No Prorated Rents on HUD???

Question

I'm getting ready to close on a purchase at the end of this week and just found out that there will be no prorated rent added to the HUD.  According to the seller, during this cold weather there was a burst pipe in the building, which required them to pay for one tenant to stay in a hotel for two weeks and credit another for the lack of water.

They stated they did not try to collect rent, but if they receive any partial payment for February that they would turn it over.

My initial thoughts are:

1. I really hope everything has been resolved and I won't be dealing with any backlash from this incident post-closing.

2. Is this problem really something that should affect me as the buyer?  I.e. if they did not receive rent, then am I the one who is on the hook for it due to the timing of the close?

I've never heard of anything like this happening and wanted to see what kind of ideas or advice all of you BPers might have for me.

Adam Johnson · Answer

I would not accept this unless you were asked and agreed to this in advance. The problems (all of them) belong to the seller until the day you close.  In my opinion, it is time to step to the plate and play hard ball. Tell the seller that you want to inspect prior to close to see the repairs and related damage are done to your satisfaction.  Also let them know that rents WILL be pro-rated per your original agreement.

In NY, unless it is in writing regarding real estate, it "never happened".  That said, if you didn't sign off then you shouldn't be bound to a substantive change to the contract, which is what the seller is attempting to do.  The already "broke" the contract most likely by letting it freeze in the 1st place.

Time for some soul-searching.  The guy with the money (you) drives the deal.

Adam Johnson · Answer

quick thought, the money doesn't HAVE to be tenant money, it can be sellers money from the proceeds of the sale, that way you avoid ticked off tenants

Adam Johnson · Answer

So the easy answer is to push for the 750 minimum and consider that as "insurance". Doesn't matter if you are writing a check for closing costs or not, you are giving money away if you agree to these terms.  I would also push for warranty or escrow as others have mentioned, but would never agree to give up money you are entitled to just because the seller screwed up and now wants YOU to pay for it.

Adam Johnson · Answer

Glad to help.  Sounds like it worked out ok, all things considered.  I didn't think the seller would "like" it, but he/she doesn't have to like reality.  I think you were wise to ask for both the escrow as well as the rent you are entitled to while also being reasonable to give on the escrow.

With that said, I would still do a thorough inspection of both the damage as well as repairs made.  Don't accept less than you want to accept.  Remember, you hold the money, so you drive it across the finish line.

Happy investing!

Michael Seeker · Answer

Just an update on this - I requested that $3K be held in escrow for 3 months to cover any potential issues (thinking if I'm going to inherit this problem, I want some insurance).  The seller did not like this idea at all, but agreed to credit the prorated rent at closing to ensure a smooth purchase.  Not a huge deal, but had I just accepted "we didn't get rent, so we're not giving any to you" I wouldn't have gotten anything.

Appreciate everybody's comments which helped me craft my requests/responses!!

Lynn McGeein · Answer

Not sure, but the seller would have to agree to it so that would help determine the terms.  As escrows can be a big pain, I'd prefer to have copies of paid repair receipts from a licensed plumber and make sure there is some warranty on the work, and then I'd check to make sure the tenants are good with the outcome and the incident is settled (in writing would be good).  But in the event of the seller doing repairs himself, I'd probably push for one in the amount that would cost you to have it repaired properly in case he hasn't done the work correctly, and make sure you inspect it before the time runs out and he gets his money back.

Michael Seeker · Answer

Also, I will definitely be doing a walkthrough before closing!

Michael Seeker · Answer

Thanks for the feedback everybody!

There is no money being paid out by me at closing, there is only the prorated rents not being applied at closing (~$750 = 1/2 months rent).

@Lynn M.  - I do like the idea of an escrow being set up in case the repairs were not properly completed and/or the tenants become a hassle because of how this was handled.  Any thoughts on how that escrow would be set up and how long any funds should be held?  I'm thinking $2-$3K would be a reasonable amount for maybe 3 months?

Adam Johnson · Answer

BUT, in my opinion and not legal advice, it was technically the sellers fault for the lost rent, not the buyers.  For that reason, I would not accept the lost rent.  Rent is generally paid in advance, so the period of rent loss would not be pro-rated to the buyer anyway.  Either way, I would stick to your guns, it was NOT technically an act of nature, it was seller negligence for not protecting the pipes properly.  Don't back down!

Bill Gulley · Answer

Michael, if you are buying the seller's company and property you would assume the liabilities. If you're simply buying the property you have no liability for past agreements, other than the terms of existing leases as you will buying the property subject to the existing lease-hold interests held by tenants. If the agreement has been modified, then you may have an issue.

Not your fight, to some degree. However, you'll be dealing with your tenants, I wouldn't allow them to be messed over if possible.

These issues were not in the sale agreement and are not issues required to be shown on the HUD-1.

However, I'd ask that the closer (and seller) pay these matters as "Lease Settlements" on the seller's side of the HUD as an expense.

If you have written evidence of these agreements or you have an estoppel letter from a tenant where the terms of the lease you are to assume don't match the understandings shown in the lease agreement, then you have a sufficient claim to make on the matter. That the discrepancies between the lease and the tenant's understandings cause the lease not to meet the representations made by the seller. In other words, the seller is giving you ticked off tenants, who believe they are due compensation who won't be happy and may break a lease or at least not renew as a happy tenant could.

That's how I would justify my request to ensure the tenants were paid. You may be able to push that saying you may not close with outstanding issues, but I'd pick that battle carefully, you might just release the tenants from the lease if they wanted out with a "Sorry that guy messed over you" letter.

It's a matter that you address to ensure your tenants are treated fairly, but you don't have any liability unless it was made as a modification to the lease, such as a letter that could be seen as modifying the written agreement, then you could be liable for the agreements in a settlement at the end of that lease, IMO.

Like to see @John Chapman 's thoughts, I'm not an attorney and he is!

No Prorated Rents on HUD???

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