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Monday, April 2, 2012

Buying Occupied Properties

I buy a lot of occupied properties. However, I wholesale the majority of these and haven't had to deal with the tenants. There were only three instances in the past when I purchased a property with a tenant/owner in place and did not wholesale it.

- Western: I purchased this property from a wholesaler. The mother of the two sons who sold the property was to stay in the home for 60 days and pay rent. This is commonly referred to as a sale lease back. However, she only paid the first month's rent and didn't pay after that. I filed eviction, but she moved out shortly afterwards. There was a storage unit at the back of the garage in which she left behind her mother's living room set. It consisted of two antique marble top end tables and a matching coffee table which are now in my living room, and a very old, but very nice couch and chair which are sitting in my warehouse. 

 - Mojave: I purchased this property from a wholesaler. The owner was still living in the home and after my experience with Wallace, I wanted to be sure he would move out in a timely manner. I asked the wholesaler to offer me some sort of protection and some way to get the seller motivated to move out. He had the seller sign an addendum that stated $10,000 out of the proceeds would be held in escrow. If the seller did not move out within 7 days after close of escrow, there would be an automatic $2,500 extension fee and $250 a day penalty thereafter. I made an extra $5,500 on that deal because it took the seller 12 days to vacate the home.

- Wallace: I also purchased this house from a wholesaler. It was sold by two brothers as well. One of the brothers was to stay in the house and pay rent. The 1st of the month came around and he didn't pay. I went to see him and he said he didn't have any money. I could only laugh because I had just paid over $200K for the property. I filed eviction on him and it went all the way to the sheriff needing to come out for the lock out. He was gone on that day and the property was cleaned out. I called his brother and let him know what happened, and how much I was owed. His brother paid me in full out of his brother's share of the proceeds.

I recently purchased a property in Corona. It is located in a very nice neighborhood just around the corner from an elementary school. I decided to rehab and flip this property. As with almost every real estate deal, we do have a challenge: The current occupant is a non-paying tenant. He hasn't paid rent in seven months. At first, he said he was interested in buying the house. I liked the idea of that because it would mean I get to move the rehab budget to the profit line, but I didn't think he would qualify for a loan. I sent him over to my preferred loan broker and she told me the only thing he would qualify for was a bankruptcy!

Now we have to make a decision on how to best proceed with getting him out. We definitely do not want him filing a BK. We do have a copy of the rental agreement he signed with the former owner. The problem here is the change in terms without a 30 day notice. Per his agreement, rent is to be paid at the former owner's address. Now we want him to pay rent to our address. If we put our address on the 3 day notice to pay or quit, he could argue in court about the change in terms and get the case thrown out. Ideally, avoiding a court situation is best for all parties involved.

We called the local eviction attorney and asked what he thought we should do. His suggestion was to serve the tenant with a Notice of Voluntary Transfer which is a 60 day notice to move. We then called the tenant on Friday and let him know rent would be due on the 1st per his rental agreement. If he paid the $1,600, we didn't expect him to, we would serve him with a 60 day notice to move. He had been there over 12 months and 60 days is required per California law. He said he wanted proof of transfer before he paid.

What we decided to do: We then told him if he didn't pay, we would stop by on Monday and serve him with a 3 day. When we went by on Monday morning, we brought the 60 day notice, a copy of the deed, and the 3 day notice to pay. We got there at 11AM and he was home cooking breakfast! We kept it very friendly. We handed him the deed explaining who the new owner is, we then gave him the 60 day notice to move out, and finally, the 3 day notice to pay or quit since he had not paid rent on the first and it was now the 2nd.

We then made the tenant an offer: I told him I spoke with the owner and explained that he (the tenant) is a really nice guy caught up in a bad situation and could he (the owner) give him some move out money. The owner agreed to give him $1,500 cash, in $100 bills, if he was out by Sunday the 15th, $1,000 if he was out by Sunday the 22nd, and would file eviction on Monday the 23rd with no cash payment. The tenant was very happy to hear this. Since I was at the door and got him thinking we were on his side, I asked if he wouldn't mind if we came in and looked around. He obliged and gave us a tour.

Our hard money loan on this property is $1,000 / month. Eviction would cost at least $600. The tenant has bad credit and obviously no job. If we tried to strong arm him, he could file BK and drag this out for months. If he stayed for even 2 months it would cost us $2,000 in holding fees and $600 in eviction fees, and we don't even know how long before we could actually get him out or what condition the house would be in by the time he vacated. Making him an offer we don't think he can afford to pass up and 'going to bat' for him against the owner, we think we can get him out quickly, keep the property in great shape, and at the minimum expense to us.

By getting inside, we got a good idea of our rehab budget, noticed he had bagged up a lot of his clothes, and there were 'Moving Sale' signs sitting on the kitchen table - a good indication that he will be out in a timely manner.

3 comments:

  1. Aaron,
    I like your creative strategies to get/appear on the same side as the tenant in order to motivate them to move. Cash for keys is tricky because I hate the idea of rewarding bad behavior. But, I understand the financial/emotional/time loss could be greater in court. How do personally rationalize paying for a tenant's bad behavior? Is it just a matter of you'll pay one way or another?

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  2. I don't look at it as rewarding any type of behavior. It is a cost of doing business just like buying insurance. If I don't come to an agreement with them, they have many options available to them that will cost me potentially many thousands of dollars; each person in the house can file BK, they can fight the eviction, they can do a lot of damage to the house, etc.

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  3. Very nice post. I just stumbled upon your blog and wanted to say that I have really enjoyed browsing your blog posts.

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