If you’re thinking about buying a rental property and becoming a landlord, you need to start by researching the property and its current residents, if any, and finding out exactly what’s included in the sale. During the due diligence period, which is when your escrow and purchase are pending, ask lots of questions.
The due diligence period is probably your only opportunity to discover whether the seller has misrepresented any important issues. Confirm all information in writing.
A list of the property included in the sale
Inventory all the personal property included in the sale. This list may include appliances, equipment, and supplies owned by the seller.
Don’t assume anything is included in the sale unless you have it in writing. Verify that all items indicated are actually physically at the property before you close the deal. It’s your responsibility to avoid any misunderstandings about who owns the appliances in the rental unit.
A copy of all resident files
Make sure you have all the appropriate paperwork in the resident files. These documents include rental applications, current and past rental contracts, move-in inspection checklists, full payment history, any rent increase documents, all legal notices, maintenance work orders, current contact information, a resident complaint or communication log, and correspondence sent to or received from each resident.
A seller-verified rent roll and list of all security deposits
A rent roll is a listing of all rental units with the residents’ names, move-in dates, current and market rents, and security deposits. Be sure you get a written seller statement that no undisclosed verbal agreements or concessions have been made with any resident regarding any aspect of the tenancy.
When acquiring an occupied rental property, follow state or local laws about handling the resident’s security deposit. Most state laws require the seller and/or purchaser of a rental property to advise the residents in writing of the status of their security deposit. These laws usually give the seller the right to return the deposit to the resident or transfer the deposit to the new owner.
Here’s why you want the latter to happen:
If the seller refunds the security deposits, you have to collect them from residents already in possession of the rental units. Avoid this scenario by urging the seller to give you a credit for the full amount of the security deposits, and have each resident agree in writing to the amount of the security deposit transferred during the sale. Send each resident a letter confirming her security deposit amount.
If the seller transfers the security deposits to you, make sure you receive in cash an amount equal to all the security deposits held. Remember that if you just get a credit in escrow, you must be able to refund the remaining balances of any resident security deposits when the individuals move out.
Without written proof to the contrary, dishonest residents may later claim they had a verbal agreement with the former owner or manager for a monthly rent credit or discount for maintaining the grounds.
A copy of all required governmental licenses and permits
Rental property owners in many areas are now required to have business licenses or permits. Contact the appropriate government entity in writing and notify it of the change in ownership and/or billing address.
These governmental entities often impose stiff penalties if you fail to indicate the change in ownership in a timely manner.
A copy of all the latest utility bills
Get copies of all account information and verification that all payments are current for every utility that provides services to the rental property. These utilities may include electricity, natural gas, water/sewer, trash collection, telephone, cable, and Internet access. Prior to the close of escrow, contact each utility company and arrange for the transfer of utilities.
If provided with sufficient advance notice, many utility companies can arrange for the final meter reading and/or billing cutoff to coincide with the close of escrow, which prevents the need to prorate any of the utility billings between the owners.
A copy of every service agreement or contract
Make sure you obtain copies of all service agreements and/or contracts. These documents may include agreements with landscapers or gardeners; pest control services; heating, ventilating, and air conditioning (HVAC) companies; boiler maintenance services; laundry services; elevator, swimming pool, or spa servicing; and other providers. Review all current contracts. If contracts bind you to continue service, ensure such provisions are legal and in your best interest.
If you plan to terminate the services of a particular contractor or service provider, the seller may be willing to voluntarily send a written conditional notice of termination indicating that, should the property sell as planned, the provider’s services will no longer be needed as of the close of escrow.
A copy of the seller’s current insurance policy
One of the most important things you do when taking over your new rental property is to secure insurance coverage. You need the proper insurance policy in place at the time that you legally become the new owner. Request a copy of his existing policy or declaration of coverage, because this information can be helpful to your insurance agent when analyzing the property to determine the proper coverage you need.
When you receive the current insurance information, take steps to verify the accuracy of all records. This step can be important in preventing future disputes.
To avoid the unpleasant surprise of very high premiums, have your agent run a loss history on your new property before you close escrow to determine whether any losses have been claimed. Finally, make sure that the current insurer hasn’t paid any claims for repair or replacement work that hasn’t been done.
Although you may trust your insurance agent implicitly, don’t allow your escrow to close until you have documentation confirming that your insurance coverage is in force.