Are you purchasing an occupied investment property? Before signing on the bottom line, your first priority is to determine the legal occupancy status of everyone residing there. Do not make the mistake of relying on a seller’s verbal promises on this one, as occupancy issues can drag on for months, or even years—and mounting legal and holding costs can significantly impact your ROI.
Prior to taking ownership of an occupied investment property, if there is a signed lease agreement, be sure to obtain copies. If you plan to ask current tenants to relocate now, or in the future, you should devise a fair and timely exit strategy for them in advance. Of course, another option is for the tenant to remain in the home under mutually agreed upon terms.
Either way, you should know the answer to these 4 critical questions before closing on an occupied investment property:
1. Is the occupant in the home legally?
If the investment property you are buying is occupied by persons who do not have legal permission to be there, you may be able to ask local law enforcement for help removing them from the property. Be aware that in some states even illegal tenants may have some “squatter’s rights” depending on how long they have been living in the home. An eviction can cost upwards of $5,000, so offering a cash incentive to entice the occupants to leave without eviction may be your best option. If squatters have taken up residency and will not leave when asked (or when offered “cash for keys”), you will likely need to consult an eviction attorney and begin legal proceedings when you become the property's legal owner.
You may have heard that shutting off utilities or removing exterior doors is an effective way to force squatters to move, but these extreme measures may open you up to costly legal liability, so do consult an attorney before proceeding.
2. Is there a signed lease in effect?
If the occupants are legal tenants who contracted with the seller to live there, ask the seller if there is a signed lease currently in effect, or if there is a signed month-to-month agreement. When purchasing an occupied property, in most cases you will be taking on all of the prior owner's legal obligations and lease terms. If the current occupant did sign a lease, it is likely that you will be obligated by law to allow them to remain in the home until the term of that lease expires. Of course, you can also negotiate with the current tenant to end the lease early if they are willing to move.
If there is no lease in place, but the tenant has been paying rent month-to-month, you can serve a 30-day notice to vacate when you become the property's legal owner.
In either case, offering "cash for keys" to occupants is often the most effective way to entice them to relocate quickly. Once all occupants have left your property, do change the locks immediately and transfer utilities into your name or the name of your company.
3. Did the tenant pay a security deposit?
If the current owner received a security deposit from the tenant, any amounts currently held should transfer to your account at closing. When the tenant leaves the property, you will be responsible for returning their deposit (or possibly some portion of it) to them.
4. Is the tenant aware of the property sale?
Ask the property owner if the tenant has been given legal notice of the impending sale. Has the tenant already begun the process of moving out? If not, once your name has been recorded on the deed, visit the property and introduce yourself as the new owner. If you are comfortable approaching the tenant directly (and if you have good people skills), establish a positive relationship with them if you can, and discuss an exit strategy that will get the occupants to comply quickly and without the need for legal interventions. If you are not skilled at negotiating in situations like this, consider hiring a real estate agent, or have someone from your team who is good at negotiating meet with the occupants to discuss their options.
Good communication produces positive outcomes
As the new property owner, you may have the legal right to demand that occupants vacate, but keep in mind that being forced to find and move to a new home is a hardship most tenants would find difficult and costly—if not offensive. An offended tenant can become resistant to negotiation. You do not want them to stop rent payments, drag their relocation out for months or years, or vandalize your property before they leave, so do keep things as positive as possible in the interim.
NOTE: The contents of this blog post do not constitute legal advice. When evicting tenants, you must follow state and local laws by providing proper notice and following procedures of a legal eviction. Consult your attorney before making any attempt to remove occupants and their belongings from your property.