When you buy an investment property, sometimes it will come with tenants already in place. These tenants can be a good thing as your new purchase will be immediately generating income. But, these tenants can also be a bad thing because you really have no idea how they were screened, how they have been as tenants or even what the details of their lease are. You can of course review existing written lease agreements, but there are landlords and tenants out there who have nothing more than a verbal agreement. There is no written lease to review.
So what you might ask.
Well, here is the thing with inherited tenants, you are stuck with them. The existing lease, even if verbal, cannot be changed by you just because you have bought the building. Your purchase does not in any way, shape or form alter the lease agreements the tenants currently have in place. You can’t raise the rent. You can’t just evict them. You can’t add rules. You can ask them to sign a new lease. You can offer to pay them to do so, but they do not have to. As I said, you are stuck with them. Stuck with them until the term of their lease is up.
Not a good place to be, especially if you have no idea what unwritten agreements might be hiding out there.
So how do you, as a landlord who wants to add the property to your portfolio, protect yourself? How do you determine what the current lease terms and conditions are?
One way is to ask to review the current leases. But what if there is no written lease? Or, what if the selling landlord is just making stuff up? It happens!
One of the best ways to protect your interests is to use an estoppel agreement. This agreement, which spells out the existing lease terms, is filled out and signed by both the tenant and the selling landlord. An estoppel agreement is a simple one page form that asks some very basic questions regarding a tenant’s living arrangements. Questions such as:
- What is the term of your lease?
- Who is listed on the lease?
- How much is the monthly rent?
- Do you pay any utilities?
- How much is your security deposit?
- Do you own any appliances in the apartment?
- Are you current on your rent payments?
- Are there any repairs that need to be made?
- Do you have any other arrangements with your current landlord?
By getting this form filled out by the tenants you are about to inherit and the landlord you are buying the property from, you will have a legal piece of paper that will offer you some protection going forward.
How?
If a tenant later claims that his verbal lease was for a year and that you can’t ask him to leave you can point to the estoppel agreement that he signed stating that he was on a month to month term.
Or,
If when the tenant moves he claims that his security deposit was $5,000 and that he owns the appliances, you can again refer back to the estoppel agreement to determine if that is indeed the case (If it is the case when you review the agreement before closing you may want to renegotiate the purchase price.)
The estoppel agreement is a very important piece of paper to get completed when buying any property that has existing tenants. Use it every time and make the completion of this agreement a part of your purchase and sale contract. In fact, I think this document is so important I want to make it easy for you to use. So please follow this link to my Smarter Resources Page to download the estoppel agreement form that I use and protect your future buying interests.
We will pass this on to our property owner as we found some great tips here to share.