The three dirtiest words I can ever hear when purchasing a property are “Long-term tenants.” No other phrase sends shutters and disgust through my body during my initial due diligence on a property. It makes me feel like saying “oh thanks I appreciate the trash you are leaving behind but telling me it’s grade A merchandise.” Like it’s some sort of benefit to
me. Now I know what you are thinking, if you are like most investors that are entering the market you are probably thinking that this sounds great. You automatically think that these tenants must be good because this seller has left them there for quite some time and you are going to enjoy success with them. Well I can’t tell you just how wrong that line of thought is.
There are no formal eviction statistics kept on eviction rates of tenants you inherit with a property vs. tenants you place yourself, none that I could find anyways, and if they were kept they would be skewed an inaccurate as the courts do not track that sort of thing so the data would be unreliable. Therefore, for this blog post I am going to be writing purely based on my own experiences with inherited tenants and the experiences of clients that I have represented in the past on property transactions that have also inherited tenants. There are three types of problems that often occur with inherited tenants that you as a landlord will deal with. One will be the tenant that pays his rents but causes problems, the “asshole effect” as I like to call it. The other will be the tenant with an “arrangement” that the landlord failed to disclose, or the “landlord family act” as I refer. Then you have the scammer tenant who is trying to get one over on you, which is the “asshole effect 2.0” and lastly you have the “scum bag” landlord problem tenant that I’ll explain.
The first one I will go into detail on is the “asshole effect.” These are the tenants that pay their rent but are a real pain in the ass to deal with. They are always pushing the rules and trying to see what they can get away with. They store stuff in the basement they shouldn’t, they are drinking and arguing with their spouse or other neighbors, rent is paid but it’s usually late, their apartments are nasty and usually they have more than their fair share of broken down vehicles left around the property. These types of tenants are dangerous because you may not be able to detect their scumbag trashiness right away and they are like mold, the longer you ignore them and they go untreated the worse they become.
The second type of tenant I will talk about the “landlord tenant act” tenant. This is the tenant that always has some sort of deal or special payment arrangement worked out with the landlord that was conveniently never fully disclosed to you. For example, this tenant would be the one that cleans the hallways for free rent or takes the trash out for some obscene amount of a rental discount. Better yet the landlord “always lets me pay on the 20th of the month” is something you would likely hear from them. Be aware of these types of tenants as the deals they will tell you they have are usually grossly inflated and they are trying to take advantage of the transition of the property.
The “asshole effect 2.0” is much worse than the standard “asshole effect” tenant. Much like the “asshole effect” this tenant will cause you problems and bend the rules but to take it further they will likely not only stiff you for the rent but they will exploit anything they can to make it harder on you to evict them. Rest assured this tenant will not go away quietly or easily and they will exhaust all means possible to prolong their stay and torture of you. Then when you do get them out their apartment will be packed to the gills with trash and other nastiness that you get to deal with.
The last types of tenants are nothing more than mere deadbeats that the “scum bag” landlord has so kindly left behind. This is like a landlord covering up a defect in the building with a nice painting or plant but only with paying tenants. These tenants do not pay their rent and probably haven’t for quite some time, at least not in full anyways. The reason they are left behind is because the landlord felt it would be easier to sell the building with “long term tenants” in there so he lied to you, the buyer, and told you they paid their rent to get you and the bank to finance the purchase and have it go through. You will be evicting these pretty quick once you realize the tenants are not paying.
Depending on the size of the property you are buying (by size I mean number of units) is often a determining factor if you are going to inherit tenants or not. If you are buying a property with several units then it may not be advantageous to have it all vacant; however, if you are buying a property with small unit counts (say under five) then it may be worthwhile to have it completely vacant so you can place your own tenants. But assuming you are inheriting tenants then you must be cautious about what you are getting.
. Sometimes bad tenants will slip through the cracks and you will be inadvertently stuck with them but you can do some additional due diligence to reduce your risk. For example, if you are purchasing a larger property (or smaller one for that matter) instead of taking the landlord at his word that tenants pay their rent ask to see the bank deposit records. Anyone can fabricate a receipt but it will be hard to fabricate bank records. Another thing you can do is to interview the neighbors and ask them about the neighborhood and if there are any problem tenants in the building. Given the chance most people will gossip and will be glad to tell you all they know, all you must do is ask. Make a night visit to the property and see what goes on at night. Is anyone outside drinking excessively? Do you hear screaming and yelling going on? These are all things you can find out on a short visit to the property a couple times prior to close. As I said before sometimes bad tenants will slip through the cracks but you can take a few extra steps to help reduce the risk of getting the previous owners trash handed over to you and having them call it dinner!