You have been on the hunt for the perfect property. Finally, you find a duplex up for sale in the neighborhood you want to invest in and at the price you are willing to pay. The only catch, the duplex already comes with two tenants. While inheriting tenants may seem like an easy set up that lets you bypass the pain of marketing the property and filling vacancies, the reality is that inheriting tenants doesn’t always go well. If the previous owners were excellent landlords and property managers, then you may get lucky and inherit excellent tenants. However, it is often the case that you inherit problem tenants or simply walk into a situation far more complex than you anticipated. If you are going to inherit tenants, there are a few key things you should do to guard yourself against major problems down the road. Check out these helpful tips on the best way to handle inheriting tenants.
Prevent Misunderstandings With A Tenant Estoppel Certificate
Doing your work before you finalize a property purchase will save you countless headaches when it comes to inheriting tenants. One of the best methods for preventing a catastrophe with inherited tenants is to request a tenant estoppel certificate. This piece of paperwork can help create a smooth transition from one landlord to another.
An estoppel certificate essentially states that everything is as it seems. In this case, the estoppel refers to the current lease and terms within that lease. A tenant has the chance to sign off on whether or not the current lease reflects the right terms, such as how much rent is, when rent is due, and any other important conditions.
Usually, a tenant estoppel certificate will include the following:
- Lease dates, both commencement and expiration
- Date when rent is due as well as the base amount
- The amount of the security deposit
- Any other deposit amounts
- A verification of the current lease terms and whether or not modifications have been made
- If modifications do exist, what they are
The following example demonstrates why a tenant estoppel certificate is critical:
Mary finds a duplex for sale and decides it is the perfect fit for her investment portfolio. She plans to rent out both units and is pleased to discover both units are already occupied. During the purchasing process, she is given copies of the tenant’s leases. The leases appear to be fine by her standards and the monthly rent amounts will provide an adequate cash flow for the investment.
Mary moves forward with the purchase and inherits two tenants. The first due date for rent comes around, and to Mary’s surprise, one of the tenants only pays her half the amount due. Inquiring into the situation, Mary is told by the tenant that the previous landlord had worked out a deal where in exchange for handyman labor and landscaping work, rent costs would be cut in half. Mary is obviously unhappy with the situation and now faces the dilemma of whether she should abide by the lease or by the word-of-mouth agreement.
Meanwhile, tenant #2 pays rent on time but has reached the end of their lease. Upon move-out, Mary finds out that the tenant had a dog, which was not mentioned in the lease. The property is in good condition, so Mary decides to let it go and refunds the full deposit to the tenant. However, the tenant informs Mary that a second deposit had been given to the previous landlord for the agreement to allow the tenant’s dog to live on property. Tenant #2 demands the other half of their deposit, money Mary never received from the previous owner.
This is only one example of how quickly things can go awry if a tenant estoppel is not signed. If instead, Mary had requested tenant estoppel certificates, she could have found out up front about the extra negotiations made with the existing tenants.
If you discover during this process that there are more stipulations than you bargained on, you can use it during the negotiation process to lower the price of the property. It is far better to go into the deal with eyes wide open than to blindly inherit tenants.
Honoring Their Lease
When you inherit tenants you will need to honor their existing lease and, unless they violate their lease, you will keep the tenants until the end of their lease. At this point, you can choose to renew with them if they have proven to be good tenants, or you can end the lease with them and market the property to find new tenants.
Remember, while you may not like the lease or tenants you inherit, you have to abide by the lease terms until the lease is over. This is why it is important to do your research ahead of time. Most tenant inheritance problems derive from a lack of upfront work.
Filling Vacant Units After Turnover
Eventually, if the time comes that tenants you inherited move on, you will need to switch your focus to filling the vacant unit. Prepare ahead by finding the tools you will need. Utilize our free landlord software to market your property online, accept online rental applications, and screen tenants.