When buying an occupied property from a seller you may run into occasions when no leases exist. This is something you see more so with mom and pop landlords.
It can happen for any number or reasons, with a common one being that the tenants have occupied the unit for many years and are tenant at will (or month to month) and no lease extension was done.
Pro tip: Write into your lease that it defaults to a month-to-month agree upon expiration of the lease duration.
Using Estoppel Letters When Leases Don’t Exist
Before we get into why you will want and need to use estoppel letters in this scenario, let us first define what they are.
An estoppel letter is a document used in due diligence for real estate and mortgage activities. It is completed by the current landlord and tenant. The letter provides confirmation by the tenant of the terms of the rental agreement, such as rent amount, security deposit, what items are tenant or landlord owned (think appliances) among other things.
Using them for purchase
If you are purchasing a rental property and intend to use financing, the lender will want completed estoppel letters if no leases exist. The estoppel letter verifies the amount of rent coming in, an item the lender will need as part of their underwriting.
Provides information you want as well
Knowing whether the current landlord is holding security deposits and last month rent for the tenants is pertinent information as well. If last month rent is being held and the tenants convey with the property then you should get a closing credit for the amount of those rents otherwise you will essential lose a month rent’s when a tenant does decide to vacant.
Same with the security deposits. If they are held, those funds need to be transferred to you upon purchase, which again can be done with a closing credit.
Key pieces to keep you from losing money
Those are just a few key items to pin down in order to ensure you are not left holding the bag on something. There are several other items on a standard estoppel letter that further help cover you and satisfy lenders, be sure to look through the document thoroughly. You can find them online by doing a simple google search.