If I buy tenant occupied property what are the critical issues that must be covered in the purchase offer?

A purchase offer contract should protect the interests of a buyer by including adequate contingency clauses for seller disclosures and property inspections. The seller should be required to provide copies of all relevant documentation related to all issues that are material factors in a buyer’s decision of whether to own the property for the price that will be offered. The buyer theoretically would have legal recourse against the seller if the seller provides false or misleading information or does not provide information material to the sale.

Contingency clauses for inspections should include a physical inspection of the exterior building and related structural and mechanical systems. Inspection of the interior of rental unit(s) should be scheduled early in the due diligence period to determine the general physical condition of the unit(s). Existing conditions should be noted for damage, repair, or replacement. A copy of the tenant’s move-in checklist can confirm the condition of the unit at time of move-in. You will want to determine that the condition of the rental unit, if damaged, will be covered by the tenant’s security deposit upon the tenant’s move-out.

The offer should require that the seller confirm that there are no lawsuits, regulatory agency actions, or other claims pending against the property related to previous or current tenants not previously disclosed in writing and require a warranty that the seller has complied with federal and state lead laws and other potential contaminants. It should require that the seller provide copies of required disclosure documents for existing tenants under federal, state, and local laws and copies of all inspection reports conducted by state and local agencies for health and safety requirements. You should also request copies of current fire safety and building code inspections as well as other inspections or requirements by subsidized housing assistance programs such as Section 8. The purchase offer contract should require that the seller provide copies of documentation related to complaints by other tenants, neighbors, and government agencies regarding any tenant.

The most important documentation in buying tenant occupied property is to request copies of all rental documents, including lease agreements; security deposits accounting, rental rules and regulations; other policy statements issued by the seller to tenants; rent payment histories; application forms, screening reports, and move-in checklists. If the property currently has a resident manager, the employment contract and associated lease agreement as well as instructions and policy statements related to management should be requested.

To further reduce risk of potential problems after-closing, you should consider execution of Estoppel Certificates by all tenants as a contingency in the purchase offer. An Estoppel Certificate is a document signed by a tenant that (1) affirms the lease documents (attached to Certificate) and the deposit/rent amounts; (2) confirms that there are no agreements outside of the attached documents; and (3) confirms the amount of security deposit, the current rent, and the date to which rent has been paid. In addition to verifying information provided by the seller, the Estoppel Certificate stops the tenant from making claims regarding the included issues after close of escrow.

Since you will be responsible for the accounting and return of tenant security deposits upon existing tenant move-out, the purchase offer contract and any subsequent escrow instructions should explicitly state that you, as the buyer, must be credited with the tenants’ security deposits at close of escrow. The seller should also be required to provide a signed letter at close of escrow notifying the tenants that the property has been sold to you as the named buyer.

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