Six Things You Need to Know about Buying Rental Properties (#2 will surprise you)

When a Buyer is purchasing a residential rental property such as a multi-unit building, they often have many questions about their rights as the new building owner and landlord.  The Buyer may also wonder whether the standard FR/BAR real estate contract is the appropriate contract for them and what protections it affords them.  Below is a list of common contract-related questions that we receive from Buyers purchasing residential rental properties:

1. Is there a place on the FR/BAR contract where the Seller notates that the property is currently leased?

a. Yes, Paragraph 6 of the standard FR/BAR contract requires the Seller to check off that the property is subject to leases or occupancy after closing.

2. How do I determine what kind of lease agreements the Seller currently has with the tenants, and what if I do not approve of the lease terms?

a. Under the standard FR/BAR contract, the Seller is required to turn over to the Buyer the facts and terms of any leases in writing, along with copies of the leases within 5 days of the effective date of the contract.  The Buyer then has an additional 5 days to review this information with the option to cancel the contract in their sole discretion if any of the information is not acceptable to them.

3. What if it is later discovered that the tenant and the Seller are not on the same page as to their landlord-tenant relationship?

a. In addition to the requirement to turn over lease information and lease copies at the beginning of the closing process, Paragraph 18(D) of the FR/BAR contract also requires the Seller to furnish to Buyer at least 10 days prior to closing, estoppel letters from all tenants/occupants of the property specifying the nature and duration of their occupancy, rates, advance rent and security deposit information.  In the event that the information given at this time differs materially from the representations and lease copies that were provided earlier, the Buyer may terminate the contract within 5 days of receipt of the conflicting information.

4. What if a tenant is scheduled to move out around the close date?  Who is responsible for inspecting the property and making a claim on the security deposit?

a. If a tenant is moving out near the close date, it is always in the Buyers best interest that this move-out be completed prior to closing to simplify the process and ensure that the Buyer does not inherit more responsibility or liability than anticipated.  Once the closing occurs, all responsibility for the tenants will be transferred to the new Buyer and the new Buyer will be responsible for all matters related to ending a tenants lease including but not limited to: giving statutory notice; performing a final inspection; making any repairs to the property; and making any applicable claims to the security deposit or returning the security deposit in accordance with the Landlord-Tenant Act.

5. What if a tenant whose move-out date is post closing refuses to move?

a. In the event the Buyer purchases a residential rental property and a tenant thereafter refuses to vacate, the new Buyer is responsible for all costs and efforts of bringing an eviction action to remove the tenant.

6. Upon taking possession of the property, can I terminate all the leases and start anew with my own tenants?

a. Not necessarily.  Unless the lease terms give the Buyer/Landlord the right to terminate them, the Buyer/Landlord is bound by the terms of the lease and cannot alter or terminate an active lease.

If you are working with Buyer who is purchasing a residential investment property and have any questions about the foregoing or any Landlord-Tenant related matter, please contact your local real estate attorney.

Article authorized by Jessica Featherstone, Esq. jfeatherstone@berlinpatten.com

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

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