loss or liability claim hours after it changes hands, before the new owner’s insurance coverage is in place. The previous owner’s policy automatically ended upon the sale, so you need to make sure that there is no gap in coverage, even if you have your new policy start slightly before the day you close escrow. It’s better to have overlapping coverage for a couple of days than to discover that you had no coverage when the tornado or hurricane came down your street.
Working with the Current Tenants During the Transition
If, like most rental property owners, you’re acquiring property that’s already occupied, the tenants are probably well aware of the pending ownership change. But that fact doesn’t mean that they’re excited about it. Tenants are typically full of apprehension when their residential rental unit changes ownership, not because they think you’ll be an unreasonable landlord but because of the uncertainty of change. So begin your relationship with your tenants on a positive note by following the steps I outline in the next sections.
Meeting the tenants in person
When you first acquire your new residential rental property, contact your tenants in person and reassure them that you intend to treat them with respect and have a cordial yet businesslike relationship. Deal with your tenants’ questions honestly and directly. Often, the first question they ask is whether they’ll be allowed to stay. Other common concerns are the potential for a rent increase; the status of their security deposit; the proper maintenance or condition of their rental unit; and the continuation of certain policies, such as those concerning pets and rent. Anticipate these concerns, and prepare your responses. You’ll lose credibility and damage your relationship with tenants if you later decide to implement changes that you didn’t acknowledge up front.
Inspecting the property
The condition of a property directly affects its value. The prudent real estate investor always insists on making a thorough physical inspection before purchasing an investment property, even if the property is brand-new.
A new investment property may look good on paper, and your pre-offer due diligence may reveal no legal or financial issues or concerns. But your investment is only as good as the weakest link, and a physically troubled property is never a good investment (unless you’re buying the property for the land and plan to demolish the current buildings).
My experience is that an inspection usually pays for itself. Inevitably, you’re going to find items that the seller needs to correct that are greater in value or cost to repair than the nominal sum you spend on the inspection. This value isn’t just a marketing ploy by inspection firms, but it also isn’t a game that you “win” if you can offset the inspection cost by finding enough items that the seller must correct or provide credit in escrow for — as some real estate gurus seem to believe. Instead, inspection is a serious matter, not just a way to squeeze more out of the seller.
The best result is an inspection that reveals no problems. Although you’ve spent money, it’s a great relief to know that your property is in good condition (at least at the time of the inspection). That doesn’t mean there won’t be repair or replacement items that need your attention in the future, possibly even the very near future. In my early days in real estate investing, I worked for an apartment developer whose favorite saying was “To own is to maintain!”
Inspecting the rental unit
Although you likely had a brief chance to view the unit’s interior during the due-diligence period before escrow closed, walking through again with the tenant can be helpful. Know your state’s laws, however. In most states, tenants don’t have to let you enter their units unless you have a legal reason and have given proper notice. If you set a voluntary appointment, the tenant knows that you’re coming and can prepare. If conducting a periodic unit interior inspection (perhaps annually) is legal in your state, set that expectation with your tenants at the outset, and include it in their lease.
Don’t knock on the door and expect to walk through a tenant’s rental unit. But if you’re already at the property delivering your letter of introduction (see “Meeting the tenants in person” for more on this topic), you can schedule a mutually convenient time to meet. Some tenants are glad to meet with you then, but don’t necessarily count on that. Giving your tenants time to think about any issues they’d like to discuss is beneficial for all of you.
The former owner of the property may have had a policy of documenting the unit’s condition at the time the tenant took possession of it. If so, you may want to compare those notes with the notes you make when you walk through the unit. If proper documentation of the unit’s move-in condition wasn’t made, consider preparing such information during your walk-through. This info allows you to establish some sort of baseline for the unit’s condition to use when the tenant moves out, which then helps you determine the proper amount of the security deposit to return.
Using a new lease or rental agreement
When you’re taking over an occupied rental property, you always want to transfer the tenants to your own lease or rental agreement as soon as legally practical. The sooner you begin to convert your new property to your rental contracts, the better. If your policies are markedly stricter than the previous owner’s, you may find the transition period to be difficult. For a single-family rental or a small rental property, implementing your own rental agreement as soon as legally allowed is relatively easy. For a larger rental property, you may want to transition to a new contract gradually upon tenant turnover. Regardless, establish uniform policies for all your tenants to avoid any possible fair-housing violations. (Find out more about fair-housing laws in Chapter 11.)
Your tenants already have one of the following:
A valid written lease
An expired written lease that has become a month-to-month rental agreement
A written month-to-month rental agreement
A written rental agreement for a period of less than a month
A verbal agreement
Your ability to implement your own lease or rental agreement will be affected by which agreement is currently in force with any existing tenants. You have to honor a written lease until it expires. If your tenant has an expired lease that is now a month-to-month rental agreement, or they are already on a month-to-month rental agreement, you can transfer your tenant to a new rental contract upon 30 days’ written notice. A verbal agreement can be changed at any time.