What seems like a potential headache may pay off more.
Let us discuss what you should do when you receive a property lead sheet from your virtual assistant or you are calling yourself and you come to know that there is a tenant in the house. For now let’s assume this is a single family as multi-unit properties involve a bit more detail and nuance.
The lease-purchase deal with the tenant already in the home will be the same as usual, but it’s the details of their lease and the math that matters here. As with every deal, you just need to know how to navigate the terms and be a master transaction engineer.
What does it mean? You’ll evaluate the property and circumstances, and decide whether it’s a sandwich, a subject matter, or owner financing.
Connected: Buying Investment Properties With Existing Tenants
How to handle properties with existing tenants
We’ve bought more than one property with a tenant, but in this particular instance, we started with a sandwich and later turned it into a theme. This strategy boosted profit margins substantially, almost like a Payday No. 4.
Think about that for a minute. Because we have the under (lease purchase with due date for the seller to cash out vs we own it), we can’t put pressure on the tenant buyer. They can enjoy the house for a long time before running to cash out.
If they withdraw cash early or on time, great. If they don’t and you have to give them an extension, you’re back in the driver’s seat. You can change the price, terms, or whatever else you want. That’s where payday number 4 was made — additional principal payments, probably more monthly, and probably a higher price.
be transparent with the seller
During the viewing, you should tell the seller your exact plan. Tell them you’re fine with inheriting a tenant, but you’ll need to do your homework and meet with the tenant first. Tell them, “I’d like to watch your home as long as your tenant is there.”
Ideally, this should be a meeting just between you and the tenant(s)—not the seller. That way you and the tenant can have an open conversation.
Connected: How to handle inherited tenants: Reviewing leases, raising rent, and more
meet the tenant one on one
You can pick their brain and get good information, like whether they are dissatisfied or not, whether the property has some challenges or not. Ask about things you can’t hear when talking to the seller.
It’s also good to meet with them to see if you want to deal with them for months or years to come. Are they communicating well with you? Are they keeping house or is it a complete mess?
Establish terms with the seller
After the meet and greet, you can tell the salesperson what you’ve decided. “My period of X (hopefully 36 months or so) begins when I either convert your tenant to my buyer or when their lease expires and I fill it with my buyer.”
Terms begin when the tenant leaves or when you are able to replace them. If you like the tenant, you can convert them to a tenant-buyer using the normal process. If the tenant doesn’t want the home or can’t qualify for your buyer process, begin marketing the home toward the end of their lease (90 days or more).
If the house is vandalized or cluttered by a tenant, just wait. In our case, we had about 18 months left. I usually start my buyer marketing right before the tenant moves out.
The risk here is that they may come back or sell the asset. That said, on the other side of that coin, the tenant can default and leave earlier.
Don’t be intimidated by it. That’s just business. And when you get comfortable with deal structuring, you’ll be able to move in any necessary direction.
Do you understand my approach? would you have done anything differently?
Tell me in the comment section below.
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
