Purchase to flip, with a tenant

DavidHamilton · Feb 4, 2011

Hi,

I've got an opportunity where I can buy a propert $50k below market value. There is a tenant in the house - no written lease.

I understand that a tenant in a house that is sold has a 90 day period to move out if I don't like the lease or the tenant... basically the fine print in the offer to purchase says I can have a vacant property.

The seller wants a quick close because she's drowning in debt. I want to put the property on the market as soon as I can. So my question is: does the 90 day tenant departure take place before closing or can I close and negotiate a new tenant departure date (under a new lease with me)?

EdRenkema · Feb 4, 2011

[quote user=DavidHamilton]Hi,

I understand that a tenant in a house that is sold has a 90 day period to move out if I don't like the lease or the tenant... basically the fine print in the offer to purchase says I can have a vacant property.

I've never heard of this clause, basically tenants without a lease can move anytime they want given 30 day notice as I understand it, if they want to stay the only way to get them out is if purchaser or their family needs the place to live in.

Somebody correct me if I'm wrong...

invst4profit · Feb 4, 2011

60 days notice is required.

A landlord may request a tenant leave for the purpose of sale however the tenant does not have to leave and can not be evicted for the purpose of a sale.

A lease whether it is written or verbal remains in place with a sale. A tenant does not have to agree to a new lease and can not be forced to sign a new lease with the sale of a property. The tenant must voluntarily leave and can not be evicted without cause.

The buyer once they take possession may give the tenant 60 days notice to terminate the lease but only if the buyer, or a family member, intends to move into the home.

Generally a buyer should be prepared to live in the home for 1 year as that is how long the ex-tenant has to file with the LTB for unjust eviction.

The owner may evict for the purpose of renovating but the tenant has first option to return, at the original rent, when the reno is completed.

You could also try to bribe the tenant into leaving if they know there rights and refuse to voluntarily leave.

Otherwise if you intend to flip the property be prepared to flip it as a rental property

DavidHamilton · Feb 4, 2011

Okay, I think I'm getting it now.

I can purchase the property with the tenant in it. Since I don't intend to live there, the tenant can stay. There is no written lease, so I can have the tenant sign a lease with me. However, I can also put the property up for sale again and then the new owner can either move in or keep the tenant.

thanks!

RedlineBrett · Feb 5, 2011

Good grief I'd never invest in Ontario. I can't believe the rules you guys have to live with out there.

invst4profit · Feb 5, 2011

The tenant must voluntarily sign a lease with you however if they chose not to sing a lease you can not force them to sign a new lease. Whatever the existing agreement is with the present owner continues on indefinitely or until the tenant voluntarily decides to move.

Ontario is extremely pro tenant and getting worse. Definitely not, in my opinion, a place for non residents to invest. Almost impossible to evict. I believe, and may have the numbers wrong, but last year of approximately 70,000 board hearings 50,000 were for non payment of rent. The LTB has thoroughly trained tenants in Ontario how to live rent free for about 4 months on average. In addition board rulings are not enforced by the board resulting in LLs having to take tenants to small claims court for payments. IN addition those on any form of government assistance can not have there income garnished. They all know they are untouchable and are there for a extremely high risk to rent to. Unfortunately it is illegal to discriminate against them and as long as the rent is not more that 100% of there government checks you can not reject there application based on income either.

No language in a lease agreement outside of what is specifically stated in the RTA are supported buy the LTB.

No pets - not enforceable, no smoking - not enforceable etc.

If a tenant does not pay rent, which usually takes 3-4 months to get a ruling on, the board forces a LL to accept a payment plan rather than upholding a eviction. Many times I have seen LL owed several thousand dollars in back rent having to accept payments that take 1-2 years for the LL to be payed off and usually the tenant defaults and ends up being evicted anyway after inflicting thousands of dollars damage on the property.

My advice: stay out of Ontario.

housingrental · Feb 5, 2011

I like Greg's above posts with a slight correction

For pets and smoking you can get tenants out eventually for interference of reasonable use and enjoyment of premises of other residents IF applicable.

Happy landlording!

invst4profit · Feb 5, 2011

That is correct but only in the case of another tenant or owner having a recognised allergy or after severe damage has been caused by the smoker or the dog. In the case of another tenant complaint that tenant would have to be prepared to testify at a eviction hearing for the landlord to possibly be successful in evicting. It is doable but extremely difficult.

To clarify my example: In the event a landlord had a no pet or no smoking clause and a tenant lied on there application they could not be evicted or prevented from smoking or having a dog simply because the Landlord had it in the lease. Clauses such as that are considered void by the RTA and tenants are actually encouraged by the LTB to lie on the application merely by the fact that the RTA makes it clear a LL may not enforce such clauses.

Thomas Beyer · Feb 5, 2011

[quote user=DavidHamilton]However, I can also put the property up for sale again and then the new owner can either move in or keep the tenant.

It is harder to sell with a tenant in it ! Therefore, if you take possession with a lease in place try to sell place vacant, following the provincial landlord-tenant act (I assume Ontario .. but please confirm), and stage the property for maximum resale value !

It is NOT COMMON to ask the seller to divulge details on the tenant
except his name, his security deposit, his rent and his move-in date,
usually by getting a copy of the original lease.

The purchase contract usually has a term that states that the new buyer assumes the lease(s) and all its terms.

It is not common for the seller to ask tenant(s) to leave. It is illegal
in many province in fact. The existing (and the new) landlord has to
honour the existing lease, and that may require a 3 month termination or
longer.

If you are a buyer, you decide on property inspection if you like the
property and the condition the current tenant put the property in, given
those leasing facts. Then you decide to buy .. or not !

Once you are the owner you then follow the rules laid out in the provincial landlord-tenant act and that may allow you to

a) raise the rent by a certain $ amount by certain dates

b) terminate lease with certain payments due to tenant or by certain dates

c) lower the lease

d) keep on trucking 'as is"

e) ask tenant to leave early with a payment that is acceptable to him (say $2000 + moving cost)

If you are a buyer you must be aware of the provincial landlord-tenant
act so you can ask the existing owner if in fact you must have a vacant
possession, and in most provinces that means 3 months notice or more !

Govern your purchasing contract language accordingly !

RandyDalton · Feb 5, 2011

Hi,

I agree with much of the posts thus far. Although I disagree that Ontario is a bad place to invest. But that is another story.

Big question is whether this property is in Ontario?

Certainly 50K below market value is nothing to sneeze at. How much do you stand to lose though in realtor fees, land transfer costs, legal fees, etc? Not sure how fast the close has to be? What issues exist other than the owners debt and the existing tenant?

Thomas' comments that a vacated unit is easier to sell is certainly true. Your offer should address this issue in the language and given your post it sounds like it does not at present.

If this property is in Ontario there are a couple of options for addressing this issue. Feel free to give me a call or post more info.

Regards...Randy D.

DavidHamilton · Feb 6, 2011

Hi,

The property is in Ontario.

I have done my analysis on the property to account for all legal expenses, commissions, LTT etc. as per the ACRE system.

The vendor will get certain benefits: a quick close, no more nasty calls from the creditors etc.

What I will get - if the deal goes through - is a property purchased well under market value, with a tenant and his family, and no written lease.

I don't plan to live in the unit. I do plan to put it up for sale right away. The tenant will stay in the unit under the current non-written lease (so at least most of my monthly expenses will be covered off by the rent). I will aim for a closing date of mid to late June which would give ample time for a new buyer to prepare to take possession and to give 60 day notice to the current tenant. IF the new buyer is an investor, then they could keep the tenant if the buyer has no intention of living in the unit.

Other than the challenge of selling a property with a tenant in it, is there something I'm missing with this strategy?

thanks

RandyDalton · Feb 6, 2011

Hi David,

Congratulations on doing your due diligence. It sounds like a great investment.

Only things to consider are;

1) In Ontario you must give 90 days notice to the end of the rental period. Thus if you give notice on March 2 say, with the tenant going month to month and paying rent on the first of every month, then your notice will be for vacancy based on July 1.

2) The tenant has the right to terminate tenancy at any time on a month to month tenancy with 60 days notice to the end of the rental period.

If you are looking to purchase this property and there is a good return on it, it might be better for you to purchase with vacant possession. Many landlords give notice to evict based on a family member moving in. The tenant finds another place to live and signs the necessary new leases, etc. Then as things would have it, something happens and the landlords plans change.

What does your realtor suggest? Is this property something another investor is going to want or is it something a home buyer is interested in. Since the purchase is to make money on a quick flip, make your decisions based on who is your target customer.

Regards...Randy D.

DavidHamilton · Feb 6, 2011

Hi Randy, thanks a lot! This has been very helpful.

One of the challenges with this little neighbourhood is that the prices have outstripped the rents. Thus, it is really hard for an investor to make anything with rents so low. As such, my target customer would be a young couple or family just starting out and looking for their first home.

invst4profit · Feb 6, 2011

The only other point you will need to consider is that in the event you do sell with the tenant in place the new owner may not apply to evict until they take position of the property. You as the seller may not apply in advance of closing on there behalf. This would require them to live elsewhere after the closing date until such time as the tenant vacates.

In this case the day of closing the buyer must apply immediately to evict for personal use. They should not simply ask the tenant to vacate in 60 days as at the end of 60 days the tenant may change there mind and chose to remain. In that event the owner would then have to apply to evict. That would take another 2-4 months.

All things to be kept in mind when reselling.

RandyDalton · Feb 8, 2011

Sounds like you are well on your way. Congrats!

You may also want to consider an RTO option. Even though the rents are lower in this area it does expand your potential customer base.

Regards...Randy D.

RandyDalton · Feb 8, 2011

Hi Greg,

Just wondering if your comment about the seller not being able to evict on behalf of the purchaser is from personal experience as the LTB website provides the following forms for eviction;

One of the following people wants to move into the rental unit:

myself or my spouse,

my child or parent,

my spouse`s child or parent,

a person who provides or will provide care services for any of those people

I have entered into an agreement of purchase and sale for the rental unit and one of the following people wants to move into the rental unit:

the purchaser or their spouse,
the purchaser`s child or parent,
the purchaser`s spouse`s child or parent,
a person who provides or will provide care services for any of those people

The LTB website certainly indicates that a seller can request an eviction on the purchaser's behalf based on an agreement of purchase and sale. No mention of closing. It also doesn't make sense since after closing why wouldn't the purchaser just proceed since they now own the property.

Regards...Randy D.

DavidHamilton · Feb 8, 2011

This is really important information for me. Has anyone done this before who can verify the process and whether or not there are days of notice involved?

thanks!

RandyDalton · Feb 8, 2011

Hi David,

I have done it for my clients in the past. However not through the purchase. Rather they owned the property at the time.

I have placed offers to purchase before based on obtaining vacant possession, all legal and above board with respect to the LTB and offers of purchase, however the offers did not proceed to closing due to other reasons. In the offer I simply stated I wanted vacant possession as I intended the purchase for personal use.

My realtor at the time helped me out considerably through the process however he was an investment realtor. Can your realtor not assist you and advise you? Certainly they should know the legal verbage that needs to be in the offer.

Regards..Randy D.

dplummer · Feb 9, 2011

If this is going to be an easy flip, why hasn't the present owner done it? The problem is in the tenant. Purchase the place free of the tenant. Clean, paint & stage for maximum return. Just my 2 cents.

Doug