tenant.

I during my contingencies I found out the current tenant hasn't been paying throughout COVID as the tenants work is correlated to hollywood/filming.

The entire reason I like the idea of a duplex is to offset my mortgage, but with a non-paying tenant, its a bit concerning + COVID. Seems like there's light at the end of the tunnel soon, but who knows! I spoke with the tenant and they have plans for staying 6-12 months. They're not interested in cash for keys from the current owner either. They've been there for 6 years and never had troubles on rent until COVID and the month of April is their first month paying again. The tenant applied via the city for rental assistance (80% paid of back rents) which was remitted to the landlord. So now the tenant is technically "current". For what it's worth, the tenant is paying market value.

During my due-diligence, I found out the true story about the tenant (described above) and trying to see what's still feasible for me to continue and purchase the property while protecting myself. I'm concerned I acquire the property and then have a non-paying tenant. Having to float the entire monthly PITI for the building doesn't sound fun, but so long as I can put something in place with the current owner/tenant, I'd feel more comfortable.

OPTIONS:

- Ask for 12 months of rent to be held in escrow to draw from if tenant doesn't pay rent (my favorite option so far and for all parties involved)

- Ask current owner to deliver property vacant

- Cash for key --> tenant not interested

- Price reduction on the building for non-performing tenant --> The price of the property is a good value, but most likely b/c of the tenant situation, but could be a last resort

Any other ideas to suggest?

--

So long as I can assure the tenant will be paying until the moratorium lifts or be compensated another way, I'd be a happy camper and proceed to buy the duplex. Having the opportunity for a performing tenant to off-set my mortgage is really appealing.

Once I get through COVID and beyond this property has value for an ADU conversion and appreciation so I'm trying to look long term, but also the next year as I don't want to be bleeding cash on this property.

If you've made it this far, thank you! I've given/received a lot from BP so hoping some others can weigh in :)

Thanks,

Matt

Malia Miyashiro-Harmon · Answer

Hi Matt.. just some thoughts on the tenant as someone who works in the film industry... filming in LA sort of started in late summer / early fall of 2020, but then went back down for the holidays and into Jan as COVID cases rose.  Since Feb I would say, its been pretty busy.  Now who knows what sector your tenant works in.. maybe they are in post production so things could be swinging in to gear for them now since filming has been happening.  It sounds like the tenant is now paying and w a consistent record for the last 6 years, I would take it as simply the COVID situation, and not a 'bad' tenant.  If you can get a good deal on the duplex, or do the 12 months rent holding in escrow like you mentioned, I think it would work out fine.  This is just my insight on the film industry, but still trust your gut when speaking with the tenant.

Matt Silverstone · Answer

Thank you all for the replies. I’ll be taking this into my considerations and see if a deal can still be made! Be well.

Steve Jones · Answer

Hi, I think eviction moratorium will be lifted soon, you may have a little bit of a sticky situation with your tenant but I like to take the long view...if everything else checks out on the property, ask for a little discount and buy it!

You will be so happy you did 5 years from now.   :-)

Rick Albert · Answer

If there is a vacant unit available then I wouldn't bank on getting the tenant out through owner occupied.  A judge would push back saying he could move into the other unit.

Regarding the family member, it is through the Ellis Act, where someone has to live there for at least 2 years and you would be paying relocation fees.  That can range from about $7,900 to over $20,000 depending on the circumstances.

In either scenario, the eviction moratorium is in effect until the end of June, so either is not an option at this time.

If this is of major concern, I recommend contacting an attorney.  Your Realtor has access to free legal help that might be able to provide guidance.

Mel Hayes · Answer

My answer depends on how good the deal is. I'm in SoCal and I know its close to impossible to get a tenant out.

This is a great deal Options:

Option 1. Move into one unit and move a family member into the other unit. (family member has to live there for at least 1 year.) Be careful with that because the family member may not want to leave either.

Option 2. Take the property, wait out the eviction suspension and then he either starts paying or you evict.

Option 3. Buy the property, file for 6 month mortgage forbearance due to Covid19.

This is not a great deal:

It that's the case walk away because you will not be able to afford the property with the tenant not paying rent.

Dan H. · Answer

In most areas of CA one of the legal ways to get a tenant out of a multiplex unit is for the owner or family member to move in.  This is an option, but I believe this tenant is actually impacted by COVID and not abusing the eviction moratorium (so I personally would not take their home at this time).  You could decide you want to live in the unit that is occupied by the tenant that is having issues paying their rent.

Here are some options that either one may work:

• Accept 80% of the rent via the government rental assistance program until things go back to a state where either the tenant can pay rent or where they can legitimately and safely find a new home.  This would be the option I would choose because I do not want to boot someone truly impacted by the epidemic.  Can you make your commitments if only 80% of rent is collected?  I would hope so because reserves should easily be able to handle this type of impact.
• Take advantage of loan forbearance.  I recognize that the impacts to credit scores is an unknown.  The unknown is why this is not an option I would use.

I recognize that ideally you collect the rent as indicated in the lease agreement.  However, there are many people struggling at this time.  I believe 80% of rent is close to a fair share of the pain threshold (assuming the tenant is not abusing the rules).

Good luck

Rick Albert · Answer

Hey Matt,

I don't see the escrow company holding money back and paying you every month.  They are not the bank and are strictly an intermediary for the transaction. The eviction moratorium is until the end of June but may get extended, so you have to assume the worst that this will continue on and that tenant can stay.

If you want to proceed with the property, I would go back to the Seller and ask to have all of your closing costs paid.  The money saved you can put towards the loss of rent.  If the Seller is smart, he/she would consider it knowing the duplex would effectively be unsellable at a reasonable price.

Good luck!

Rick