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Important Considerations when Buying Tenant-Occupied Properties

Important Considerations when Buying Tenant-Occupied Properties

If you’re an investor looking to purchase an investment property in Pensacola, you’ll likely come across a home for sale that comes with existing tenants. Nearly all single and multi-family properties come with existing renters. While it sounds great to have rent collected on day 1 of your purchase, we warn you that extra considerations need to be taken when buying a Pensacola area investment property with an inherited tenant. Here are a few things to consider during your due diligence phase.

When submitting your offer, be sure the tenants are addressed in the contract. When the box is checked, paragraph 6(b) of the current Florida Bar Association’s Residential Purchase Agreement specifically outlines a contingency to allow the buyer to review copies of all leases and agree to terms of occupancy. Unfortunately, we’ve seen inexperienced real estate agents ignore this section, leaving a built-in clause out of the contract at the buyer’s expense. Be sure the proper verbiage is included to protect your EMD while you gather records on the property.

Was the property self-managed or professionally managed? Knowing this up front will help you in navigating the questions below. Always reach out to the management company to request pertinent information and have a conversation with the person who managed the building. Many of our multi-family owners have never been inside and carry a limited knowledge of the property. It’s easy for them to choose “don’t know” on a seller’s disclosure when they have access to records. While we would never legally recommend this, we know it happens since we see it all the time.

Are the tenants on current leases? This is so important that I would caution you not to move forward during your due diligence period without receiving and reviewing the tenants’ leases. The lease document outlines the landlord and tenant relationship and is imperative to have in place during your due diligence process. Even if the lease is expired and the tenants are on a month-to-month agreement, you should ensure you have the original lease and any relevant addendums. Absent a lease agreement, you should get an estoppel certificate signed by each tenant in the property outlining the following:

a. Current rent amount, pet rent, benefit packages, and any prepaid rent (like last month's rent)

b. Resident information including contact information and all occupants and pets in the property

c. Security deposit amounts including any refundable pet fees
d. Move-in date and dates of any existing agreements
e. Any utilities, pest control, pool maintenance or lawn maintenance paid by the landlord
f. Ask important questions including was the property rented with any furniture, are any appliances or storage buildings owned by the tenant and are there any outstanding maintenance issues the tenant is aware of? These are a few of our favorites but feel free to add in some others specific to the property. For example, is there a septic tank? Have they had issues with the tank, etc.

This document does not have to be fancy and you can make it yourself, as long as it contains these important details, and it is signed by both the owner and all tenants to avoid any legal complications. If you are unable to obtain a lease agreement or an estoppel certificate, reconsider your purchase. Too many serious issues can arise from this scenario. 

Does the landlord or tenant have any records of the property condition when they moved in? This is imperative when the tenant eventually moves out. If the tenant has these records and you do not, you could end up in a costly legal battle over a security deposit dispute. Ask both parties to provide any move in condition reports, inspections during the tenancy, and a maintenance history during the occupancy. You can request this during the due diligence process and get the result in writing. Also ask if they have any photos and request you be provided with those records. This will help tremendously during your ownership. If you do not have these records or they do not exist, a judge will likely side with a tenant. Therefore, it’s also important to know when they moved in so you can consider normal wear and tear and length of tenancy during the move out process. We find the longer the tenant has been in place, the less routine and preventative maintenance has been done on the property, and the more likely the tenant is to feel entitled to the property. Tenants who have been in place forever seem to disregard a new owner or management company as they feel more like it’s “their” home and not yours. They tend to be less open to change at the property (including rent increases), are more likely to be paying under market rent, and tend to ignore your efforts to make necessary changes compared to others. Thus, we find they will be more likely to be evicted and that you’ll need to put more work into the property when they leave to get it ready for a new tenant. You’ll want to budget and plan for this.

Don’t make the mistake of skipping the home inspection or opting for a less thorough inspection just because it’s occupied. I’ve seen investors skip the WDO (commonly referred to as the termite inspection), opt for only required insurance inspection instead of a full home inspection, and forego inspections all together thinking the property must be okay since it’s occupied. This is a huge mistake. Because it’s occupied, this is your only real chance to be sure the property is up to safety standards and habitability standards under Florida Landlord Tenant law. Many occupied properties we take over don’t even have necessities such as operable smoke and carbon monoxide detectors. This is always a huge liability for you,  but especially with tenants in place! You will miss your opportunity to be sure the property is thoroughly evaluated during due diligence when you can receive your EMD back and to be sure it’s safe for them on day one of your ownership. 

If you have the opportunity, meet with the existing tenant(s) or at least walk through each unit. We know many of you are out of town, and as your agent, we’re happy to do this if you’re unable. You will learn invaluable information from an in person visit and even more when the tenant is present. This is a great opportunity to verify the information provided all parties is accurate.

It seems obvious, but make sure you have working keys to all units. You need keys to access the unit with proper notice for inspections or in case of an emergency. 

Have an agent evaluate market rent for each unit and consider the condition of each unit when doing so. You can’t assume market rent based on Zillow or compare a dated unit to a remodeled one for rent nearby. Meet with a property management professional to discuss their recommendations as to the property’s future so you are able to evaluate a realistic NOI for your investment. We can help you more accurately estimate realistic expenses and income for your specific building. You’ll also want to have accurate estimates for taxes, insurance, flood insurance, vacancy rates, maintenance, capital expenditures and more. Don’t rely on a spreadsheet from another investor in another area to estimate your expenses for Pensacola, Florida's market. 

Be sure you are working with an experienced Pensacola realtor who specializes in investment properties before putting in an offer on an income producing rental to make sure these considerations, and others, are taken seriously. Are you interested in purchasing a single-family or multi-family property in Escambia and Santa Rosa Counties of Northwest Florida? Connect with one of our investment specialists today.