Multi-family Acquisition w/ Bad Tenants

[JR Nieman]

I've offered on a duplex (Class B) that is 100% occupied. After entering the due-diligence period, I found out that one of the tenants is 2 months behind on her rent. My plan is to increase rent by $125 ($625 to $750) on both sides of the duplex as there is an identical duplex behind the property that has active tenants paying $750. The problem is neither of the current tenants will be able to afford the increased rent. 

As a prerequisite to closing, I've asked the seller to evict both tenants. In return, the seller asked that I put up $5,000 in due-diligence as he doesn't want to risk losing tenants if I don't end up closing on the property which is understandable but $5,000 is a lot of money. 

I want the seller to handle the eviction so he would be liable for any damage to the property during this process. I would acquire an empty property and have the ability to screen/find my own tenants. The only problem is, if the tenants do damage the property during the eviction process and the seller doesn't want to fix these damages, it's my understanding that my only legal course of action to have the property repaired back to it's normal state is to take the seller to court. At this point, I'd be facing legal fees as well as losing the $5,000 in due-diligence. 

The seller doesn't think the tenants would damage the property and he does have security deposits from both tenants.

Based on the information above, I have the following questions:

(1) Is anyone aware of an addendum that would require the seller to return the due-diligence money if he decides to not repair damages incurred by the tenants?

(2) Would I be better off closing on the property and handling the eviction process myself as opposed to putting $5,000 in due-diligence up?

(3) Does anyone have a better suggestion on how to handle this?

Thanks in advance for any feedback!

[James C.]

JR,

The cleanest way to handle (IMHO) this is to do the following:

Close the deal. As part of the closing, the seller signs an affidavit that can be used in court about the missing rents. Transfer security deposits from seller to buyer at closing as normal. If you want to ask the seller for eviction costs go ahead,  but I would take it out of security deposits.

Now for potential damages. Seller deposits $5k in escrow at closing to cover damages above and beyond the security deposits from evicting tenants. If there is no damage, the seller gets his 5k back. If there are damages, then the seller gets the leftover of the 5k (if any), plus the receipts to write off as a loss.

This means you have to do the eviction. If the seller was a jerk, he would say one of two things. Either 1) There are no security deposits and rent is up to date or 2) pay the rent out of his pocket. Either way, you would inherent bad tenants without knowing it, and you would end up in a worse situation.

I'd just chalk it up to doing business and not be so worried about it. No one likes to do evictions,  but just like pulling a bandaid off,  quicker is better. You could also negotiate that the seller pays for an attorney to do the eviction. 

Hope that helps.

Good luck!

[Matthew C.]

@JR Nieman  Just reading this post..  What ended up happening with this one?