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When considering buying a property with existing tenants, it's crucial not to overlook certain terms. Often, as investors, we encounter seemingly good deals, but a significant problem arises: the current tenants.
It becomes evident that the property's current owner isn't managing things professionally, possibly neglecting tenant screening and selling due to issues with the occupants. They may not be paying rent, and even if they are, it's well below market rates. The property itself might be in poor condition, with neglected landscaping and years of accumulated clutter.
While the property might make sense on paper, the mess associated with it can be a deterrent. However, this challenging situation can actually be a lucrative opportunity in real estate. Tired and inefficient landlords are willing to sell these properties at a discount to avoid dealing with the problems they've created.
As a buyer, you can capitalize on this situation, especially if you're a buy-and-hold investor. Most owner-occupants won't consider purchasing a property with an existing tenant, giving you a competitive advantage.
To seize these opportunities, it's essential to include specific terms in your offer. These terms should address the current lease, tenant details, property condition, and your ability to conduct due diligence. Here are four key terms to include:
1. Directly transfer all fees, deposits, and prorated rents to the buyer's property manager at the close of escrow to avoid post-closing confusion about deposit ownership.
2. Require the seller to provide current leases and relevant documentation within three business days of acceptance, ensuring you have a clear understanding of existing agreements.
3. Include a clause allowing you to perform a satisfactory walk-through of all occupied units within three business days of acceptance, providing an opportunity to assess the property's condition before committing to a professional inspection.
4. Specify that the seller cannot extend, alter, or amend any current lease agreements without the buyer's written agreement before the close of escrow, preventing unexpected changes that could affect the deal's profitability.
These terms aim to protect the buyer, offering time for thorough due diligence before committing to significant expenses like inspections or appraisals. It's also crucial to consider local landlord-tenant laws and market conditions when navigating these deals. Additionally, be aware of verbal lease agreements and the landlord-friendliness of your state, as these factors can influence the ease of dealing with tenants and potential legal challenges.
In summary, don't let the challenges of bad tenants or low rents deter you. Real estate investors thrive by solving problems others avoid. If you approach these deals with careful consideration and a clear understanding of the associated challenges, you can turn them into profitable opportunities.