Ask Us: Upside to purchasing 2-units with protected tenants

Where our readers ask, and we try to answer:

Is there any upside at all to purchasing a 2 unit building with protected tenants?

We’re looking at a 2 unit in Noe Valley at the moment.

Thanks for any insight you can provide.

Osho, thanks for the question. We’re going to have to start providing a full legal disclosure that states something to the effect of if you turn around and purchase this two unit based off our advice and it turns out to have more downside than upside, you won’t come back and sue us.

Without knowing more of the details of which property it is, your future plans with it, are you purchasing alone or with a partner, are you purchasing as investment or owner occupier, etc., etc., it’s hard to say. The short answer…yes, there is upside, but you need to know your sh*t, and you need to contact someone like Andy Sirkin or Goldstein, Gellman, Melbostad, Gibson & Harris, LLP. That’s a start, at least. Good luck.

Maybe our Stammtisch can provide some further insight for you.

Tenant Evictions Brochure [G3MH, LLP]

20 thoughts on “Ask Us: Upside to purchasing 2-units with protected tenants

  1. I’m not an expert by any stretch of the imagination, but I would walk away. Buying a property with tenants in San Francisco is a complex issue in its own right, but buying with a protected tenant could be a flat out nightmare. The conventional wisdom in SF is that, if you are a landlord, your tenants own you. Also, what happens if at some point you need to sell over the next few years? Odds are the tenant will never, ever move out because they’re paying ,what, $500 a month in rent? Talk about a tough sale. A multi-family home near me has protected tenants and has been in an out of escrow multiple times and has had a fairly massive price reduction.

  2. Impossible to give accurate advice without knowing more about the place, but there clearly is a possible upside. Perhaps you explore if there’s a way to pay the renters a certain amount of money to leave the property. Could very well cost 50K a tenant – but if the property sits on the market and slips in price due to the negative reaction regarding tenant issues, there very well could be an opportunity.

    Obviously it depends on what the goals are, state of the building, location, etc. I generally try to steer clear of tenant occupied situations, but have helped several parties in ’07 who stand to make a great return on their investment and enjoy their home. It’s a risk – but at the right price it’s worth taking.

  3. someone rents out their condo in my building and i think he may have the right strategy to deal with the san francisco market. he only gives folks 1 year terms, no exceptions. he has a new tenant in there every year this way and can set the price. quite clever when you think about it. i think several other folks in the building have caught on to this strategy now as well.

  4. FYI condo is not rent controlled so you can raise your rent every year if you want. Either case, 1 year lease term is a good idea.

    I believe there are generally 4 ways to get tenants out

    1) tenants voluntarily decide to move

    2) you offer tenants a deal and buy them out

    3) owner move-in eviction (OMI) – you designate a unit in the building as the owner’s unit, and you evict the tenant in that unit, and you will need to live in that unit for at least 3 years. No subsequent OMI in the building can happen except in that owner’s unit. Or, you and other members of your family (mom/dad/inlaw, etc.) want to move in to the building, and you initiate OMI on units that you and your family members plan to live in. Apparently the court found it unconstitutional to disallow a property owner to be able to live in his own property, so OMI is the way to do it.

    4) Ellis act eviction – you take the building ‘off the rental market’ by getting everybody out, and you will not rent the building out for 5 (or is that 10?) years.

    The city has specific compensation terms for displaced tenants for 3) and 4) that you need to pay so you need to check in on that.

    For 3, you cannot OMI evict a protected tenant, period. So that option is out if you have a protected tenant.

    For 4, if you ellis act a protected tenant, your building will be tainted and you will never be able to convert to condo.

    For 2) even if you have a deal with the tenant, if it’s not ‘legally’ done you still have the risk that later on they can change their mind and decide not to move at all. So it’s risky… I hear some landlord say you can initiate a legal proceeding against the tenant in court, and then have that buy-out amount be recorded as settlement out of court, so there is a legal contract there… But I don’t know how that could be done as on what legal grounds can the landlord initiate the legal proceeding?

    So, I don’t know. I won’t touch a building with protected tenants, unless I will use it as a ‘compound’ for my whole family and i have no intention of selling it in the future.

    In any case, this is not authoritative in any way. It’s just want I think I know. I would suggest to talk to a lawyer.

  5. Everything Anon8mizer says is true.

    Remember protected tenants are typically elderly and/or disabled and have been in the property for at least 10 years. You cannot evict them. In all likelihood, the resident will be in the apartment until they die. Even with a 50k pay off, her or she probably can’t afford a similar apartment in the same area for more than a couple of years. Plus, you open the door to all sorts of lawsuits if the tenant feels they are in any way mistreated or neglected.

    Here’s an interesting article from the Chronicle:

  6. is there anywhere in this country or in any other free market oriented country where a THE free market is actually allowed to set the price for rentals and where you can evict people that don’t pay on time or trash your place? just curious.

  7. One last word of warning: trust no one. When I remodeled my house the nice little old lady down the street turned instantly into a shrieking harpy from hell resulting in horrific confrontations, nasty phone calls to the district supervisor, and threats of various lawsuits.

  8. James, if your friends condo is in a building that was built before rent control came into being, even though it is a contract, it is not a valid contract and the 1 year max term is unenforceable. Asked a real estate attorney that very question just 2 days ago.

  9. What about a condo (not TIC) Dede?

    And if the contract is unenforceable, why not just raise the rent to an astronomical level to get them since it is not subject to rent control?

  10. My upside: I wanted a home, not a get-rich-quick scheme. My protected tenant pays about $800 below what the market would bear. But her rent still covers about a third of my Noe Valley mortgage, so I can afford to live on a great street without financial strain. Plus I get to write off depreciation and maintenance on half the building.

    Most importantly, she’s quiet, kind, a good neighbor, and and since she knows I’m not out to squeeze every dime out of the building, she’s not quick to complain about the quirks of the old place. She’s also been here forever, so she knows the history of the pipe that leaks, or the heater that got replaced.

    I hope she does live here for the rest of her life.

  11. Condo’s and TICs are different due to state legislation (Costa Hawkins, I think). You can’t impose rent control on a single family home. A condo qualifies as a single family home, no matter when it was built. In SF, it’s murky but I believe if you condo convert your TIC and then rent it, it’s rent controlled. If you condo convert your TIC, and then sell it, the new owner and any future owner has a unit that is NOT subject to rent control.

    I think with regards to James’ friend’s condo if it’s built after 1978 or so, it is not subject to rent control….. but it was built before 1978 and a prior owner converted it to condo, it would still not be subject to rent control.

    BUT I don’t think that the one year lease no exceptions is legal. Renters in these post-1978 have the same protections as all pre-1978 tenants, EXCEPT the restriction on how much one can raise the rent. You can’t kick them out after one year, their lease immediately rolls to month to month. But you can raise the rent through the roof and get them out that way.

  12. Liz

    Thank you so much for writing that. There seems to be a divide between those of us who are interested in real estate as a possibility for a home and those interested in it as an investment.

    Buying a house with a good tenant works for one of those groups. Long time protected tenants CAN be the people who make a neighborhood work. They know the neighborhood, connect it to a past. For people who want to slap on some marble counters and call it a home, well, the people in the neighborhoods don’t really matter, just the comps (or whatever you call it). or off ramp convenience. or views.

    I think over time the view matters less to people than their neighbors.

    is that a touch pollyannish?

  13. That sounds really ideal Liz, but I think finding a perfect tenant in this city is an anomaly. How many of us have rented a place where the woman downstairs turns out to be Sybil?

    I just did a quick online search and in all likelihood found the property in question. I won’t reveal it here, but I think, in spite of the (somewhat) attractive price, a purchase looks extraordinarily risky, even more so given the somewhat unpredictable status of the current market.. It’s also clear that if indeed this is the same property, it would be for future investment, not a home.

  14. I think if one can find a duplex with one vacant, and one paying market rent at a decent price, it is a great way to go. The rental income and tax breaks will likely to cover about 50% of the PITI, and the other 50% of the PITI will probably be equivalent to the rent the buyer has to pay to rent the vacant unit… On top of that there is a 10-20% upside to convert to TIC and then fast-track to condo in the future once (or if) the renter leaves.

    I think it’s better than buying a condo. It’s not as great as having an SFR all to yourself but given the price actions in SFRs these days a duplex with income is less of a risk me thinks.

  15. Having just dealt with a greedy protected tenant I have more than a few thoughts about the tremendous downside of buying a property with protected tenants.

    My case started in 2001 and just settled this summer. I innocently purchased a 2 unit bldg. to live in, with a protected tenant, and thought I’d slowly go about doing needed repairs, renovations and offer the tenant a huge lump sum (50K) to move out. At this point I didn’t know how greedy the tenant was and didn’t know about his financial resources. The tenant laughed when I made this cash offer and said he wanted $150K to move out. Seriously.

    Shortly after I was sued by the tenant for all sorts of murderous activities thats on the boiler plate lawsuit forms the tenant’s lawyers use… for $500K, yep, half a million, not a typo. Not one of the charges stuck when it got to court recorded depositions…since in fact the tenant had only nice things to say about me but he wanted money and had me hostage.

    My options were: sell the property at a minimum of 50% loss in value, pay the tenant his request of $500K, or Ellis the building & start a legal defense. I ended up hiring a bunch of attorneys, filing insurance claims and Ellising the property. I even had to hire a firm to keep the insurance companies and the insurance lawyers “in line” because of course, the first thing any insurance company says in response to a claim, is “we’re not responsible”.

    Even though it was clear that I had NEVER done anything wrong to the tenant, his lawyer threatened a trial. I wanted my day in court, but my attorneys (I had an ever growing team of 6 attorneys by then) were deathly afraid of trial. Seems in SF most judges are pro-tenant. And even if the jury hears that the “protected tenant” plays golf all day, sails on their private yacht, drives a new Mercedes Benz, while checking on their bonds… (I wish I were making this up)…and has their own vacation property in Carmel, all while claiming disability and hardship… the case is bound to go the tenant’s way. HERE’S THE RUB: Even if the jury DETESTS the “protected tenant”, if they award the tenant even $1 of damages, the landlord automatically has to pay ALL of the tenant’s legal fees (in this case his fees were over $78K). All jury judgments are tripled and the juries are not told this while they are deciding the case. So there are cases where the juries, thinking they are doing the right thing, give a low award to a greedy tenant, only to discover later that the award was trebled AND all legal fees automatically awarded. And, insurance companies might pay towards the landlord’s defense but they WILL NOT pay judgments….so, trial is for the foolhardy.

    How to calculate the downside and the cost? Difficult, because how do you calculate the grief and loss to life when going through something as crazy as all of this. The building was tied up for years… when it could’ve been generating money. My funds were tied up. I couldn’t enjoy being at the building and wanted to minimize my contacts with the tenant, who was paying $389/mo. rent, as much as possible. Legal fees, NOT reimbursed by eviction insurance and personal umbrella policies, were roughly $90K.

    WHAT DID I LEARN? Ellis the property the day after you buy it, before you’ve met the tenants and they get a chance to claim you’ve done something wrong to harm them personally. It’s a business decision and you just move forward. Ellising would’ve saved me, but I thought the tenant deserved something for moving from a place he’d been in for 28 years… and that I’d try to negotiate something. I was so wrong. Lest you think Ellising is easy… it isn’t. You MUST have a law firm who has a GOOD track record with Ellis filings. There are strict deadlines that must be observed for several months and SEVERAL YEARS after you file for it…. one missed deadline means you have to start all over again AND can result in a harassment lawsuit from the tenant. In retrospect, filing for Ellis would’ve been a lot easier than the dealing with a frivolous, costly, time consuming lawsuit for 6 years!

    I always wonder what Dashiell Hammett would have done with a story line about a tenant extorting a half a million out of their landlord…it’s a crime novel begging to be written.

  16. Yikes Zang. I’m already not a fan of TICs for my own reasons some of which you covered, but to hear your horror story, man oh man. My parents went through something horrific too. Not with TICs but with a tenant in a city locally where tenants don’t have protection. The tenant refused to pay rent after a year of living there and essentially squatted. My parents had to hire legal counsel in order to get the tenant out and 50K later won the suit, but it didn’t matter because the tenant filed for bankrupcy. So my parents not only paid 50K to get this tenant off their back but also lost money on their property for the year, yup one whole year, the tenant refused to pay rent! Turned out, this was the tenant’s lifestyle and there were many other people in line before my parents. For this experience alone I will never buy a property that has a tenant nor rent out a property to one.

    [Editor’s note: Thanks to Zang for that comment. It’s on the front page. I’d just like to add that I can categorically, speaking from experience, say there is nothing wrong with renting, but there is all sorts wrong with being a bad tenant. I’ve had three bad tenants and it absolutely sucks! Even the good ones go bad when rent is late. It is the one MAJOR downside to owning and renting out. I will say, (it must be because Christmas is around the corner), but this is the first December in years that all rents are paid and accounted for. That is cause celebre.]

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