Investors often find properties with good potential, but the tenants are a major issue.
The current owner has not managed the property professionally. They haven’t screened the tenants properly or at all. And they are selling the house because of the major issues they created with the existing tenants. Rent is not paid. If they paid rent, the amount would be half what is currently being charged.
Landscape maintenance has not been done for many decades. The carpet has been vacuumed last in Richard Nixon’s presidency, but there is so much stuff that it is piled from floor to ceiling.
It’s on paper a great deal. The numbers might work, but who wants to mess with it?
Someone Else’s Problem Can Be Your Opportunity
Maybe you are right. We get paid in real estate to solve problems. You can make a lot of money by solving the neglected property and the tenant problem.
They will pay for you to handle the problem. In fact, you’ll be paid to deal with the problems because they directly affect the marketability but not the value of the home.
You can help. In most cases an owner-occupant will either not be able to or won’t purchase a property with a tenant already in place. This eliminates 90 percent of your competitors.
As a long-term investor you may not be able to keep the same tenant for a very long time, but your returns could continue indefinitely. Investors should not miss out on these opportunities. They can help build equity, and create a profitable portfolio.
Four terms to include in your offer
You need to act quickly to underwrite these transactions and make an offer. You must be familiar with all the laws governing landlord and tenant in your region, as well as the lease that is currently in place. This will help you to understand how you can handle the situation when you become the owner of the property. You’ll want to hire a knowledgeable agent with a support team if you aren’t confident in these areas.
You’ll want to make sure that you include in your offer terms that pertain to the existing lease, tenant, property condition and the ability of you to perform due diligence. The boilerplate language will differ by market but we use it in all offers for properties with an established tenant.
1. At the end of the escrow, all fees, deposits and prorated rents must be paid directly to the property manager.
The BiggerPockets forum is flooded with new investor posts who have just closed or are closing on an investment property and are trying to determine who holds the deposit, and when they will receive it. The deposit technically belongs to the tenant, but the landlord is required to keep it in an escrow account. It doesn’t stop people from trying, after the transaction is closed, to keep those funds and prorated rents. Do not give them this opportunity.
2. The seller must provide all leases, addendums to leases/tenant documents and any other documentation related to leases or tenants within 3 business days after acceptance. Sellers’ preliminary due diligence shall not commence until this documentation has been received.
Estoppel is not a bad thing, but I want these documents and don’t want to waste any of my due diligence time waiting for them. Estoppel may not be a bad idea, but I need these documents and don’t wish to spend my time on due diligence waiting.
3. Within three days after acceptance, the buyer must perform a satisfactory walkthrough of each unit.
Most sellers in my area won’t allow you to view the property if there isn’t an accepted offer. I therefore want all my (and my clients’) offers contingent on them allowing us access as soon as possible. We can then get an idea of the condition of the property before paying for an inspection. The inspection is always scheduled for the next day and we cancel it immediately if the contract ends based on our informal walkthrough.
4. The seller will not amend, extend or alter any existing lease agreement or sign any new lease agreement before the closing of the escrow, without written consent from the buyer.
This is a lesson I had to learn the hard way. A long-term renter was paying a lot less than market value. I managed to get a contract on a house for under the market price. All of my contingencies were over by the week before closing, so the seller emailed me a new lease with the previous rate.
It was a bad deal. The deal was good, but it cost me an extra $5,000 or so. This cost me another $5,000. This contract term would have saved us money.
Other Considerations
This will protect the buyer, and allow them to fully understand their purchase before paying for an appraisal or inspection. You want to make sure that you do your due diligence before handing over money.
In some states verbal agreements are binding. Thankfully, they are not in Idaho. I have never dealt with this issue. If a seller or tenant wanted to say that there was a verbal contract, it could be a very interesting situation.
When using these strategies, you should also consider how friendly your state is to landlords. In a state that is very friendly to landlords, it can be difficult and expensive to get a tenant who has a bad attitude out. Book a consultation to get an idea of the investment. Your favorite REI lawyer should have a better understanding. These numbers can be factored into your budget.
This would be less an issue if you live in a state that is more friendly to landlords. It can take anywhere from three to six months depending on how the tenant reacts and the type of eviction. When you buy to keep forever, this is not an issue.
Cash for keys is the most common way to begin. This method will likely result in a better response from your tenant. It can also shorten the timeline and save you money. A few dollars put in the pocket of tenants will help them get a new start. If you are able to work out a solution, it is usually a better option for everyone.
The Bottom Line
Do not be scared away by bad tenants and low rents. Real estate investors make money by solving issues that others don’t wish to solve. Many people are concerned about tenants and personal issues. You can make a lot of money if you enter into those transactions with an open mind.