If you are purchasing an occupied fix-and-flip property, it is critical that you know the legal occupancy status of the tenants, and plan a fair and timely exit strategy for them. Occupancy issues can drag on for months, and legal and holding costs can eat away at your house flip profits while you wait to begin your fix-and-flip renovations, so be sure to factor these possibilities into your project schedule and budget.
Below are 4 important questions you should ask the seller before you close on an occupied fix-and-flip property:
Is the occupant in the home legally?
If the fix-and-flip property you are buying is occupied by someone who does not have legal permission to be there, you may be able to ask local police for help removing them from the property. Be aware that in some states illegal tenants, or "squatters," may have some tenant's rights depending on the length of time they have been living in the home. If you have squatters who are resistant to leaving the premises when asked (or when offered money to vacate), you may have to consult an eviction attorney to begin legal proceedings.
Be aware that, depending on the level of complication, an eviction can cost upwards of $5,000, so it may save you a lot of time and money to offer a cash incentive to entice the squatters to leave without eviction.
You may be tempted to shut off all of the utilities in the home to force the squatters out, but that is not advised as you may open yourself up to costly legal liability.
Is there a signed lease in effect?
If the occupants are in the home legally, ask the property seller if there is a signed lease in effect. When you purchase an occupied property, you typically take on all of the prior owner's obligations and lease terms. If the occupant did sign a lease, you are likely obligated to let them finish out the term of that lease. Of course, you can negotiate with the tenant to terminate the lease early if they are willing to vacate your property before their lease expires.
If the tenant has been paying month-to-month rent, you can present the tenant with a 30-day notice to vacate when you become the property's legal owner.
In either case, you can also offer "cash for keys" to the occupant to entice them to move out of the home. Once the tenants and their belongings are gone, you should change the locks and transfer all utilities into your name or the name of your company.
Did the tenant pay a security deposit?
If the property seller received a security deposit from the tenant, those monies should transfer to your account at closing. You will be responsible for returning the deposit (or possibly some portion of it) when the tenant vacates the premises.
Is the tenant aware of the property sale?
Ask the property owner if the tenant has been informed of the impending sale of the property. Is the tenant already in the process of moving out? If not, if you have good people skills and are comfortable approaching the tenant directly, you should visit the property and introduce yourself as the new owner once your name has been recorded on the deed.
Establish a positive relationship if possible, and negotiate an exit strategy that will entice the occupants to comply quickly and without legal proceedings. If you do not have the best people skills in situations like this, consider hiring a real estate agent, or have your spouse or an assistant reach out to the occupants to establish the first contact.
Positive communication produces positive outcomes
While you have the legal right to demand that occupants leave your property, keep in mind that being forced to relocate is a hardship some tenants may find difficult and costly, if not offensive. An offended tenant may make things more difficult for you in the long run by stopping rent payments, dragging out their relocation and even vandalizing your property before they leave, so keeping things as positive as possible is usually your best bet.
NOTE: The contents of this blog post do not constitute legal advice. When evicting tenants, you must follow state and local laws by providing proper notice and following procedures of a legal eviction. Consult your attorney before making any attempt to remove occupants and their belongings from your property.
