Although you may trust your insurance broker or agent implicitly, don’t allow your escrow to close until you have written documentation confirming that your insurance coverage is in force. Even though it may seem improbable, many times a property suffers a catastrophic loss or liability claim a mere matter of hours after it changes hands, and the new owner’s insurance coverage isn’t yet in place.
When you receive the current insurance information, take steps to verify the accu- racy of all records. If certain representations about the types and amounts of coverage are made verbally but not given in writing, then you need to protect yourself by sending written documentation to the seller and all brokers and agents to confirm any information you’ve received. This step can be important in preventing future disputes about the representations made by the seller or any of the brokers or agents.
Working with the Current Tenants during the Transition
If you’re like most rental property owners and you’re acquiring property that’s already occupied, the tenants are probably well aware of the pending
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ownership change. Tenants are typically full of apprehension when their rental unit is changing ownership, not because they think you’ll be an unreasonable landlord, but because of the uncertainty of change. So be sure to begin your relationship with your tenants on a positive note. In the following sections, I guide you through the transition process step by step.
Meeting with the tenants in person
When you first acquire your new 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’ ques- tions honestly and directly. The most common concerns are usually 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 allowing pets. If you’re not honest with the tenants, you’ll lose credibility if you later decide to implement changes that you didn’t acknowledge up front.
Provide your tenants with a letter of introduction during this brief in-person meeting. This letter provides your contact information, plus explains your rent collection policies, the status of tenants’ security deposits, and the proper procedures for requesting maintenance and repairs.
Be sure to request an opportunity to perform a property walk-through with each tenant. Let the tenant know whether you’ll be implementing your own standard lease or rental agreement form as well.
Inspecting the rental unit
Although you most likely had a brief chance to view the interior of the rental unit during the due diligence period before escrow closed, walking through again with the tenant now that you’re the owner can be helpful. However, know your state laws. In most states, tenants don’t have to let you enter their rental units unless you have a legal reason and have given proper advance notice. If you set a voluntary appointment, the tenant knows you’re coming and can prepare.
Don’t just knock on the door and expect to walk through your tenant’s rental unit. But if you’re already at the rental property delivering your letter of intro- duction, you can schedule a mutually convenient time to meet. Some tenants will be glad to meet with you right 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 you both.
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The former owner of the rental property may have had a policy of document- ing the condition of the rental unit at the time the tenant took possession of it.
If so, you may want to compare the noted condition on the Move-In/Move-Out Inspection Checklist (see Chapter 11) when you actually walk through the rental unit. If proper documentation of the move-in condition wasn’t made, consider preparing such information during your walk-through. This information allows you to establish some sort of baseline for the unit’s condition to use upon the tenant’s move-out, which then helps you determine the proper amount of the security deposit to return to him.
Using a new lease or rental agreement
Another first step to take as the new owner of a rental property is to begin converting your existing tenants to your own lease or rental agreement. If you have a single-family rental or a small rental property, implementing your own rental agreement as soon as legally allowed is relatively easy. However, with larger rental properties, you may want to gradually transition to a new contract upon tenant turnover.
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 some period of time less than a month
A verbal agreement
Although you may want to make some changes in the terms or policies, when you acquire an occupied rental property, your legal and business relationship is already established by whatever agreement the tenants had with the former owner. Wait until the expiration of the contract to change the terms — or provide the tenant with proper legal notice of any proposed changes.
Consider the potential impact of making significant changes in the rental rates or policies immediately after you acquire the rental property. For example, although you may have strong feelings against allowing pets on your rental property, your tenants may have pets already. Although you legally have the right to implement your no-pet policy upon lease renewal or upon giving proper legal notice, you’re almost guaranteed a vacant rental unit if you do so.
Impose your policies over a reasonable time frame, but be sure you’re aware of the potential financial consequences in the short run.
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The sooner you begin to convert your new property to your rental contracts, the better. Establish uniform policies at all your rental units so the terms and policies are consistent for all your tenants. This action is extremely important to avoid possible Fair Housing violations, as discussed in Chapter 10.
The tenant information the seller provided you during escrow may be outdated.
One quick way to update your records is to have the tenants voluntarily com- plete your rental application form. In many states, you may not have a strong legal argument for requiring existing tenants to provide this information; how- ever, many tenants will understand your reasoning and not mind. Other tenants may be reluctant to complete an entirely new rental application. Even if you receive initial resistance, seek this updated information prior to renewing any lease. You need to be able to properly determine the financial qualifications of your tenants, particularly if you anticipate future rent increases.
Evaluating the current rent
When you acquire a rental property, part of your research is to establish its fair market rental value. If a tenant’s current rent is below market value, one of your toughest decisions as the new owner of a rental property is how to handle rent increases.
As the new owner, you often have much higher mortgage payments and typi- cally higher expenses to make necessary repairs and upgrades to the prop- erty than the last owner did. Some tenants get very upset and antagonistic about any rent increase, however, and you won’t be able to appease them.
Fortunately, the majority of tenants just expect to be treated fairly and honestly.
They understand you may have higher expenses and will reluctantly accept a rent increase as long as two basic conditions are met:
You don’t raise the rent beyond the current market rent for a compa- rable rental unit in the area. Give tenants documented information on comparable rentals in your area to show them you’re not asking for an unreasonable rent.
You’re willing to make basic repairs to the rental unit. Don’t ask tenants to shell out extra cash without proving you’re committed to maintaining and even improving the property.
Seek cost-effective improvements or upgrades that enhance the rental unit.
Most tenants just want to be sure they’re receiving some of the benefit of paying higher rent. And if you’re asking for more rent, be willing to reinvest a portion of the rent increase into improving the rental property. Clean the carpet, repaint the interior of the rental unit, or send in a maintenance person
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for a few hours to repair the miscellaneous items that need attention. Of course, if you have a very good and stable tenant, you may want to consider more signifi- cant upgrades to the rental unit. Replacing the carpet, installing a new appliance or countertops, or adding a ceiling fan and microwave oven may be an incentive for your golden tenant to sign a new lease at a higher rental rate.
Although tempting, be wary of making significant renovation or repairs to the rental property before the close of escrow. If the sale of the property doesn’t go through as planned, you may have spent considerable sums to upgrade the seller’s property without any recourse.