How should house flippers deal with taking over properties with non-performing tenants?
America is still littered with properties that are occupied by non-performing borrowers and tenants. Some can prove to be incredibly attractive investment opportunities for house flipping. Yet, many are not sure how to effectively handle the situation when there is an occupant who just isn’t paying. How can you tackle the situation well?
Know What You Are Getting
It is important to know what you are getting before you take on a property. Ideally you need to know if there is a tenant or occupant issue before you make your offer. It can make a big financial difference. Investors should also be re-verifying the property is vacant or appropriately occupied at the walk-through right before the closing.
Some investors proactively seek out properties with trouble tenants in order to secure discounts from sellers. Others hope they can turn these situations around with better management. Some will find their model just doesn’t work if there is someone occupying the property. So, ask upfront, do your due diligence, verify at closing. It’s smart to put these conditions in your contracts, and to have your title company verify any leases and tenant status as well.
Know Your ROI
Whether knowingly taking over a property with non-performing tenants or being surprised with it upon closing, you’ve got to assess how much the situation matters, and what potential ROI there is on your potential actions. For example; if you are actually just wholesaling the property it may not matter if it is occupied or not. You may have to price in the cost and holding time of an eviction for the next buyer, but you may not have to deal with it yourself. If you planned on doing a full rehab, then you need to factor in the cost of eviction and extra holding costs until you can access the property freely. There may be some moves which help optimize your ROI; such as temporarily relocating the tenant, giving them a cash for keys offer, or negotiating new terms which let them stay and get them performing again. If you can turn this around to being a turnkey rental deal with a performing tenant you may boost your resale value.
A common scenario in the wake of 2008 is that the previous owners remain in the property. They may be the ones selling to you, or they may have just stayed in the property for years while in the foreclosure process. It’s nice to be able to help these people. Yet, they typically make the worst tenants. They didn’t pay when they owned it, had a lot more to lose, and were up against the banks with big legal teams. The odds of them paying you may be far less. Often this arises just before closing when they announce they need more time to move out. It is much easier if you help them move prior to the closing than to deal with the potential issues afterwards.
Another common scenario is that family members of the previous owners are still occupying the property. Sometimes these nonperforming ‘tenants’ are the reason the seller sold. They just couldn’t get them out. In other cases the problem is that the owner told them they could stay, and these occupants may not be eager to leave. It’s vital to check out what rights they may or may not have to the property and occupancy.
Renters can fall behind for a huge variety of reasons. The lease will typically survive the sale. So, as the new owner you are likely to be obligated to abide by the lease terms and local landlord-tenant laws. Sometimes the situation cannot be turned around and you will need to evict or flip the house as-is. In other cases, new ownership and management creates a great opportunity for getting the tenant back on track.
In many cases, there can be occupants in the house with no lease. They could be squatters, tenants whose leases already expired, or they could have been on a month to month arrangement. Check your local laws and consult with a real estate attorney or the local sheriff’s department. This may actually be a very simple situation. With no lease they may simply be trespassing on your property and can be moved out very quickly. Then you can get back to your rehab project and flip that house. Some will just leave once they find out there is a new owner.
Acquiring properties with nonperforming occupants can be highly profitable investment opportunities. However, it will all come down to your due diligence, having good legal help, and knowing how to negotiate with occupants.
Kent Clothier is President and CEO of Real Estate Worldwide (REWW), a highly sought-after speaker, the owner of three multi-million dollar a year Internet marketed brands, and proud husband and father. Kent is motivated by his love of family and freedom, creating products that enable people to live their lives the way they choose.