Beware of inherited tenants when buying new properties

Property Management Blog

Being an real estate investor, you are always on the lookout for properties that are in good condition and available at a price less than their market price. You are more interested in rental properties containing several units as more units mean more tenants and thus more rental income for you. In some cases, the owner sells the property along with tenants occupying units inside the property. In real estate parlance, such tenants are referred to as inherited tenants. Owners want to show you that you can start earning rental income right away after the purchase because of transfer of these tenants in your name.

You bear the burden of inherited tenants

However, you need to beware of inherited tenants when buying new properties. They can be a risky proposition for you in two different ways. Existing tenants in the rental property have already signed lease agreements with the previous owner of the property and these agreements remain in force till the end of their expiry. You remain bound by the terms of these lease agreements. Neither can you raise the monthly rents of your inherited tenants nor can you forcefully evict any of them. Change in ownership of the property means nothing to these existing tenants. They just continue paying their monthly rents to you now instead of the previous owner.

You are not sure about the quality of these tenants

Second and perhaps more important reason why you should stay away from properties containing inherited tenants is that you are not sure if they have passed a quality screening system. In any case, you know that you have not applied your own screening system on these tenants. Do you know about their criminal records or employment background? These are the reasons why there is no need to be impressed by a claim of 100% occupied property. What do you do even if 1-2 tenants turn out to be bad tenants? If they just refuse monthly rent payment, you can manage somehow but it becomes troublesome for you if they also cause damage to your property. You have no way of getting rid of rotten eggs until the expiry of their lease agreements.

What should you do in case of a property with inherited tenants? Well, the least you can do is to check individual lease agreements of all the existing tenants. However, it will only give you some peace of mind and not a solution to dealing with the bad tenants. The best way of avoiding this problem is to sign an estoppel agreement when buying a new property.

Estoppel agreement aims to prevent future claims made by tenants

Estoppel agreement prevents existing tenants form making a claim on the property once it has been purchased by someone. None of your tenants can say that he has paid a $10000 deposit to the earlier owner once you have signed estoppel agreement with him at the time of closing the deal.

Estoppel agreement should contain the names and details of each tenant living in the rental property. It should also spell out monthly rents of each tenant in addition to the amount paid in the form of security deposit. This document should also make it clear who owns the appliances and the fixtures so that no tenant makes claim on them later.

Good thing about estoppel agreement is that it is signed by each tenant living in the property along with the owner. After obtaining this document, you can live in peace as you know that no tenant can come up and say that he has paid 6 months’ rent in advance to the previous owner of the property.

If you’d like to talk more about property management, or you need help with Everest Property Management, please contact us at Everest Realty. 

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