WHY I DON'T BUY HOUSES WITH "TENANTS IN PLACE"Jul 01, 2019
This is a house I have under contract to buy in Huntsville (will be my first one there!)
I'm waiting for the tenant to move out before closing (I requested this of the seller because the tenant is a major hoarder and paying basically nothing, and usually that foreshadows an eviction if I were to "inherit" him).
I'm trying to stop buying houses with tenants already in place. It has a nice ring to it but rarely works out. A lot of time the owner will butter up the situation to you but secretly the tenant isn't paying or is causing problems (and that's why they want to sell it to you). I'd say that 75% of the time I inherit a tenant, it doesn't go well. I've had to do a handful of evictions on them, and it costs a lot of money (when you consider that you lose 3 months of rent on top of the attorney fees)
Furthermore, the houses I buy are usually rented for LESS than the market rate, and they need repairs. I want to go in and fix it up and rent it for the maximum (and I can't usually do the repair when the property is occupied, and the tenant rarely wants to pay a lot more than they have been).
Also, my property manager finds higher quality tenants than the ones I inherit, and feels more accountable when things go wrong (when the tenant was his choice versus something he was given). So all in all, I've found it's best to require the property be VACANT before you close on it.
This does present a bit of a tricky scenario...asking the seller to kick out the tenant...because how does he know if I'm serious (what if his tenant left and then I didn't close?)
That's a valid concern, and to appease it I'll usually offer a large non-refundable earnest money deposit. The contract will read something like "In the event that buyer does not uphold agreement of the contract he will pay seller $5,000" (I've even had to promise $10,000 before).
That amount would offset the losses that the owner had to face when finding a new tenant and missing out on rent for a few months. (As a side note, there's always a way to make a deal work, by adding contingencies and what not. Get used to asking "What WOULD make this deal work for you?" instead of just saying "That won't work")
Sometimes the seller isn't able to get the tenant to move out. In that situation I'll suggest that he try the "cash for keys" thing where he offers the tenant, say, $500, to be out by Friday and turn over the keys. That works at least 50% of the time, because the tenant thought they were about to lose their deposit, get evicted, and instead you're offering to PAY THEM to leave? It's a good deal for them. If a tenant actually gets evicted, it ruins their credit score, so you want to avoid it if you can.
So the next time you are about to buy a property with a tenant in place, STOP. Ask yourself if you really want to risk going through a 3 month eviction, and ask, instead, how you could structure this deal so the property is vacant when you buy it, so you can swiftly move towards making it cashflow.
To your freedom,