The seller provided a rent roll as if all tenants paid rent consistently, but the estoppel certificates show many tenants are consistently 6 months behind in rent or unsure what rent to pay. How should I account for this in the purchase price?
I would defiantly use the info as a negotiating tactic. I would explain to the seller that I could not include them toward income and that it is likely going to be expensive to have to evict those tenants that are behind on rent. I would decide how much it is worth to me and start with a low offer to allow the seller to negotiate the price up somewhat.
The fact is that with many tenants 6 months behind in rent you are going to have a up hill battle getting them up to speed on paying on time and inevitably you will have to evict some to get your business practices in line. It is important as a new owner that you maintain zero tolerance regarding paying rent on time.
Sounds like you are buying into a very poorly run operation. Possibly a turn around park.
I can tell you my experience in Omaha we had 18 months ago. We had roughly 12 TOH not paying, some for up to a year.
After buying, and making it clear that previous balances are forgiven and evictions would be filed for non-payers, ALL of them began paying, and on time too.
My main takeaway, is that all of them realized that this was the best deal they would find, and if they had any income they would pay because they dont want to lose the home they own. Logically, it makes sense.
The other question though, is how many of them you want to keep? Early on, i valued paying rent too much, and i didnt evict those who gave red flags that they were not desirable tenants. Thats the bigger problem, in my mind.
Thanks so much for your quick response and great advice.
My purchase price is based on NOI and through the estoppels I’ve learned one tenant has actually vacated their home, one is just going to start paying rent the day I close, and several and another 5 out of a total of 50 lots are behind in rent. Would you reduce the purchase price for the tenant that has actually left and assume the others are going to pay timely once they are faced with eviction?
My opinion of how i would try to handle it, if you are working directly with the seller, is I would explain to them why you have to reduce the purchase price for all of them, and see what they say. Assuming this is being funded by a bank, explain thats how they look at it and they are lending the money.
In the end though, it all depends on what numbers work for you and what it will appraise at.
As i wrote before, the ones that are behind on rent you might not want to keep anyway. The ones that arent paying are usually the ones that are least fit to be part of the community and you will repeatedly get complaints on. Its an 80/20 rule but probably more like 90/10 or worse. That being the case, if the park has high demand, its not too big of a deal because you will be able to evict them and fairly quickly get someone new in and start collecting rent again.
My big mistake with our park was worrying too much about keeping paying tenants rather than ripping the bandaid off quick and evicting, say, 5 homes all soon after taking over the park.
thanks so much for the great advice…I really appreciate it.
It is not wise to “assume” bad tenants will do the right thing. The opposite is most often the case. I would exclude the income from any tenant that is behind in rent payment. The sellers poor business practices places the new owner in a position of having to either evict or retrain tenants.
Thanks for the quick response. Great advice
Here is my hierarchy.
- Rent paid on time.
If someone is clean, neat, and quiet, but occasionally pays late then I am more willing to be flexible.
If someone is not Clean, Neat, and/or Quiet, they better pay on time every time.
I second @SDGuy, but we have it down to three items that we communicate to each new resident.
1.) Make sure your rent is paid on time in in full each month.
2.) Make sure the outside of your home site is nicely maintained.
3.) Don’t piss off your neighbors.
We tell them if the follow these three (3) simple rules all will be good, but if not, we have fifteen pages of Rules & Regulations that we will use to evict. We have about a 98% success rate.
Awesome advice - I’m just buying this park - the current owners don’t have leases, but I am getting estoppel certificates for each tenant. At what point do you suggest I hand them the 15 page ( maybe mine is closer to 5 page) Rules and Regulations? Thanks
The day you close, you should have your Lease packet prepared with your new Welcome Letter, Rental Agreement/Lease, Rules & Regulations, Addendums and/or regulatory documentation required in that location to distribute immediately. You can offer incentive to return the signed documents withing x number of days (like $50 rent credit). Likewise, penalties are more difficult to assess without proper notification of any adverse circumstances, you could say, any residents that have not delivered completed documents within ten (10) days, will be issued “no cause” eviction within thirty 30 days. Whatever (if any) penalties you may impose, just make sure they comply with statutory requirements as most residents will know exactly who to call to make your life miserable if you are in violation.
Any “value-add” property without Lease will usually mean the residents are running the park, and they just need to be reminded that there is a new sheriff in town. Generally, we end up evicting 10-20% of existing residents before the others fall in line.
Check with your state landlord tenant regulations. In most jurisdictions leases become valid regardless of whether the tenant returnes it signed or not. I personaly would not offer bribes to tenants to comply. This could encourage tenants to require a bribe for compliances in the future. Make your rules and enforce them to the letter otherwise you show weekness that some will always attempt to take advantage of. When it comes to dealing with difficult tenants I have learned it is always better to be feared than liked.
So the question is, are those behind on rent paying consistently and they just aren’t able to catch up ? When you buy they start off with a zero balance, so you may not experience another delinquency from them.