Dealing With Inherited Tenants

Inherited tenants are the folks you acquire with a dedicated rental property.

Picking up a property that already has rent paying tenants in place often sounds like the perfect solution for a new or busy landlord, but it comes with it’s own unique set of challenges.

The first question that always pops into my mind with this scenario is “If these tenants are so great, why is the owner selling?”.

Buying Other People’s Problems

Granted, there may be many valid reasons a landlord is selling a property, but typically it’s because they are burnt out or the tenants have worn them out. It never hurts to go into the situation with this mindset as it’s always better to be cautious to start rather than simply jumping in and learning expensive lessons as you go.

By buying the property you’re potentially shouldering that burden of a bad tenant or bad situation and hoping you can outlast someone else’s problems.

Now I don’t know about you, but I typically have enough of my own problems. So why would I want to inherit someone else’s?

That’s why I insist on vacant possession whenever possible, but if you’re reading this maybe it’s too late. Or maybe you’re looking for options or simply how to protect yourself.

So let’s break down the steps.

Tenant Diligence BEFORE You Buy

Before you commit to any purchase you need to do your diligence. You need to make sure the rental property is worth what it’s said to be and that it will earn what it’s supposed to earn.

That will require an appraisal on the property and an appraisal of the tenants and all their paperwork. Unfortunately while you can hire an appraisor, it’s a bit tougher to hire someone to analyze or dredge up the tenant info.

That’s going to fall on you.

The important parts of this will be all of the leases, walk through forms, deposit forms and any back end deals the landlord may have made.

Leases are clear enough as are walk through forms and being able to confirm deposits, but the back end deals are the scary ones. And are often not brought up by the current landlord, but miraculously appear after the fact.

Stuff like free lawn care that no one mentioned, or a guarantee they get all their security deposit back. You know, fun little pacts made to keep the tenant happy like free parking or the ability to sublet, but not things that necessarily fun little pacts for you.

To complete this kind of diligence as part of your offer to purchase you not only need a clause requiring all leases, walk throughs, deposits info etcetera, you also need to confirm it with the tenant and have them sign off to verify it.

You Have To Talk To The Tenant

If you’re inheriting them, you better make sure you either have a plan to work with them, or a plan to get them out. That involves talking to them.

By talking to them you can verify what they are paying, what their deposit was, any leases currently in place and inquire whether there are any side deals going on.

The worst situation you can run into is when you discover there is no paperwork. It’s all verbal

When you run into this and you haven’t committed to the purchase yet, you still have leverage and you need to apply it.

If you simply commit hoping to figure it out after the fact you may quickly discover why the original landlord was selling in the first place…

Using Your Leverage

One way to use your leverage is to change the rules to suit you.

Some of this can come down to how desperately you want the property, but if you’re that desperate you may be setting yourself up for failure so be cautious.

Big picture you want to verify everything and have it on paper, so if there is no paperwork in place maybe your offer, or amended offer, includes the current landlord having a signed lease in place with accompanying paperwork outlining everything else in place as well.

Or alternatively, if they don’t want to do that you can insist on vacant possession. If you’re aware there isn’t lease paperwork when you initially make the offer you can even use this opportunity to put a double offer in.

One offer with a slightly higher price and perhaps more favourable terms for vacant possession, and a second offer that’s lower and maybe closes a bit later if you are forced to inherit the tenants.

After all, if you’re inheriting someone else’s problems shouldn’t you get a discount for the hassle?

If You Have No Leverage Or It’s Too Late

Sometimes we discover after the fact we’ve made a mistake or we simply lost our opportunity to use our leverage.

In that case it requires you have a very good understanding of the local landlord tenant laws!

You may need to understand all your options for getting that tenant out whether it’s simply not renewing a lease, whether you can evict them without cause or what causes you need to evict them.

Cash For Keys

Worst case you need to potentially buy them out of the property or as it’s called offer cash for keys.

This is where you have to decide how painful these tenants may be. The amount of pain then gets translated to a dollar amount and an offer to them of that amount if they vacate.

Maybe it’s free rent for a month plus you cover the security deposit on their new place. Maybe it’s just $500 if they vacate at the end of the month.

You need to decide what will be fastest and least painful for you. If an eviction costs $1,000 and it could involve two or three months of not receiving any rent paying the tenant $2,000 could be a huge win.

You simply want to make sure you do what is bets for you and the property to succeed.

Or It Could All Work Out

All this worry may be for naught. You may simply be looking at a property where the landlord has had a great run and the landlord is ready to pass the opportunity on to the next lucky landlord.

And if that’s the case lucky you.

Either way, you still need to check all that paperwork simply to reduce your risks.

Being a landlord is often about risk management. The fewer risks you take, like fewer bad tenants, fewer bad properties, the longer you will last.

So hopefully it all works out! If you have a story about inheriting great tenants tell us about it below, or if you have a sorry about inheriting bad tenants share it to help warn others!