Should I purchase and inherit tenant without a tenant lease?

Question

I want to purchase this duplex in cleveland 44120 with tenant in it.  I contacted the agent, she said the current owner of the duplex didn't have a sign lease contract with the tenant.  The tenant called the agent that they want to continue the rent "as is".  Let me put her quote on this message.

-------------------------"When purchasing a property with tenants in place, usually the seller has your requested information available.This is not the case.From my understanding From tenants who started just recently calling me That they want to continue** as is**With new owner.That's usually what happen When good tenants don't have leases.Soon as property transfer title to you. Not before because no leases is in place.A one year lease would be the only requirement from you as the new ownerAs long as tenants pay you your rents on time and is good rental Property tenantsYou explained to me it was important to have tenants in place in Properties that you was interested in.I will wait before sending purchase agreement until I know if there is any security deposits /amounts For purchase agreement. that is credited to you at title transferat the title companyIt's a easy process All is explained in detailsIt could be your property In 12 days.With all terms approved by you the buyer and the sellerYes Seller is ready to move forward.--------------------

It is just month to month.  She said once I take over the title, I can put a simple rental lease and continue as is.

Please give advise. ...

Andrew Weiner · Answer

This is going to be up mostly your preference.  You can put the tenants on a month to month lease for now which should work for them and give you the structure to the relationship that is a best practice.  After a few months of you like the tenants you can ask them to sign a one year lease or give them notice to leave.  That will also get you into the summer which is a better leasing season.   I would recommend asking for proof that the tenant is current on their rent, it’s never fun to inherit a tenant that needs to be evicted, especially if it’s in the Cleveland side of 44120.

Dave Stokley · Answer

You can always add a contingency that the property be delivered vacant. Whether they agree will depend on how motivated the seller is and how solid of a buyer you appear to be, but I requested this on my very first purchase and got it.

To @James Maradits' point above, if the seller represents the contracts as month-to-month and they turn out to be different, I would think this is fraud that would allow you to cancel the contract or seek some other remedy (not legal advice - consult a lawyer!).

James Maradits · Answer

Between this and your other recent discussions, it definitely sounds like you did not chose the right agent to work with on this deal.  I would be more careful moving forward to ensure that you find someone familiar with dealing with investment properties like this one.

It's fairly common to take on an occupied property without leases in place and often times it can be an opportunity.  When doing this, it's extremely important to verify that there are in fact no leases in place to protect yourself against the event of a tenant actually having a lease with terms that were not accurately stated (example: if the seller says the tenant is paying $1000 a month but they actually have a lease for the next 10 years at $500/month that you would be stuck with).

It's probably a good idea to assume/budget that you will make no profit the first 3-6 months of ownership until the property is stabilized (repaired, rented, whatever you need to do).  This might not be the case, but it would be better to prepare for the worst rather than put yourself into a risky situation.

David K. · Answer

Limited experience compared to the rest on here, but I inherited one tenant that was month to month when I took over a property. I was extremely nervous with the question of "why aren't they on a lease?" in the back of my mind. Going on two years later, they are one of my best tenants. I finally got them under lease recently, but it was a low pressure situation. Frankly, I've had a worse experience with tenants who were under lease when I took over other properties. It can obviously be a risk taking over existing tenants (whether on lease or month to month), though the benefit is obvious of immediate cash flow without the need for additional expense of getting units rent ready and then getting tenants placed.

All things considered, I would probably prefer taking over vacant units at the time of acquisition. But based on my experience so far, I don't make a point to avoid properties with tenants in place like some investors do. Maybe I'll have a bad experience some day that will change my mind, but just my two cents based on my experiences so far. Good luck!

James Wise · Answer

There isn't a yes or no answer to this. It's about how good you think the deal is and if you want to take on the risk / inconvenience of a tenant without a lease when you take it over.

Also as a side note I do not consider them ignoring your requests for proof of payment as so much of a red flag as it's really just how business is done on these assets. Having sold over $200 million worth of these types of properties to thousands of investors over the years I can tell you that it's very common to get green investors fresh off of reading a book or reviewing an education course of some sort where they have their lists all of these things to do proper "due diligence" run into sellers that don't operate their homes in a professional way that the buyer was told to expect. These assets by and large are sold by mom and pops who are by no means professional landlords.

Rent is often cash right to pocket. Could there be something they are hiding from you? Sure. Could they easily manufacture fake "proof" that rent has been paid if they really wanted to? Absolutely. Many buyers of these properties are already hip to the game and know all of this so if there are 10 buyers who aren't asking for this stuff and have no issue buying the property and then there is you of course the sellers are just going to ignore your requests. It's just not something they need to bother with.

It's just an additional risk you need to accept when doing business on these types of properties. You aren't usually running into professional sellers and landlords until you get into big properties. But that's going to come with it's own pros and cons such as the fact that professional sellers and operators tend to get a much higher price for their properties than the accidental landlords do.

James Lin · Answer

Thank you for the advice.. I have tried asking my agent and the seller agent about the prove of payment of rent (rent payment history) and also lease.  Both of them just ignore me.  Making feel that there is something wrong.

Should I purchase and inherit tenant without a tenant lease?

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