Tenants can sometimes make or break whether you buy or sell a property. They can make a property more attractive to investors, while also being a potential drawback for smaller single-family properties. No matter if you are a buyer or a seller, you should always be aware of the tenant’s legal rights and your potential options as a landlord. Read on to learn what you need to know to buy or sell a property with tenants.
What does the law say?
In any situation, property sales do NOT change the terms of tenant leases; after a sale, leases simply change over to the new owner. This means that you cannot legally increase the tenant’s rent, modify the rental agreement, or evict the tenant without legally sound cause. All buyers must honor the existing rental agreements that are in place when they purchase a property. Therefore, if you are the buyer, make sure you know the current lease terms, so that you do not inherit the previous landlord’s mistakes.
Buyers may have the opportunity to get rid of problem tenants before purchasing a property by making the purchase contingent on the property’s vacancies. In this case, the seller is responsible for figuring out how to remove the current tenant; property sellers may break the lese or offer a financial incentive to their tenant(s) to get them out. There is also the chance that the tenant has a specific clause in their rental agreement that states that if the property is sold, the owner can legally terminate the lease. If this clause is incorporated into the tenant’s rental agreement, sellers can legally have the lease terminated when the property is transferred to the buyer.
Buyers can also try to remove a tenant after purchasing a property by breaking the current tenant’s lease or offering them a monetary incentive to move out. However, buyers should remember that the tenant is not legally obligated to leave the property and be careful of opening themselves up to a potential lawsuit.
The law also specifies that whoever currently owns the property is responsible for making sure the property is habitable. Buyers immediately take on this responsibility upon closing. If you are a buyer, be aware that you are responsible for making sure common areas are safe and clean; all structural elements are safe and intact; all electrical, plumbing, heating, air conditioning, and ventilation systems are maintained; tenants have access to running water, hot water, and heat; and all potential vermin infestations are promptly taken care of.
Lastly, if a property is purchased as a result of a foreclosure, state laws will often allow the buyer to legally terminate a tenant’s rental agreement. If you are a buyer of a foreclosure, you will most likely have to provide tenants with two months’ notice to vacate the property. Make sure to check state laws for specifics.
Buying best practices
Buying a new rental property can be an exciting venture; however, you should never let the excitement blind you from the potentially hidden pitfalls. Make sure to collect as much documentation as possible. Get records for prepaid rent and security deposits and obtain this money from the seller. This will keep tenants from claiming they paid for something before you purchased the property. You should also secure documentation regarding the condition of the property before the tenant moved in, so that you can prove that the tenant was responsible for any damaging you may find later.
Before purchasing a property, review its income and expense statements for the past two years in order to identify the tenants who have and haven’t been paying their rent. If you notice that there are many tenants who have a history of late payments and non-payments, it may be time to search for a different property to purchase.
If you review the income and expense statements and verify that there are no bad apples, a property with tenants might be a smarter investment than a vacant property. With rental agreements already in place, you will have access to instant cash flow without having to find and screen new tenants. Should you elect to purchase a property with tenants already in place, use an estoppel agreement to cover yourself legally and introduce yourself to your future tenants.
An estoppel agreement is a one-page legal document that reiterates the terms of the current rental agreement. The document usually includes: names of tenants and occupants, lease start and end dates, rental payment amount and due date, security deposit amount, which appliances are the tenant’s, and any special agreements. The estoppel agreement legally protects you from existing tenants claiming something against you after the deal has closed. However, it can also be the perfect way to introduce yourself to the tenants as their new landlord. If you get permission from the current owner, you can use the estoppel agreement process to introduce yourself to the current tenants, let them know that you are buying the property, and reassure them that their lease is still in effect.
When you visit your new tenants, you should also provide them with information packets that give them your contact information, emergency contact information, instructions on how to submit maintenance and repair requests, and an explanation of how, when, and where the tenants will pay their rent.
Selling property with tenants – best practices
You have two options when it comes to selling a property with tenants.
1. Wait for the lease to expire
Choosing to hold off on selling until your current leases expire gives you the opportunity to clean, repair, and renovate a property before listing it, which will likely allow you to increase your sale price and profit potential. It will also make your closing quicker and more efficient since you will not have to worry about removing your tenants should the sale be contingent on the property being vacant. However, if you choose to wait until the rental agreements expire, you may lose money while waiting for a buying without any rental income.
You may also be able to terminate a rental agreement before the year date if your tenants are guilty of breaking their rental agreement. If your tenants are guilty of the following, you may be legally permitted to serve them with an eviction notice: late rent payments or non-payments; causing severe damage to the property; or breaking additional rules in the rental contract, such as no pets. Although this is a viable option for removing your tenants, you should never use this approach if you do not have valid cause to do so. A lawsuit will likely follow if you evict your tenants without good reason.
2. Sell with tenants still in the property
A property with tenants already in place may be attractive to potential buyers since an income stream is already in place. You may be able to increase your sale price if this income is significant. Current tenants also provide you with staging free of cost; buyers will be able to see exactly what the property will look like with inhabitants. Be aware that this may not be a good option for you if your tenants are unpredictable and unreliable. It will be difficult to show the property if you cannot fully rely on your tenants to be prepared for visitors. Unpredictable tenants will inevitably lead to unpredictable showings.
Should you decide to list your property while your tenants are still there, it may be prudent to offer them a lower rent in exchange for their cooperation while you show the property. Be creative with your incentives in order to make sure that they work with you during the selling process. Other incentives include offering flexible move-out dates, reimbursing moving costs, or purchasing upgraded appliance or furniture while they are still in the unit.
Remember that your tenants may be wary of changing landlords and rental agreements, so you should always keep them as informed as possible. Give your tenants notice when your property is listed and provide them with the necessary details if you plan on showing their unit to potential buyers. Let them know how much notice you will be able to give them before showings and clearly communicate the condition you expect the dwelling to be in when you show it.
In the case that you are selling a small, single-family property, you should always offer your tenants a chance to buy before publicly listing the property. This will give your tenant the opportunity to stay if they love the home and will show them that you respect them as your tenant. To ensure neither you, nor your tenant gets burned, make sure to work with a real estate attorney.
The bottom line
Although buying and selling a house with tenants can be potentially difficult, it can financially benefit both the buyer and the seller. Navigate the various pitfalls by being aware of all applicable laws and working with a landlord tenant lawyer or a real estate lawyer. The last thing you want is to encounter legal trouble right upon closing on a property. Be courteous and mindful to your tenants, and always work with them if possible.