You’re buying a multi-family property and it already has lots of tenants, but who are they? What can you learn about them? When do you need to get to know them?
You’ll need to know if these tenants are the tenants you expected when you first looked at the property. Maybe the seller said they are all good tenants with just a few sometimes late on rent. Or they said you’re going to have to replace a lot of them. Both are reasonable summaries of their tenant population, and either situation could represent a great opportunity for you. But you have to know what you want, and then verify that this property has the tenants you expected.
Start with your contract. Your contract needs to say that you get to see the leases. All of them. Right away, not at the end of your feasibility period. And in electronic form. It also needs to say you need the rent roll and it needs to include name, unit, unit type, square footage, rent, month-to-month indicator, other fee types itemized including both the recurring ones like pets and parking as well as the incidental ones like late fees, plus security deposit, move-in date, latest lease start and end date, and past due balance. I won’t say any one of these is less important than the others because they all need to be provided. In a spreadsheet. Don’t hassle with converting pdf to Excel. I’m pretty good with Excel but it’s just a mess having to convert.
Don’t let the seller get away with just showing you paper leases. If that’s all they have, it’s cheap for them to have an administrative assistant come in and scan them over the course of a day or so. I’ve taken phone pictures of paper leases in the manager’s office – don’t do that.
Your rent roll tells you what to expect from the lease audit. In the lease you should be able to confirm all of the information they provided in the rent roll. This includes the security deposit, increases in rent, other fees, unit number (tenant is no longer in the unit they originally leased? no problem but the lease needs to reflect that), and month to month (no problem if the lease expired as long as the original lease says it reverts to M2M).
Check the signature on the lease. Unfortunately there are unscrupulous owners/managers who sign other people’s signatures. Be sure you’re not seeing a signature that looks like another one you’ve seen.
Read the lease. Is there anything unusual in it? For example, I have seen leases with a provision preventing the lease from being assigned to a new manager. They sell the property, a new manager comes in, then the tenant has an issue and discovers this provision. Guess what, lease is null and void and you the new owner are out of luck.
You see a fee in the lease but it’s not in the rent roll? Is it being collected? Maybe off the books? Goes straight to the property manager? That’s a cost to the tenant and it has to be accounted for.
What if you find these problems. They all have to be solved. If the lease has issues, you need to work with the seller and your attorney to create a lease rider or some other addendum, and every tenant whose lease has this issue has to sign it. And they have to sign it well before the end of your feasibility period because if they don’t, you’re not going to want to move forward.
These are all reasons why you have to be aggressive early on with leases. Be clear about the books and records you require, give the seller a short amount of time to deliver them, and if they’re not delivered, your feasibility period needs to extend day for day.