Re: Purchasing leased property


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Posted by Christine Baker on July 25, 1997 at 12:33:39:

In Reply to: Purchasing leased property posted by Reader on July 24, 1997 at 20:56:49:

Originally posted by Christine Baker on June 20, 1997 at 16:00:24:

In Reply to: Taking over a lease posted by Reader on June 18, 1997 at
16:37:35:

: I am considering purchasing a duplex that has both
: units leased to tenants until Jan. '98. Rents are
: below market and the house has been neglected and is
: in need of a lot of repairs. It will be difficult to
: have the repairs done with the tenants occupying it.
: If I buy the house, am I legally obligated to take over
: the lease, or can I give the tenants a 30 day notice?

You didn't mention what STATE and CITY you are planning to purchase in and the laws vary by location.

Generally speaking, yes, you are bound by the leases. That's what a lease is for. So the tenants know how much they'll pay for what term.

I recommend you get copies of the leases, any existing inspection reports and the sellers' Disclosures (in some States.)

The obligatory advice I have to give you is to have a competent attorney review the leases and explain to you all possible problems, cost of eviction etc.

I recently called the local Rent Board and after I identified myself as the property owner they gave me the Lawyer Referral number. So I had a friend call back who identified himself as tenant, and he got me the answer. I have seen too many lawyers give out wrong information, so I try to get my answers from more reliable sources.

You'll have to be sure the seller credits the security deposit to you in escrow and that the rents are prorated properly. In some States the tenants and the seller have to complete a questionnaire.

I've heard of dead beat tenants who hadn't paid rent in a long time, and the owner got tired of the hassle and sold the property. The seller didn't mention to the buyer that the rents weren't current, as the buyer would most likely not have wanted to purchase. The buyer never got a penny in rent from these tenants and instead incurred a lot of costs paying for a lengthy eviction.

I don't think I'd ever close on a property while it is tenant occupied unless I'm purchasing to own RENTAL property. The possibility of lots of problems and more repairs costing much more than expected is too much of a risk for my taste.

Personally, I would talk to the seller, the tenants and the neighbors and try to get as much information as possible.

The tenants can be a great source of information about the property and the seller. Often tenants have been abused by ignorant and obnoxious real estate agents. Many times tenants are not given the required 24 hour notice prior to showing the property or agents don't call to cancel appointments. So don't expect them to be thrilled to see you and to talk to you.

Treat the tenants with respect, establish a friendly relationship with all parties. Remember that EVERYTHING is negotiable, including the tenants' leases. Once the tenants realize that they have to move sooner or later, they might be very willing to move out early. Obviously, the amount of compensation and the type of compensation is negotiable.

You could submit an offer contingent on the seller obtaining lease modifications or you could negotiate with the tenants directly (after you have an accepted offer, subject to your ability to obtain the lease modifications.)

I had Clients in San Jose, Cal, who bought a rental house early this year at about 10% BELOW market value while other properties received multiple offers above asking price. The reasons were that the listing agent was incompetent, my Clients' agent was very aggressive, and the other agents did not show the rental even though it was in the MLS. They were too lazy to deal with tenants (no lockbox.) The tenants moved out prior to closing and the seller paid for quite a bit of work to obtain the termite clearance. It took many hours to close that deal, the buyers' time, their agent's time, my time.

To find out whether "your" property is a great deal or your worst nightmare you'll have to do the research. You'll have to invest a lot of time and you'll have to decide how far to take it. It's definitely a lot easier to buy an owner occupied or vacant home.

And don't forget that a duplex CANNOT be compared to single family homes to establish market value. Many buyers erroneously think that a duplex is more valuable than a single family house.

Good luck!

Christine Baker


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