New Owner Complains of ‘Sweetheart’ Lease
Question: We recently purchased a four-unit apartment building where we plan to live in the largest apartment. Our problem is that about a week before the sale closed, the seller signed a two-year lease with his mother, who lives in one of the apartments. Her rent is substantially below market value and we were planning to raise it to help pay our mortgage costs. Do we have to honor this lease, which we didn’t learn about until several weeks after the sale was recorded?
ANSWER: The general rule is a new owner must honor any existing leases on the property. If the rule were otherwise, property owners with bad long-term leases could sell the property and the buyer could raise the rent.
However, the seller may be liable to you for damages, such as the difference between the attainable rent and the rent his mother is paying. Your circumstance is not unusual, and it shows why buyers of income property should check with each tenant before the sale is completed to verify the lease terms. A real estate attorney can advise on your recourse against the seller for misrepresentation.
Avoid Evicting Tenant Whenever Possible
Q: For about five years we rented a house to a nice couple. But, they got a divorce about six months ago. The wife stayed in the house with the three children, but she is obviously having a difficult time, because the ex-husband isn’t paying child support or alimony. This lady is now a month behind in her rent with no hope of getting caught up. I hate to evict her. Do you see any other alternative?
A: Yes. Consult your local city or county housing authority about Section 8 government-subsidized rentals. Your tenant may be eligible. Then the federal government will pay part of her rent and she will pay the balance. I have several Section 8 tenants who otherwise could not afford their homes, and the program works quite well.
However, if your tenant cannot qualify for Section 8, a better alternative to eviction is to offer to pay the tenant’s moving expenses. It may cost you $500 or so, but that is far cheaper than taking a tenant to court and losing rent during the delay.
The Ultimate Tax Shelter Is Death
Q: I have been investing in real estate for many years and have used tax-deferred exchanges to pyramid my net worth to over $2 million. Although I am in excellent health, what happens to all my tax-deferred profits when I die? Will my family have to pay the tax which I avoided?
A: No. The ultimate tax shelter of all is death. When you die, all the tax-deferred profits will be forgiven by Uncle Sam. However, the value of the properties will be included in your estate for estate tax purposes. Consult your tax adviser about how to eliminate or minimize death taxes.
Paying Deadbeat to Move Out Criticized
Q: Have you gone crazy? Several weeks ago you suggested to a landlord that he pay a deadbeat tenant to move out. You said this was cheaper than evicting the tenant, who can stall the eviction for months. That may be true, but as a matter of principle it is wrong to reward a person who is blackmailing another. Why don’t you admit you were wrong to advocate payment to a non-paying tenant?
A: I do not feel good about paying a deadbeat tenant to move out. But from experience, I have learned it is far smarter and cheaper to do that than to waste time and money going through a court eviction. Some of the “professional tenants” know how to stall evictions for months while they enjoy free rent. Of course, payment should not be made until the tenant has moved out and the premises have been inspected to be sure there was no damage.
Agent Passed Up Deals While Clients Got Rich
Q: I am a stupid real estate agent who failed to follow my own advice. My clients have made thousands of dollars in real estate on homes, apartments and commercial buildings I sold them. However, I am ashamed to say the only property I own is my home.
It is the best investment I ever made. Although I earn over $100,000 per year selling real estate, I can’t decide whether to invest in apartments, commercial buildings, condos, land or perhaps rental houses. What do you advise is the best way to make money in real estate today?
A: I understand your frustration. Years ago I was a real estate salesman like you, although I never earned $100,000 a year in the 1970s. The prime reason I sold real estate on commission was that I thought I would have the best access to the bargain properties.
But I was wrong. Virtually every listing that came into the large sales office seemed to be vastly overpriced. So I didn’t buy. Eventually, I realized that I was missing out because my clients were buying all these properties, which looked like bargains a few years later.
Over the years, I have owned apartments, condos, commercial buildings and even raw land. Today, I only invest in single-family rental houses. Single-family homes are by far the best real estate investment because they are so easy to buy, finance, manage and sell profitably.
Best Real Estate Opportunities Nearby
Q: I would like to invest in real estate and make big profits. Do you think Dallas and Houston are the best places to invest? Which cities do you feel offer the best realty opportunities today?
A: The best real estate opportunities are available within a half-hour drive from your home. I hear from correspondents all over the U.S. who are making realty profits even if their local market is not especially “hot.”
The key is to find local properties which can be acquired below market value. These are often fix-up houses which need minimal work which the seller refuses to do. I do not recommend you move to Dallas or Houston which, according to my informants, still have depressed realty markets.
Finding New Tenant for ‘White Elephant’
Q: About a year ago, my father inherited a six-story concrete warehouse building in a low-rent, high-crime commercial area. The moving company that has leased it for many years has given notice that it does not want to renew its lease. They have already moved out. I am a real estate agent and have been trying to help my father find a tenant.
Every moving company in town says the building is too old and expensive to operate, so they are not interested. I also have contacted all the mini-warehouse companies, but they say the building is not suitable for conversion. Unfortunately, the building has no windows, so it would be very expensive to remodel for offices and there is a glut of those here anyway. Any ideas?
A: Think creatively. A similar building in my area is being converted to an auto display center where the creative dealer will have lots of storage space for automobiles. The key is to find a user for your “white elephant” building, which may be very valuable to the right type of tenant.
For example, perhaps the building might be suitable for small businesses that could rent low-cost spaces for new businesses. I presume the building has fire sprinklers and high ceilings, so they are added benefits. Be sure to place for rent or sale signs on the building and advertise it daily in the newspaper classified ads. Keep your eyes open for businesses that need lots of low-rent space. Eventually you will find the right tenant for that unique building.
Broker Sold Lot for Business, Gets Sued
Q: I have been a real estate broker for more than 20 years and have never been sued. Until now. About six months ago, I sold a commercially-zoned vacant lot to a buyer who wanted to erect a building for auto repair. There are several such businesses within the same block, so I thought he would have no trouble getting a building permit.
But the city turned the buyer down for a permit because cars would have to back out into the street when leaving the garage. There is no back alley or other way to exit. Now the buyer is suing me for misrepresentation. I never told him he could build an auto repair garage, but I showed him the property because I presumed he would have no trouble constructing the building he desired. Do you think I misrepresented the property?
A: No. For your protection and the protection of the buyer it would have been a good idea to make the purchase offer contingent upon the buyer applying for and being granted a building permit for the type of structure he contemplated. Although you probably did nothing wrong, in today’s litigious society I am not surprised you are being sued.
In the future, when a property buyer tells you of plans to build on the property, protect yourself by including a contingency clause in the purchase contract. I hope you have errors and omissions insurance. Ask your attorney to explain further.
