I’m doing a Lease/Option on a apartment complex that has 50% vacancy. As soon as I get three more renters in the cashflow will be positive and I can get it financed. I truly believe it will a simple task, however my wife continues to bring up the idea of what happens if I lose tenants or for some reason can’t fill the vacancies. The 6 month lease agreement is that I will pay the seller his exact monthly expenses as a lease so he will break even, then he gets $100 option money. The expenses are $2,600 with Gross Rents being $2,200 monthly.
My question is, if I realize after the first or second month that I can’t get tenants in to make this work, what options do I have? How should I structure the agreement?
If you get into any contract, there WILL be penalties for backing out, otherwise, why even bother with the contract? You aren’t going to be able to “work” the deal so that you can try it for a month or two, then say “sorry” and walk away. It’s not that easy.
In a lease arrangement, you are responsible for paying the FULL amount of the lease terms (6 months X $2,600 = $15,600). If you break the lease, then the leasor can sue for specific damages as well as for any and all months that he has been unable to find a replacement leasee.
In other words, he’ll probably have you in court suing you for his court costs, attorney fees, damage to the property, lost time from work, repair costs PLUS the full balance of the lease because he will not be able to find another person that wants to lease/option a negative cashflow apartment complex.
I don’t agree with Roger J.
“You aren’t going to be able to “work” the deal so that you can try it for a month or two, then say “sorry” and walk away. It’s not that easy.” -Roger J
In the first paragraph of my contracts I have a clause stating I have 30 days to find a qualified tenant. If I can’t the contract is null and void and all monies exchange are considered liquidated damages and no more money is due to either party.
If you want it, put it in the contract. Obviously you’ll need to justify why it’s there (to the seller and possibly the judge) but it is that easy. It all comes down to negotiating.
I guess that we’ll just agree to disagree then.
You can put whatever you want in the contract. Heck, I can put in my leases that the tenants are not allowed to use the back door as an entry or exitway, and if I catch them doing it, I’ll evict them, but I seriously doubt that it would hold up in court.
As you said, gold, you need to justify it to the seller and the judge. It’s fairly easy to ‘justify’ pretty close to anything to a desperate seller. A judge may be a different matter, especially when the seller brings you before one because you wasted a month or two of the time and ability to sell their property claiming such a bogus excuse as “unable to find a suitable tenant,” and arguing that the seller’s signed it.
I certainly agree that you cannot ask for the moon and expect to get it. If you can provide the logic in the contract (and the logic makes sense) can you argue with it?
I state the reason for the 30 day window as being beneficial to both parties. If a qualified tenant, not just any tenant, cannot be obtained, the contract is void. Obviously, every effort must be made (and proven) that you tried to find a qualified tenant. But in the end it is in the best interest of of both parties to find a good tenant…can you dissagree? The seller agreed and signed the contract.
I should correct my last post. I don’t think Roger J is “completely” wrong here. There WILL be consequences and repercussions if you back out of the contract. It’s mitigating the consequences that is key.