Purchase house to flip with tenants inside

[David Lamb]

Seller distressed and willing to sell his property for 22% discount, however his family is living inside rent-free.  Yes, I know California is very tenant friendly.  And yes, I know many of you would not do the deal as a result.  However, for the rest I am looking for potential solutions to this situation. Thank you, Dave

[Andy Sabisch]

The first option is to use the "Cash for Keys" approach and offer them some money to move out and find somewhere else to live.  While the state is tenant friendly, eventually they will be forced out and at that point it will be without the offer you gave them and with a black mark on their record making it harder to find another place.

Since you are looking at flipping the property, you need them out to do the work and I would discuss that with them - not the flip portion but the work that needs to be done and can't be done with them in it.  Hopefully that will get them to take the cash for keys option. 

Make sure you figure that offer into your number to see if the deal still makes sense.

[Theresa Harris]

Cash for keys, but make sure you don't hand over any cash until they are out.  I'd also think about having someone live on site to make sure they don't come back.  Other option is get the house delivered empty.  He (or his family) are living there, so as soon as they get the cash from the sale, they should be able to move immediately.  Offer to pay for 1 month of a storage unit starting 1 week before you close.

[Peter Mckernan]

Quote from @David Lamb:

Seller distressed and willing to sell his property for 22% discount, however his family is living inside rent-free.  Yes, I know California is very tenant friendly.  And yes, I know many of you would not do the deal as a result.  However, for the rest I am looking for potential solutions to this situation. Thank you, Dave

 What's the situation, they want the family to stay or it's up to you on how to handle after close. I would do cash for keys as Andy mentioned. The other option would be to see if you give them a long escrow to get out of the house. This one is tricky because not only is it "tenants" but it is family so they will feel more entitled to the house, more than normal. 

Other option, be a person of solution on where they are going next, help them find a place rental etc., or get them lined up with a residence in and pay for it for the first month. 

If all else fails, as the new owner, you can do an eviction on them once you buy it. I know that is not what you want to do, but if they are going to stay for a long time you do have the option.

[Bruce Woodruff]

Seeing it's how it's California, I would not do the deal unless you factor in 12 to 18 months of no income, and see if you can withstand that picture. I'm from SoCal so well aware of the pitfalls of being a landlord there, and I have a friend right now going through a horror show that you would not believe. Also have known other landlords personally, and heard of many others, that  took more than a year to get out a tenant/squatter.

so this could be an opportunity, if the price is right, to pick up a good property for future use. But be aware that that alleged 22% discount will be eaten up and then some by your losses. Assume the worst. Say it takes you 12 months to get that person out before you can even lift a finger to do any work, and say that they leave the place completely destroyed. Now run your numbers based on that scenario.. do they still work? And also very importantly, what is this neighborhood like? Will there be extremely good appreciation in the next few years do you think? If so that adds some value in my mind.

[David Lamb]

First and foremost, I LOVE BP!!!  I know it's ridiculous but I always feel a sense of connection whenever I post a question and get so many wonderful responses and people offering their expertise.  Yes, cash for keys is definitely the way to go.  As far as whether the family will leave, mmmmmmmmmmmm, touch and go.  They want to help their uncle with the cash needed for him but selfishly do not want to give up free rent which they have come to rely.  Sooooo, yes, it will be a solution oriented approach and one that must be accomplished prior to solidifying the deal!!!  Thank you again, you people are great!

[Robert Adams]

I would recommend the cash for keys coming from the current owner and then you compensate the seller for that cash at closing when they deliver an empty house for you. If they can't/won't do that then I would go the cash for keys route yourself after the fact. Be sure to no only account for the cost of the cash for keys but your additional holding costs while you have to wait to get them out. Best of luck.

[David Lamb]

Quote from @Robert Adams:

I would recommend the cash for keys coming from the current owner and then you compensate the seller for that cash at closing when they deliver an empty house for you. If they can't/won't do that then I would go the cash for keys route yourself after the fact. Be sure to no only account for the cost of the cash for keys but your additional holding costs while you have to wait to get them out. Best of luck.

Excellent idea!!!  Thank you Robert

[Robert Adams]

Quote from @David Lamb:

Quote from @Robert Adams:

I would recommend the cash for keys coming from the current owner and then you compensate the seller for that cash at closing when they deliver an empty house for you. If they can't/won't do that then I would go the cash for keys route yourself after the fact. Be sure to no only account for the cost of the cash for keys but your additional holding costs while you have to wait to get them out. Best of luck.

Excellent idea!!!  Thank you Robert

 Happy to help best of luck!

[Jacob Sherman]

I would consult with a local real estate attorney on the scenario and what the risks are 

[Bill J Fay]

As others have suggested, C4K is easiest. Staggering the compensation is a great way to build urgency. $10k if you move out in 7 days, $7k if you move out in 2 weeks, etc.

Consult with local attorney always.

[David Lamb]

Quote from @Bill J Fay:

As others have suggested, C4K is easiest. Staggering the compensation is a great way to build urgency. $10k if you move out in 7 days, $7k if you move out in 2 weeks, etc.

Consult with local attorney always.

Oh man, that is BRILLIANT!!! Thank you Bill.  

[Jeff S.]

“Yes, I know California is very tenant friendly. And yes, I know many of you would not do the deal as a result. However, for the rest I am looking for potential solutions to this situation.”

Directing the conversation away from the fact that California is very tenant-friendly will cost you a lot of money @David Lamb.

Does the property fall under the Rent Stabilization Ordinance (RSO)?  Is it subject to the Ellis Act? If so, depending on the age of the tenants and the length of their tenancy, you could be required to pay a relocation fee between $10k to $30k to leave.  This could take many months. There is no urgency nor any sort of sliding scale.

Second, what do you mean by a 22% discount? Are you paying 78% of the ARV for a flip? You recognize that a typical rehab lately will run around 15%+ of the ARV. Thus, your project cost could be ~93% of the ARV leaving 7% for property taxes, HML fees, agent sales fees, closing costs, title/property insurance, etc. This well exceeds 100%. When you ran your numbers what was your profit estimate?

The correct answer is never to purchase a flip that has tenants. Property must be delivered vacant. Second, run the numbers.