What To Do When You Buy An Investment with “Tenants in Place”.

When taking over a property be sure you know who the tenants are.

If you have followed this blog for a while, you know that I specialize in Residential Rental Real Estate and that we also provide Property Management Services.

REO/Bank Owned properties generally will give you possession at close of escrow without any existing tenants.   However, in many “short sale” situations,  you may inherit some existing tenants.

If you have just purchased your first investment with a “tenant in place”, you may or may not be lucky.    On the one hand, you won’t have the prospect of doing a “turn over” right away,  which can cost a couple thousand in painting, carpet replacement and clean up.  However, on the other hand,  you may wind up having problems with the existing tenants if you aren’t careful.

Ok then… what do you do to protect yourself…?

If you and your agent are using the California Association of Realtors Form, Residential Income Purchase Agreement (RIPA – revised on 4-10-2010), there are some great “due diligence clauses that pertain to “Rental/Investment” property.  Paragraphs 9. A. Rental/Service Agreements,  8. B. Income and Expense Statements and 8.C. Tenant/Estopple Certficates.

I am going to summarize them below.

Rental/Service Agreements – You won’t get these on a Bank Owned/REO in most cases because the property is vacant.   If the property is occupied, this paragraph requires that the Seller is to provide copies to you of all Rental and Service agreements.   These normally would not only include the Lease agreement, it would also include, the tenants’ payment history…   any rebates, the date of their tenancy, copies of service agreements,  such as a Landscaper’s Maintenance Agreement and copies of the water, sewer and garbage bills.

Income and Expense Statements You won’t get these on a Bank Owned/REO and rarely on a Short Sale.   They are either Bank Owned and they don’t have them anyway and on a Short Sale you won’t get much help from the Seller,  in most cases,  unless it’s been professionaly managed.

Tenant Estoppel Certificates –  These are important…!  These documents are filled out by the existing tenants and given to the Buyer.   These certificates will have information, according to records of the Tenant.  They will show what the rent is, what they said they paid for a deposit, if they were given any kind of “incentives” or “rebates”, who the original tenants were and who lives there now.   Any conflicts with the statements and records of the owner and the tenant should be resolved before the close of escrow.

Now while I’d love to have copies of the current tenant leases and service agrements, the income and expense statements, it’s  not a deal killer if you can’t get them.

Why…?   Because when we obtain “Tenant Estoppel Certificates”, these will sufice for a short time as enough information to allow you to take over the property until you get the tenants to sign a new lease/rental agreement,     Since we can’t get the Income and Expense statements, we’ll still get copies of all of the existing, water, sewer/storm drainage and garbage bills so we can have an idea of what our “fixed expenses” will be.   We will be able to figure out what the Real Estate Taxes will be (approximately 1.25% of the sales price) and we’ll obtain a quote from your Insurance Agent to find out what your annual Hazard Insurance will be.

What we won’t know will be the variable costs associated with maintenance and repairs.   To avoide unforseen issues, you should obtain a Termite Inspection, a Roof Inspection and Certification.  If the property is currently occupied the Tenants will tell us what doesn’t work.

With all that information, you should wind up with a good idea of what the condition of the property is.

Finally, I will say that even with all that information, something may come up that was unforseen inspite of your due diligence.  Hopefully, because you did exercise your “due diligence”, you will mitigate most problems so that they are small ones.

Make it a Great Day…!!!

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