There’s nothing better than finding what seems to be a great real estate investment opportunity, and once you get a property under contract the excitement sets in, that excitement can quickly go to the wayside if you’re not prepared for the issues that could come up.
Having been party to hundreds of real estate deals from being an agent and an investor, I’m pretty prepared for when things go wrong, because they always do.
Getting a property under contract is really just the first step and what comes next is what determines if a property is a good deal or not. So I wanted to share the most common issues that I see after a property goes under contract, and offer some solutions on how to handle those issues.
There are usually two reasons why a seller decides to sell an investment property 1) They want to take the cash and re-invest it into another property 2) They are tired of being a landlord and don’t want to deal with it anymore.
In my experience, the best deals have been when a seller is tired of being a landlord, and wants to move on. These sellers often self manage or have hired a bad property manager (which could be the cause of their issue). These types of sellers tend to have little to no paperwork to provide to the buyer.
I’d say 35-40% of the deals I’ve been a part of did not have lease agreements.
So what do you do if you’ve gotten a property under contract and found out that the seller did not have written lease agreements?
First I would get them to make that statement in writing that there are no written lease agreements and to state the amount (and show proof) of the rent that is being paid, you don’t want a tenant pulling out a long term lease after closing that you’d be stuck with (this actually happened to me).
An alternative option would be to get the seller to sign month to month leases with the tenants and provide those to you, which would be assumed upon closing.
Next thing would be to decide if you want to keep the existing tenants or not. In most areas when there is an occupant with no lease it is considered an implied tenancy (also referred to as tenancy at will) which usually requires a 20 day notice to terminate tenancy, to be given by the 10th of the month.
Bottom line: No leases is not a big deal, and in some cases is much better than a long term lease at a low rental rate
The most common paperwork related issue I come across is when the seller has lease agreements and has collected security deposits, but did not do a move in condition checklist before the tenant moved in.
In Washington State it is actually a violation of landlord tenant law for a landlord to collect and hold a security deposit without having done a move in condition checklist with the tenant. I imagine most areas have similar rules.
If this is the case the tenant can do as much damage as one can do and not be charged for it, since there are no records of the condition prior to move in and the entire security deposit must be returned.
When this has happened I have almost always requested a credit or reduced price from the seller, or I’ve had them remove the tenants prior to closing.
An alternative solution would be to do a move in checklist with the tenants upon closing and collect the deposit from the seller so that you’re not violating any rules, but you would not be able to hold back any part of the deposit for “old damage”.
Bottom line: If the units are in good condition and the seller is willing to give a concession for their error, it’s not that big of a deal.
It’s common for agents who list investment properties to make the statement “tenants pay all utilities”, and what I’ve found is that they’re saying that tenants pay for utilities such as power and gas but usually not water, sewer and garbage which can be the expensive ones.
I always try to verify this expensive detail before I submit an offer so that I can add that expense to my property analysis excel calculator, though more than once I’ve been told that tenants did in fact pay ALL utilities to later find out that the owner was still paying water/sewer/garbage.
Multi-family properties that only have one water meter is tough because most utility companies require it to stay in the owners name and it’s up to the owner to split it up or ask for reimbursement.
So what do you do if you’ve been lead to believe that tenants pay all utilities only to find out that it’s not that case? Ask for a price reduction, at a minimum ask for a full years worth of owner paid utility bills off the price.
Also, discuss with your property manager to see if the market would support billing back for water/sewer/garbage or about adding a flat fee to the rent, which is what I do.
I have two duplexes with one water meter that I have to pay. So I asked for a years worth of bills, rounded up and then divided that number by 12 to get the monthly reimbursement amount, and then divide that between both units. It’s usually around $60-$75 per month so I just tell new tenants to include that fee with their monthly rent (paid online via Apartments.com (formally Cozy))
Bottom line: If the utility bills are substantial, the market does not support billing back to tenants and the return on investment no longer meets your criteria then you may need to pass on this property and find another.
If it’s still a great deal with the utility bills being account for in the expenses, then get that price reduction and move forward.
The whole point of doing a home inspection is to make sure that all of the major systems and structure of the buildings are in good shape. Every home inspection will disclose items to address, the inspectors are required to do so.
But what happens when you find major issues like standing water in the crawlspace, mold in the attic or major electrical or plumbing issues?
The first thing I would do is start renegotiating with the seller. Keep in mind the seller is now at a point where they are thinking about spending the funds from the sale, so they do want to sell and it’s in their best interest to work with you since any other buyer would find what you’ve found.
A great agent will be able to explain the situation and negotiate a workable solution. It may be that the best solution is for the seller to hire a contractor to repair prior to closing, another option would be to have the seller discount the price and handle the repairs yourself, which is what I did when I found standing water in the crawlspace in my duplex in Indiana along with mold in the attic.
Bottom line: If there are major issues it’s okay to ask the seller to make repairs or concessions. If they are not willing to come to a solution that makes financial sense then move on.
This happens ALL THE TIME. I’m still not sure how it’s possible to list a property for sale and advertise the wrong rents but nothing surprises me anymore.
Best possible solution is to ask for a price reduction for the error, most of the time it’s worked.
Where it’s a bigger issue is when the rents are much lower than advertised and the lease term has a long time left to go. This type of situation would require a much bigger price reduction.
Bottom line: It’s annoying but not that big of a deal, especially if you plan on moving in new tenants anyway.
As you can tell, I’m willing to put up with a lot for a good deal and I think it is worth dealing with issues to get a great property. As competition for high cash flowing rental properties increases, those who are willing to work with more out of the box situations will benefit!