Under renting.........

[Norwester]

Hi,

Has anyone had any experiences with property that has been under rented..........???

I shall explain further.

I've been eyeing off a place for some time now (low price and unrecognised development potential). Finally made the call to RE a couple of days ago to get some further info to feed into the DD.

Thought that it was owner occupied as no mention of tenant or rent was made available. Have now found out that it has been tennanted for the last eight years by the same people and that they have been really good tenants..........getting better all the time i thought,until I found out how much they were renting it for..............

They have not had a rent raise for eight years.

They were originally on a lease for the first year, then it went to periodic (month x month). Apparently they were such good tenants that the mum & dad owners never wanted to put the rent up-against the PM's recommendations.

In discussion with the agent it was quite obvious that this was one of the main reasons that the place wasn't selling.

Anyhow, the tenants got served 60 days notice during the week. I think the agent must have finally convinced the owners to sell as vacant possession - and the tennants..........well they've just pulled up the drawbridge on the place and nobody's getting anywhere near it..........

And the problem is I want the damn place as the numbers based on current market rental are really good - particularly with the development potential.

Bugger.

I have cooked up an evil scheme though that I will put to the agent tommorow - the old everbody wins (but I win more) scenario.

I get the property
The agent gets the sale
The tennants get to stay-albeit with increased rental levels - and improvements to match - when I develop the rear, the front has to be improved anyway.
The owner gets to sell and not have to worry about the place being vacant.

Or should I just walk away.

ciao

Nor

 

[jingo]

Hi Nor,

What an unusual situation. I remember reading in one of Jan Somer's books that she also kept a tenant on the same amount of rent for 10 years!

Personally, I would keep pursuing the property. It sounds as though the tenants have been in control for far too long, and your strategy above is well thought out.

If the numbers stand up I wouldn't let a tenant get in my way!

All the best,

Regards Jason.

 

[sailor]

Nor, I don't think this is an "evil scheme"...more like a sound business proposition if you ask me...which you didn't!

However, IMHO, this looks like a good deal for you, and as the owners want to sell, there needs to be something in it for everyone...and not being a charity, you are entitled to your share too.

I've just bought a unit (settle next Monday) and the PM signed a 12-month lease with the tenant (against the vendor's verbal instructions) in the middle of the contract period, at a rent $50pw below median rentals for this suburb.

I don't have a leg to stand on (according to my legal eagle). So a word from the recently bitten...go for vacant possession...you are entitled to do that. The tenant must give reasonable access to potential buyers, provided they get the reasonable notice from the PM. Don't be put off if your numbers stack up, and this is a good deal. Tis easier to get vacant possession with a contract of sale, than it is to get rid of the tenants later down the track.

 

[BV]

No don't walk away, that's what most other investors would do and they would miss out

Good luck with it.

 

[sunshine]

Made a similar purchase last year. Rental was way under market value and still had 10 months left of lease. Potential was way too good, and I snapped it up for full asking price.

Today I purchased the property next door, currently vacant and needs a whole lot of lovin. Paid more than the asking price (a bit of a tug o war which I thankfully won). With both properties I now have over 1 acre of land. Oh, the things we can do with that ...

If you see the potential and the possibilities - jump on in.

sunshine

 

[Ausprop]

"I've just bought a unit (settle next Monday) and the PM signed a 12-month lease with the tenant (against the vendor's verbal instructions) in the middle of the contract period, at a rent $50pw below median rentals for this suburb.

I don't have a leg to stand on (according to my legal eagle). "

I would get a second opinion on this. Certainly in WA the state of the tenancy must be declared as part of the sales contract, anything different is the vendors problem i.e. periodical, fixed term etc. To deliver somehting different at settlement to what was int he contract would be a breach in my view

 

[sailor]

"I've just bought a unit (settle next Monday) and the PM signed a 12-month lease with the tenant (against the vendor's verbal instructions) in the middle of the contract period, at a rent $50pw below median rentals for this suburb.

I don't have a leg to stand on (according to my legal eagle). "

I would get a second opinion on this. Certainly in WA the state of the tenancy must be declared as part of the sales contract, anything different is the vendors problem i.e. periodical, fixed term etc. To deliver somehting different at settlement to what was int he contract would be a breach in my view

I got 2 legal opinions, one from a solicitor with my firm, and one from one of the partners. The partner's opinion won. I'm not happy with the result. However, we settled yesterday, and I'm now shopping for a new PM, who might be able to encourage the tenant to move on, given that he's storing his motor bikes on the marble floor in the 2nd bedroom.

 

[karina]

I have always seen an opportunity in properties that are under rented. I recently bought a block of 3 units in a great location , they were renting for 180 each. I switched agencies and the new agency suggested they were way under rented that we should be getting $230-240 each, as the leases came up we gave the tenants the option to renew at the $230 or move, 1 stayed , the other moved and a new tenant moved in the next day for $240 a week and the third tenants lease is not up until later in the year. I am certain the rental increases will increase the value of the property. Based on my purchase price the yield is now 7.5% which I am very happy with (initially 6%)

Good luck with it, I'd not let it deter me from buying the place. Its just a temporary problem.

 

[Vodka]

Money talks.... See if you can pay the tenants to move out?? It has been known to work in the past. One family, 2 adults 4 children, were paid $1000 by the buyer and $500 by the seller, they took the money and moved on.
You don't want these guys as your tenants if this is their behaviour. Look for a new pm too if you get the property, but do not give up.

 

[fernfurn]

I thought that if you could prove the rent was under suburb values you could increase the rent, even if they were on lease. This is from years ago so perhaps has changed.

 

[Joe D]

..........well they've just pulled up the drawbridge on the place and nobody's getting anywhere near it..........

And the problem is I want the damn place as the numbers based on current market rental are really good - particularly with the development potential.

Nor

Why don't you knock on the door and politely explain to the tenants that you are an investor and are interested in buying the property and retaining it as an rental property, but the agent can't or won't get you through.

You might find that existing tenants will be more willing to have an investor buy the property rather than an owner-occupier so that they won't have to move.

If you at least get a look around the property before everyone else you will be well ahead of the pack and able to submit an offer without the agent arranging an inspection.

Issues like increased rent and new leases can be dealt will later especially if the main reason you are buying is development potential.

Just my thoughts

 

[Dazz]

It sounds as though the tenants have been in control for far too long

Well Nor, I reckon jingo hit the nail on the head with this one. Eight (8) years is quite a while to be stagnated at the same rent. They've obviously played the "we're good tenants, so you'd be crazy to get rid of us or put up our rent" card and the Landlord, as so frequently happens due to a fear based approach, has swallowed it hook, line and sinker.

Your win / win scenario as described didn't seem like much of a win for the people currently in control....they get their rent spiked up way above what they are used to. Whether they are paying well under market rent is neither here nor there to them. Their mindset is firmly set in the "we've looked after this place for the Landlord like it was our own, improved it here and there at our own expense, and always paid the rent on time.....and this is how he repays us." Bloody Landlords, bloody agents, bloody investors.....parasites the lot of 'em, what about us ?? Tenant storms off in a rage and pulls up the drawbridge as you say.

My work colleague was in this exact scenario 2 months ago.....as the tenant who had been there for the past 11 years. He had extracted a verbal promise from his Landlord that if he wished to sell, he'd either sell to him or to another investor such that he could stay. The Landlord agreed.....but lied to him.

The Landlord's agent lied to the tenant. The Buyers agent lied to the tenant. The PM lied to the tenant. The only one who didn't lie to the tenant was the innocent young 23 yr old female buyer, who forthrightly told him she had bought it, with a vacant possession clause in the sales contract as her PPoR and fully expected vacant possession at settlement.

Unfortunately, the truth never came out until 2 days before settlement, when the Buyer finally got to meet the tenant during the pre-settlement inspection. All of the agent's and representatives were there....the PM, the buyer's agent, and the seller's agent, who were all summarily told to stay on the verge on not come any closer than the letterbox. The Buyer was allowed in, and nearly fainted when told the tenant was going nowhere, had 2 or 3K worth of work tied up in the place, and if she ever eventually had a court order to evict him, he'd be ripping everything out.....(TV aerial, pot plants, retic, garden shed, shadecloth, mechanism on toilet flusher ) that he had installed at his expense.

The agent's tried to bully the tenant but he's a wily old bugger who isn't bluffed easily. All of them had to stand aside as usual, as they have no power to actually do anything.

The sales contract eventually fell over, as the Seller was unable to deliver on his vacant possession promise. The tenant is still there on a periodical lease, lapsed into periodical some 9 and a half years ago. Pays $ 170 per week for a 520K property in a top spot.

He reckons if they wanted to they could issue him with a 60 day notice, but with all of his stalling tactics, reckons he could drag that out to 5 or 6 months easily.

I told him in no uncertain terms, as a Landlord sitting on the other side of the fence, his predicament, whilst unfortunate, I could not agree with. He said stuff 'em, they are only interested in the money side of things, yet this is my home and life we are talking about.

He asked me if I knew of any tricks to extend their pain out even longer, to the point where they would give up. All I could offer was for him to buy the house off the Landlord. He said "You've got to be jokin', why would I waste over half a million on some place that I can rent for 170pw." He had a point.

It was yet more re-inforcement for our investing philosophy of not buying assets that attract this type of horrible drawn-out-no money type of situation.

 

[Ajax]

Hi Norwester,

I purchased a house in Darwin a while back. Previous owner (also an investor) was very loyal to the existing tenants who had looked after the proerty well and been there for about 4 years.

Prior to putting the house on the market the vendor had signed a 12 month lease with the tenants at $230/week. Rental appraisals were for $280/week when I purchased with 11 months left to run on the $230/week leaese.

The property value increased quite quickly after I purchaesd but when I went to revalue to borrow more the bank kept coming back with valuations well under the market price. I suspect they were taking the low rent into account on some sort of capitalisation model.

When the fixed rental period was up I obtained another rental appraisal. This one was from $320-$340 week. I put the rent up to $300/week..the $70/week increase caused a lot of angst for the tenants but they stayed.

My conclusion...try to keep rents in line with market rent (possibly $10 or even $20 under weekly market rent for a tenant who really loooks after your property). Don't let the rent fall well below market rent as it will affect the banks' perception and a purchaser's perception of the value of your property. It will also cause a lot of angst for your tenants if rents are subsantially raised in line with market rent by a new purchaser.

If you are the new purchaser the tenants need to realise that your financial position may be substantially different to the previous owner's and that you don't have the luxury of letting the property well under market rents.

Ajax

 

[neko]

Glad to hear I am not the only one with this problem. We purchased IP #3 ,6 weeks ago. The tenant had lived their for the past 9 years. When we looked at the place she told us she was paying $170 p/w, which is about $40 p/w under median rent for the area. When we negotiated and settled on a price it was written on the contract that she infact was only paying $140 p/w and had done so for the past 9 years. When I confronted her about the amount she was actually paying, she told us that she lied so that we would buy it and an owner occupier wouldn't(I know I don't quite get it either). When the house settled I put her rent up to $195 p/w. She was very vocal and unhappy about the decision at first but now 6 weeks later things have calmed down, she is staying on a periodic lease which as what she previously had. So if the sums add up and it's the IP is the one for you then buy it and the tenant will have to comply to your rules if they want to stay. My tenant had me feeling unsure that I should have been putting up the rent. The overwhelming feelings of unfairness I felt for her tore me up inside, until I had a talk to her about the situation, and all she wanted to tell me about was the new car she had just signed up for on hire purchase, and that's when it hit me. I do not want to judge what she does or how she spends her money but at the end of the day I have a duty to my family and the IP's we have must be run as a business if we are going to achieve get our goals and if that means putting up the the rent then that's what we have to do. We all accept price rises in everyday life, at the end of the day with interest rates going up or even the rates, everyone has to chip in down the line including tenants.

 

[sailor]

Good on you Neko....we really need to be aware that how other people spend their money is their choice, and our investments deserve to return decent incomes.
I felt a bit bad putting up the rent once in a unit with a single mum with a child. Until I realised she had just bought a brand new car. Then I discovered she bought takeaway 5 nights a week, and had a 2000+ DVD collection. Gee that's enough for a deposit on a house!

 

[fernfurn]

What does "lapsed into periodical" mean. If they are on a lease for the first two years, say, then I don't get them to resign, I thought it just went to week to week (and therefore I could put up the rent whenever I want, with the appropriate notice) Is all this right?

 

[sailor]

What does "lapsed into periodical" mean. If they are on a lease for the first two years, say, then I don't get them to resign, I thought it just went to week to week (and therefore I could put up the rent whenever I want, with the appropriate notice) Is all this right?

When a lease is not renewed, and you have agreed the tenants may stay on, it is called being on a "periodical agreement". Being on a periodical agreement means that you can put the rent up by giving 2 months notice (in Qld, not sure about the other states). Also the tenants have to give you 2 weeks notice (in Qld), if they want to vacate. You can put up the rent as you say, but I think you can only do that twice a year.

 

[fernfurn]

Thanks muchly

 

[Norwester]

Thanks for all the replies guys and gals.

Just a bit of an update.

The place has now been inspected, and I have got the report back from the old boy and the daughter (he points it out she writes it down...... and man they are picky. Which is great..........). Turns out to be pretty much as expected and the measurements confirm what I thought could be done from looking at the satellite imaging.

Had a chat with the agent last week, and asked him to send through the Vendors Statement.

He comes back with..........."well we haven't actually got a vendors statement", pretty weird since the place has been on the market for nearly nine months now.

Ok..............????

Turns out that the property is a family inheritance which was passed on to them when their father died........twelve years ago!!! Which lines up with when the tenants moved as confirmed by a quick chat with them.

I'm suspecting that the agent is now tearing his hair out in regard to these owners. Seems he's been getting plenty of lowball offers..........but nobody has actually said that they wouldn't offer a price under XXXXXX which is what I've done.......

Seems to be a lesson in how not to manage and/or sell a property.....

I'm not minding the delays at the moment as it's giving me some leverage and also sufficient time fo my LOC's to come through........would've been slightly embarassing clinching the deal then not be able to lock it down with some money.

So ho hum, just waiting around at the moment, not expressing a great deal of concern or enthusiasm to anyone.........

It will need to be locked in by the end of the month though or I will miss the opportunity of being there at settlement for a quick tidy up and makeover if the tennants do decide to bail as instructed. If that happens well then it's just on to the next one.

Never thought I'd come across owners that just can't get it together though.......strange game this.........

ciao

Nor