You are under contract on a duplex. Both units are occupied, the seller says the tenants have been there for years and pay every month without fail, and rent is 1,150 a side. You ask for the leases so you can send them to the lender.
The seller tells you there are no leases. There never were. The tenants moved in, they pay on the first, and everyone has been happy about it for six years.
This is extremely common on small residential rentals bought from long-term individual owners, and it is not a deal killer. But it does change what the lender uses for income, what your first ninety days of ownership look like, and what your actual risk is if one of those tenants turns out to be less reliable than the seller remembers. Worth knowing before you get to underwriting and find out the hard way.
What a month-to-month tenancy actually is
When a tenant occupies a property with the landlord’s consent and no written lease, most states create a periodic tenancy by operation of law, usually month to month, set by the interval at which rent is paid. The same thing happens when a written lease expires and the tenant stays on paying rent, which is a holdover converted to a periodic tenancy.
The tenant has real rights. They are not a squatter, they are not a trespasser, and you cannot simply tell them to leave. What you can do, in most states, is terminate the tenancy on written notice, typically thirty days, sometimes sixty depending on the state and the length of occupancy, and longer in jurisdictions with just-cause eviction rules or local rent regulation.
That matters because it cuts both ways. The tenant can leave on thirty days notice too, which is the part the lender cares about. If a person genuinely is not in a squatter situation but their status is murky, that is a different and more serious problem, covered in buying a rental with a squatter or unauthorized occupant.
How the lender sets income without a lease
On a rental loan underwritten to the property’s cash flow, the income figure is normally the lower of the in-place contract rent and the appraiser’s opinion of market rent, and the general rule is covered in do you need a signed lease at closing.
With no written lease, there is no contract rent to evidence. So the file falls back on two things.
The appraiser’s market rent opinion. On a one-unit property this comes on a single-family comparable rent schedule; on a two-to-four unit it comes on the small residential income property appraisal report with a rent schedule for each unit. This becomes the primary number.
Corroboration that someone is actually paying. Usually a combination of bank statements from the seller showing deposits, a written rent roll signed by the seller, and an estoppel certificate signed by the tenant. The estoppel is the one that carries the most weight because it comes from the tenant rather than the counterparty who wants to sell you the building. What it is and why underwriters want it is in the tenant estoppel certificate on a rental purchase.
Here is the outcome that surprises people. Because there is no contract rent to cap it, a month-to-month unit paying under market is often underwritten at the market number rather than the in-place number. That can help your ratio. Some programs will haircut it, commonly five to ten percent, precisely because the income is not contractually locked. Some will apply a vacancy factor. And a minority will simply treat the unit as vacant and use market rent with a larger haircut.
Policies vary and they change, so the honest answer is that this is a question to ask before you write the offer, not after.
Run the numbers both ways
Take the duplex. Purchase price 268,000 dollars, twenty-five percent down, loan amount 201,000 at 7.375 percent on a thirty-year amortization. Principal and interest is 1,388 dollars. Taxes 320. Insurance 105. No association dues. Total monthly obligation, 1,813 dollars.
In-place rent is 1,150 per side, so 2,300 gross. The appraiser comes back with market rent of 1,325 per side, 2,650 gross, because the seller has not raised rent in four years.
Scenario one, underwritten at in-place rent. 2,300 divided by 1,813 gives a DSCR of 1.27.
Scenario two, underwritten at market rent with no haircut. 2,650 divided by 1,813 gives 1.46.
Scenario three, market rent with a ten percent haircut for the unlocked tenancy. 2,385 divided by 1,813 gives 1.32.
Scenario four, one unit treated as vacant at market less a vacancy factor, the other at in-place. Roughly 2,343 divided by 1,813 gives 1.29.
Every one of those clears a typical 1.15 or 1.20 floor, which is the point: on a property with genuine rent upside, a month-to-month tenancy is more often an advantage than a problem. The scenario where it hurts is the reverse case, where the in-place tenant is paying above market because they moved in during a hot stretch, in which case the appraiser’s lower market number becomes your underwriting number and the ratio compresses.
Model your own version in the DSCR deal calculator. Put in the in-place number, then the appraiser’s likely market number, and see how far apart the two ratios sit. If both clear, you have a resilient file. If only one clears, you have a file that depends on which way the appraiser leans, and you should know that before you remove contingencies.
The risk the ratio does not show
The financing side of a month-to-month tenancy is usually fine. The ownership side is where the cost lives, and it does not appear anywhere in the DSCR calculation.
A tenant on a thirty-day notice can leave thirty days after closing. If both units turn in your first quarter, you are carrying 1,813 dollars a month against zero income while you clean, market, screen, and lease. Two months of that is roughly 3,600 dollars, plus turnover costs of anywhere from 1,500 to 4,000 per unit depending on condition. That is a five-figure first year on a deal that penciled at 1.27.
You also inherit tenants you did not screen. No lease means no application, no credit pull, no income verification, no prior-landlord reference. The seller’s assurance that they always pay is an assertion, not a record. Ask for twenty-four months of bank statements showing the deposits. If the seller cannot or will not produce them, that tells you something.
And if one of them stops paying, you are running an eviction against a tenant with no written agreement, which in many jurisdictions is slower and more procedurally fragile than evicting under a lease. The real cost of that process, including the part that never shows up in a pro forma, is in what an eviction actually costs a rental owner.
Budget reserves for this specifically. Reserve sizing generally is in DSCR loan reserve requirements, and on a property with two unlocked tenancies, sitting at the top of the required range rather than the bottom is the cheap version of insurance.
What to do between contract and closing
Four things, in order of how much they are worth.
Get estoppel certificates signed by each tenant. Rent amount, payment date, deposit held, any concessions, any disputes, confirmation there is no written lease. This protects you from a tenant who shows up in month two claiming the seller promised them something. It also satisfies the lender.
Get the security deposit accounting and have it transferred at closing. Most states require deposits to be held in a specific way and transferred to the new owner, and you become liable for returning them whether or not the seller actually handed them over. Get the exact dollar amount per tenant in writing and get it credited on the settlement statement. If you have not read one closely, how to read your closing statement walks through where these credits appear.
Get the deposit history and rent ledger. Bank statements showing the actual deposits, ideally two years. This is what converts the seller’s story into evidence for both you and the underwriter.
Decide your plan for each tenant before closing, not after. Three options. Offer a written lease at current rent to lock the income. Offer a written lease at market rent and accept that one or both may leave. Or serve notice and turn the unit deliberately. Each is defensible. Drifting into month four without having decided is not.
If the property sits in a jurisdiction with rent regulation or just-cause eviction rules, options two and three may be constrained or unavailable, and you need to know that before closing. Underwriting a capped rent covers how those markets change the analysis.
When the tenant will not sign
Estoppels are the right ask, and sometimes you do not get them. A long-term tenant with no written agreement has spent six years avoiding paperwork, and a form arriving from a stranger who is about to become their landlord is not obviously in their interest. Some will refuse. Some will simply not respond.
That is not automatically a red flag, and it is not automatically a dead file. What matters is what you can substitute.
Substitute one, the seller’s deposit record. Twenty-four months of bank statements with a recurring deposit in the right amount on roughly the right day of the month is strong evidence, arguably stronger than a tenant signature, because it is contemporaneous and hard to manufacture. Most lenders will take this. Ask for it in the same breath as the estoppel so you are not making a second request later.
Substitute two, a signed seller rent roll with an affidavit. Weaker, because it is the seller attesting to their own numbers, but it puts the representation in writing and gives you recourse if it turns out to be false. It also travels into the loan file as something underwriting can point at. The seller is already swearing to a set of facts at closing, and the shape of that instrument is covered in the affidavit of title.
Substitute three, underwrite the unit as vacant. The conservative path. You tell the lender to treat it at market rent with a vacancy factor and you stop relying on the in-place tenant at all. If the deal still clears on that basis, you have removed the tenant from the risk equation entirely, and anything the tenant does after closing is upside rather than a problem. On the duplex example, that was scenario four at 1.29, which still cleared. If your version does not clear as vacant, that is the number telling you how much of the deal depends on two people you have never met.
What should genuinely concern you is a seller who will not provide any of the three. No estoppel, no bank statements, no signed rent roll. At that point the rent is a story, and you should price the property as though the units are empty, because for underwriting purposes they effectively are.
The offer-stage move
If you learn during diligence that the units are unleased, the useful lever is not price, it is the estoppel. Make signed tenant estoppels a condition of closing. It costs the seller nothing if the story is true, and it costs you the deal cheaply if it is not.
Second lever: ask the seller to deliver signed month-to-month written agreements at current terms before closing. Some tenants will sign, some will not, and the ones who will not are information.
Then price your reserves for a full turn of both units in year one. If the deal still works at 1.27 with sixteen thousand dollars of first-year turnover absorbed, it is a good deal. If it only works on the assumption that nobody moves, it is a bet, and the tenants get to decide whether you win it.
FMC Capital is a Pittsburgh-based mortgage brokerage. We finance investment properties for investors in Pennsylvania and additional states, and unleased small multifamily is most of what trades in the older neighborhoods we lend into. If you are looking at one and want to know how the income will be underwritten before you commit, call 412-990-2941 or use the contact page.
FMC Capital LLC, NMLS #1840537. Informational only. Not legal advice and not a commitment to lend. Landlord-tenant law, notice periods, deposit handling, and eviction procedure vary substantially by state and municipality. Underwriting treatment of unleased units varies by lender and program and is subject to change. Consult a licensed attorney in the property’s jurisdiction.