Sometimes when you find the perfect property, there are already tenants living in that property. While inheriting tenants may seem like a dream come true (forget marketing and filling a vacancy), it can come with its own unique set of issues. Inheriting tenants can quickly become a nightmare if you don’t handle the process properly. Perhaps the people before you placed a qualified tenant, and perhaps they did not. Be prepared no matter what by taking the proper precautions. When you inherit tenants, put in action the following important tips.
Start With An Estoppel Certificate
One of the best ways to protect yourself when you inherit tenants is by doing the legwork before you finalize the purchase. An estoppel certificate is the number one way to protect yourself from preventable tenant issues. This single piece of paperwork will help you create a smoother transition as you take over a property.
What is an estoppel certificate?
An estoppel certificate is basically a piece of paperwork that states “everything is as it seems.” In the case of inheriting a tenant, this certificate refers to the current lease and the terms of the existing lease. The tenant signs off that they agree everything in the lease is as it seems and there are no additional terms agreed upon. This is the time when you will find out the following information:
- The lease dates (commencement and expiration)
- The date when rent is due
- The amount of rent
- Any deposit amounts
- If any modifications have been made to the lease
- If additional agreements have been made, a list of what those agreements are
An Estoppel Certificate In Action
A practical example of how an estoppel certificate works can be understood through the following example. Gary finds a duplex for sale and decides it is the perfect investment for his portfolio. The duplex is already occupied by two tenants. Gary reviews the leases that are in place and their rent amounts and decides everything looks up to his standards. Fast forward to the first month of collecting rent.
Tenant #1 pays Gary 75 percent of the rent amount. Confused, Gary inquires as to why the check is short. The tenant tells Gary that he had an agreement with the previous landlord that in exchange for yard upkeep and maintenance labor, he would get 25 percent of the rent knocked off his monthly bill. Gary had no idea this handshake agreement existed and now faces the dilemma of how to handle it going forward.
Tenant #2 pays their rent on time without any issue and comes to the end of their lease. At the time of move out, they leave the property in pristine condition. Gary provides them a full refund of their deposit. However, they then ask for their pet deposit back as well. Gary is puzzled as he didn’t even know they had a pet living at the property and he did not receive a pet deposit from the previous owner.
Both of these tricky situations could have been avoided if Gary had provided an estoppel certificate to both tenants before purchasing the property. When the tenants filled out the estoppel certificate, they would have had to either disclose the addendums, e.g. the handshake agreement and the approved pet, or they would have had to sign a legal document stating the original lease was binding. Either way, Gary wouldn’t have been stuck determining what to do with the extra agreements he was unaware of before purchasing the property.
Honor The Lease Conditions
When you inherit tenants it is important to not only have them sign an estoppel certificate, it is also important that you honor the conditions of the lease. You may not love the current lease conditions, but you are bound legally to abide by the lease until the date of expiration. At this point, you will have the chance to either renew and sign a new lease with existing tenants or give the proper legal notice that you will be ending their tenancy with you. If you decide to start over with new tenants at the end of their lease, it is time to begin marketing the property. Set up your own criteria for picking out a new tenant and determine what rent amount you will be requiring going forward. This is also a good time to make any improvements you want to the property and to write up a lease with the conditions you desire.
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