Wednesday, May 11, 2011

Inheriting Tenants: To Boot or Not to Boot



I am working on a transaction right now for a family member who is purchasing a rental property.  I have agreed to manage the rental of the property while the owner continues to live out of state.

One of the caveats of property management is know what to do with tenants that you inherit from the previous owners of a property.  Unlike utilities, you cannot just stop service on a tenant that has a lease on the property.  The new owner is obligated to honor the existing lease, whatever that is, with the existing tenant.

In this particular case, the tenant is a relative of the seller.  There is also no written lease agreement.   We call this kind of circustance a Tenant At Will situation.  The law stipulates that the tenant is, in the absence of paperwork to demonstrate the contrary, on a month-to-month lease.  That is good because when we initiated the contract on the property, the listing agent gave notice to the tenant that they would need to vacate.  However, the tenant asked if we would be interested in renting to him moving forward.

There are a couple benefits to keeping an existing tenant:

1.  Any existing deferred maintenance (i.e. fresh paint, upgrades, ect.) and cleaning can be deferred to the end of the tenants desire/ability to rent the property.

2.  Rent revenues begin immediately.

This would seem on the surface like a win-win situation.  The tenant wants to stay and the owner would like to defer any cash expenses he might incur working to get the place rented.   

However, when the tenant called to discuss the situation our conversation went something like this:

Tenant:  Hi, I would like to stay.  It would be a real problem for me to move right now.

Me:  Ok, are you working?  How much do you make?

Tenant: Yes, I make $1600 a month.

Me: Ok, what do you pay in rent now?

Tenant: Well I havn't paid in a while...

Me:  Hmm...our rents would be around $550-$600...

Tenant: Oh we can do that, that will work for us.

Me: Ok, do you have any felonies on your record?

Tenant: Well, I do but it was in 2001.

Me: Ok, that is fine.  I believe in redemption so as long as you have a plan and are making your life better we should be just fine.

We then discussed the plan for me to get an application to him.  About an hour later I get a phone call again.

Tenant: So I just got off the phone with my attorney and I want to be totally honest with you.

Me: Uh, Ok

Tenant: Last month, I was really hungry and my girlfriend and kid were hungry so I put a sandwich in my pocket and walked out of the store.  They caught me so now we are trying to plead down to a misdemeanor.

Me: Hmmm.....

After discussing the situation with the buyer we determined that this tenant was much too high of a risk to rent to.  If he was truly employed like he said he was, stealing from local stores would not be necessary.  Also, paying rent to the current owners would not be a problem either.  We notified the tenant and the listing agent that we would not be continuing the lease and the tenant was to vacate prior to closing.

This story is not always the norm but property owners need to be prepared for these kinds of situations as they acquire new property.   

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