Help! My deal may be falling through

40 Replies

Hi All!

Not sure if there is anything I can do to save this- but being new to REI would love some opinions.

Me: New investor here, found a great deal on a two family in the greater philadelphia area, shortly after seeing it my husband and I put in a cash offer which was subsequently accepted. Love this property for a few reasons-

1. Cash on cash return around 14.8%

2. Extremely high potential cash flow 

3. While the place needs a bit of work, it's nothing major, some electrical/plumbing upgrades + Plaster, floor in only one room, baseboards, window frames, but really not a huge amount- Inspection was conducted and went well overall 

4. Comps and area rents all checked out

We ran into a few issues when we went under contract. The first red flag, the seller misrepresented the current tenant status saying she had two leases in place, when actually she had no leases in place.  To mediate I requested that we add an addendum giving us an out if the tenants did not vacate the property prior to close, the seller signed the contract and maintained the tenants would be out. 

Last week, we conducted inspection, sent a response to inspection asking for some updates on a few safety issues. Honestly, even if they don't make any of the updates I am still comfortable moving forward with the deal because I am buying it enough under value to just do it myself when I do the renovations. 

Response to inspection was due on Tuesday, they did not comply, or respond. On Wednesday night, they responded they won't do anything (Fine) but also they are "Not sure if the tenants will move out after all" *Obviously a deal breaker.

My realtor recommended we walk away from the deal now, and that the seller and listing agent have both been pretty unresponsive and dishonest about the status of everything, which doesn't bode well.

My inclination is I don't walk away unless they can confirm in fact that the tenants will NOT move out (That is a deal breaker, these are not quality tenants that I want to inherit)- and despite we were planning to close Feb 6, we could give it a bit more time.  I feel like my realtor is being a little quick to give up, and i have nothing to loose contractually to give this a little more time to see how it plays out (My deposits are still refundable at this stage and  it's only $2500)

Any advice? 

You making a classic mistake as an investor...becoming emotionally involved. Your statement, "I love this..." If you plan on being an investor get used to evictions.

Unless you are budgeting time and money for evictions right away, walk away from the deal.

Right and just to be clear- if the tenants aren't gone we DEFINITELY walk but I guess my major question is if I walk away RIGHT NOW given the dishonesty so far, or wait another week or so to see how it plays out. Also, there is nothing I can really do here correct? 

@Janine Covello I am new and don't have any experience, but I don't see what you have to lose, just to wait it out. You said you would not buy the property unless the tenants are gone, that is a contingency you have in place to protect your money. Personally, if the house was a great deal and I had no other properties that I was interested in making an offer. I would continue to look for other deals and  stay with this one, until you found another property you like, or  know for sure the tenants wont leave. 

@Nicholas Hamblen that is exactly my gut inclination, that at this point we don't have anything to loose by waiting, and also searching for new deals. If and when we find another deal, we can choose to walk away from this one, but since we haven't put in any other offers yet might as well wait and see what happens before making any rash decisions. 

What makes you think they can make occupants go away between now and Feb. 5? Even if seller can’t produce leases, if the units are occupied the occupants have some legal protection depending on laws in your area. Probably have to go through eviction process. Why not use it as an opportunity to reduce sale price since you have to do the challenging work of getting tenants out? If you don’t have the stomach for that walk away.

@Jeff Ronningen I was at the property last week, and both of the tenants appeared to be packing up to leave at the time. So obviously something must have changed btwn now and then. Regardless- despite the fact I'm sure I am going to face an eviction at some point, I don't want to spend my first few quarters of doing this managing an eviction that can be avoided so if they can't get their act together, best bet will just be to walk away :( I guess I could always let the seller know that when she figures this out she may still have a cash buyer interested and to give my realtor a call? 

I can't help but to be so disappointed because I was really excited about this deal, but I have lined up other properties to see this weekend and hopefully I'll find something new soon!

Sometimes having bad tenants is what makes the deal good.  The prior owner maybe tired/frustrated and just wants to get rid of the house. If the deal is good enough, i would inherit the tenants and get rid of them one at a time. especially in this cold winter. let them pay the heating bill for another month..lol

@Janine Covello I would drive by and see if you could catch them packing again or something. Go up to them and ask them if they're moving out because you're looking for a place to move into as a tenant and was wondering if they knew if anyone else was moving in. Get them talking and ask questions about as much as you can about the current landlord, state of the house, any issues there were, what the neighborhood is like, etc.

Hi @Janine Covello

Congratulations on your find. 

First I want to say that with all new people purchasing\selling there is an issue that pops up at the 11th hour and one or both sides dig their heals in. The deal is going to die unless someone gives. Happens everytime, so don't worry it's not new.

One thing to keep in mind is that you have an existing contract. If that contract states that they will be out they need to make the adjustment not you. They can "say" what they want and relay that there is a problem but until it is on paper, it is just mindless ramblings of people. Some sellers wait until close to the end and then decide they really don't want to have them move in case you fall through on the deal then they have no renters (very valid point but they should have thought of that before they signed). 

I would not have recommended reopening up the contract by asking for those things you did not care about. Obviously I am not privy to the contract or any specifics, but you don't need to respond to anything at this point. I might be inclined to wait it out and then during final walk through if they are still there, then make a play for $X.00 per apartment for eviction costs. Then they either kill it that day or you come to an agreement. 

However if your agent is feeling like it should just be killed now, you are paying for their advice and they are a whole lot closer to this situation than any of us are.

Good Luck!

Originally posted by @Ray Reed :

Sometimes having bad tenants is what makes the deal good.  The prior owner maybe tired/frustrated and just wants to get rid of the house. If the deal is good enough, i would inherit the tenants and get rid of them one at a time. especially in this cold winter. let them pay the heating bill for another month..lol

Well, this is in the City of Philadelphia, and I suspect it has gas heat (the OP would know for certain). And in the City of Philadelphia, if the gas bill is not paid, it becomes a lien against the property. And in Pennsylvania, the PUC has a moratorium on utility shut offs until April 1. What I'm getting at is that those tenants probably aren't paying the heat, and won't have to because there is little fear of a winter shut off. That means the owner gets stuck with that unpaid gas bill (unless the owner is participating in the PGW LCP program, and I doubt that is the case with a poorly managed rental).

Originally posted by @Mike Cumbie :

Hi @Janine Covello

... 

However if your agent is feeling like it should just be killed now, you are paying for their advice and they are a whole lot closer to this situation than any of us are.

...

Well, that agent is not getting paid anything until a closing actually happens ;)  And Janine is not the one who would be paying (although the seller's funds for that compensation would be having Janine as the source from the closing) ...

Janine,

 I would wait it out, it is also possible they have someone else interested, willing to pay more, and hoping you do back out. you can also get an extension on the closing date if the tenants are not out  and the seller is not living up to their agreement, and close another month from now.

Get a new real estate agent, and have a real estate attorney get involved. It will straighten up the seller immediately. They have made promises they are obligated to keep.

Take the property with the tenants at a cheaper price and work some cash for keys.

@Steve Babiak thank you for that information.  Is the lien on the property only in philly or is it something statewide?

Originally posted by @Ray Reed :

@Steve Babiak thank you for that information.  Is the lien on the property only in philly or is it something statewide?

Unpaid municipal utilities become a lien on the property statewide in Pennsylvania. Philadelphia is the only PA municipality that I am aware of that supplies natural gas as a municipal utility (through PGW). So unpaid gas becomes a lien only in Philadelphia AFAIK.

More common throughout PA you will find sewer and trash as municipal utilities, and some PA municipalities also supply water. Unpaid rental license fees can also become liens in PA.

@Janine Covello This is a tough one.  It's hard to fall in love with the deal, only to discover hurdles.

A few things...First is your contract.  This is your guide through the transaction.  Go to it whenever there is an issue.  

It is one thing to have 1 party breach, it is another to have the other party know about it and allow it to happen.  You need to act.  If the Seller is not complying with the Tenant move out, you send a "Cure Notice" or whatever you call it in your area.  It is like putting the Seller "On notice" for their breach.  

Additionally, I would make sure that you have IN WRITING some type of escrow holdback for the potential utility bill that may become inherited after COE if the Tenants have not paid it.  Your title insurance should cover any liens that would show up after COE, but I don't know how the utility company works their "runs with the land" deal.  If it is like taxes, then it would survive COE.  So, you will want to ask title about that, and prepare for it with an escrow holdback from the Seller.

Tenant Deposits.  The Seller has these, so make sure they are transferred as part of the closing so that you have them to pay back the tenants (minus any damages if you have a valid move-in sheet to compare to) when they move.

Cash for Keys.  There is no better motivator than cash.  If you approach the tenants and tell them that you will double their deposit, or give them $XX amount upon their prompt (and damage free) move out, my guess is that they will be on the first truck out of there with their cash in hands.  You may consider hiring a PM familiar with the area to complete this step for you.  TOTALLY worth the expense they would charge.

I am concerned about the dishonesty part.  This usually means something is brewing in the house or in the deal.  You need to dig around and figure out what it is.

Regarding the Agent's nonresponsiveness, there are steps for this.  If you are not getting answers, you go up the chain.  Call the agent's office and ask to speak to the Designated Broker, NOT just any broker in the office, or even the office manager.  You want to speak with the Designated Broker who HOLDS this agent's license AND is responsible for the agent's actions as if they were his own.  Tell the DB about your experience, and what you need.  The DB should get it done.  DBs HATE getting these types of calls, and usually end up shining the light on the agent's business to evaluate the liability he is explosing the DB to.  IF the DB is non-responsive, you go to the Dept of RE in the area and lodge a complaint.  That will get things moving for sure.

DOCUMENT EVERYTHING!  Communicate in writing, and make sure that the title company is CCd on communications so that it becomes part of the file, so that in case you DO have to ultimately back out (or even go to court lafterwards), you have a documented case in your favor.

Best of luck to you!

Originally posted by @Steve Babiak :
Originally posted by @Ray Reed:

@Steve Babiak thank you for that information.  Is the lien on the property only in philly or is it something statewide?

Unpaid municipal utilities become a lien on the property statewide in Pennsylvania. Philadelphia is the only PA municipality that I am aware of that supplies natural gas as a municipal utility (through PGW). So unpaid gas becomes a lien only in Philadelphia AFAIK.

More common throughout PA you will find sewer and trash as municipal utilities, and some PA municipalities also supply water. Unpaid rental license fees can also become liens in PA.

 Would these survive COE?  Would her title insurance cover agains these types of liens since they were not found prior to COE?

Originally posted by @Cara Lonsdale :
Originally posted by @Steve Babiak:
Originally posted by @Ray Reed:

@Steve Babiak thank you for that information.  Is the lien on the property only in philly or is it something statewide?

Unpaid municipal utilities become a lien on the property statewide in Pennsylvania. Philadelphia is the only PA municipality that I am aware of that supplies natural gas as a municipal utility (through PGW). So unpaid gas becomes a lien only in Philadelphia AFAIK.

More common throughout PA you will find sewer and trash as municipal utilities, and some PA municipalities also supply water. Unpaid rental license fees can also become liens in PA.

 Would these survive COE?  Would her title insurance cover agains these types of liens since they were not found prior to COE?

These liens survive period, unless somebody pays them. A utility certification is normally ordered during escrow to identify these (potential) liens, and normally these would be paid from seller's side of the closing statement. But if there is a tenant who is supposed to pay and has not, then you have a dilemma because the seller will claim it is not their bill but if it goes unpaid by the tenant it sticks to the property. In Philadelphia, unpaid gas and water bills can be a headache at closing.

Originally posted by @Steve Babiak :
Originally posted by @Cara Lonsdale:
Originally posted by @Steve Babiak:
Originally posted by @Ray Reed:

@Steve Babiak thank you for that information.  Is the lien on the property only in philly or is it something statewide?

Unpaid municipal utilities become a lien on the property statewide in Pennsylvania. Philadelphia is the only PA municipality that I am aware of that supplies natural gas as a municipal utility (through PGW). So unpaid gas becomes a lien only in Philadelphia AFAIK.

More common throughout PA you will find sewer and trash as municipal utilities, and some PA municipalities also supply water. Unpaid rental license fees can also become liens in PA.

 Would these survive COE?  Would her title insurance cover agains these types of liens since they were not found prior to COE?

These liens survive period, unless somebody pays them. A utility certification is normally ordered during escrow to identify these (potential) liens, and normally these would be paid from seller's side of the closing statement. But if there is a tenant who is supposed to pay and has not, then you have a dilemma because the seller will claim it is not their bill but if it goes unpaid by the tenant it sticks to the property. In Philadelphia, unpaid gas and water bills can be a headache at closing.

 Then maybe an escrow hold back would be the best course of action to ensure that the Buyer doesn't inherit the expenses.

@Cara Lonsdale   not sure in your area but in my transactions last few years lenders wont allow escrow hold backs.. and yes east coast utls are something that are quite foreign to us West coast agents .

Is taken me a few years to get up to speed with the rules of the road out in PA  now 100 transactions later I think I kind of have it.. but even so.. I would not go past vanilla transactions.. and for sure

@Steve Babiak is an expert in his market and what ever he says you can take to the bank on how transactions are handled there.

Detroit is another market I did a few hundred deals in and water and utls survive foreclosures.. when I was funding the new buys for my guys and gals there many times the banks had larger water bills than they were getting for the property.

In Detroit the tenants KNOW that the utls company will not turn off the water no matter what and many just never pay it.. quite common. And the water bill runs with the land and survives everything ... If it did not there would be no water in Detroit as stated so many of the tenants just never pay a day in their life.

@Steve Babiak I know the constitutionality of this was being litigated last year and I believe it was appealed to the Third Circuit where a decision is still forthcoming. Last I heard PGW was enrolling LLs and giving 30 day notice of intent to file a lien for gas. Do you know current status? I think there is an injunction in place right now preventing automatic liens.

Originally posted by @Jay Hinrichs :

@Cara Lonsdale  not sure in your area but in my transactions last few years lenders wont allow escrow hold backs.. and yes east coast utls are something that are quite foreign to us West coast agents .

Is taken me a few years to get up to speed with the rules of the road out in PA  now 100 transactions later I think I kind of have it.. but even so.. I would not go past vanilla transactions.. and for sure

@Steve Babiak is an expert in his market and what ever he says you can take to the bank on how transactions are handled there.

Detroit is another market I did a few hundred deals in and water and utls survive foreclosures.. when I was funding the new buys for my guys and gals there many times the banks had larger water bills than they were getting for the property.

In Detroit the tenants KNOW that the utls company will not turn off the water no matter what and many just never pay it.. quite common. And the water bill runs with the land and survives everything ... If it did not there would be no water in Detroit as stated so many of the tenants just never pay a day in their life.

 There has to be a way to either prevent it from passing to the Buyer, or accounting for it through the transaction.  If escrow holdbacks are not practiced, is there a way to contact the utility company and get the current bill so that it can be charged to Seller at COE as a prorate?

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