Help! My deal may be falling through

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Help! My deal may be falling through

Janine Covello
Rental Property Investor · Eastchester, NY · Member since 2017 · 39 posts · 36 votes

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? 

1Reply
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David Roque
Investor · San Diego, CA · Member since 2012 · 100 posts · 37 votes
8y
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.
3Reply
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  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    8y
    Originally posted by @Steve Babiak:
    Originally posted by @Tom Gimer:

    @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.

    You are correct - the lien without notice was declared to be unconstitutional. But I have not heard of any changes in PA legislation to address this. And it is PA state law that grants municipalities the power to lien for unpaid utilities, and that law as far as I know does not require notice to a property owner. 

    PGW has a Landlord Cooperation Program (LCP) that was in place prior to that court ruling; landlords must enroll in LCP to receive the lien protections, and it is recommended that the lease addresses the LCP with tenants. If a landlord has not enrolled in the LCP, as I stated in an earlier post many do not, then the protection from a gas lien is not there. And landlords that have enrolled must also cooperate (the C in the middle) when PGW seeks a shut off - and that won't happen until April 1 due to PA PUC shut off moratorium over winter. So still some risk if gas goes unpaid, and the new owner would still have to enroll in LCP - it isn't automatic.

    Maybe @Chris K. has something to add here.

    So the unique thing here is OP wants the tenants gone at closing, whereas ordinarily you would want them continuing to pay rent and utilities. Request a final reading/bill and allocate to the seller... let seller collect from the tenants.

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    0Reply
  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Steve Babiak:
    Originally posted by @Tom Gimer:

    @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.

    You are correct - the lien without notice was declared to be unconstitutional. But I have not heard of any changes in PA legislation to address this. And it is PA state law that grants municipalities the power to lien for unpaid utilities, and that law as far as I know does not require notice to a property owner. 

    PGW has a Landlord Cooperation Program (LCP) that was in place prior to that court ruling; landlords must enroll in LCP to receive the lien protections, and it is recommended that the lease addresses the LCP with tenants. If a landlord has not enrolled in the LCP, as I stated in an earlier post many do not, then the protection from a gas lien is not there. And landlords that have enrolled must also cooperate (the C in the middle) when PGW seeks a shut off - and that won't happen until April 1 due to PA PUC shut off moratorium over winter. So still some risk if gas goes unpaid, and the new owner would still have to enroll in LCP - it isn't automatic.

    Maybe @Chris K. has something to add here.

     Can OP sign up for an LCP with the utilities companies that would define a starting point (COE) for who the utility company would go after for what is due?  Maybe a read can be taken just before closing to determine what is pre-existing?

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    8y
    Originally posted by @Tom Gimer:
    Originally posted by @Steve Babiak:
    Originally posted by @Tom Gimer:

    @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.

    You are correct - the lien without notice was declared to be unconstitutional. But I have not heard of any changes in PA legislation to address this. And it is PA state law that grants municipalities the power to lien for unpaid utilities, and that law as far as I know does not require notice to a property owner. 

    PGW has a Landlord Cooperation Program (LCP) that was in place prior to that court ruling; landlords must enroll in LCP to receive the lien protections, and it is recommended that the lease addresses the LCP with tenants. If a landlord has not enrolled in the LCP, as I stated in an earlier post many do not, then the protection from a gas lien is not there. And landlords that have enrolled must also cooperate (the C in the middle) when PGW seeks a shut off - and that won't happen until April 1 due to PA PUC shut off moratorium over winter. So still some risk if gas goes unpaid, and the new owner would still have to enroll in LCP - it isn't automatic.

    Maybe @Chris K. has something to add here.

    So the unique thing here is OP wants the tenants gone at closing, whereas ordinarily you would want them continuing to pay rent and utilities. Request a final reading/bill and allocate to the seller... let seller collect from the tenants.

    But if tenants don't pay gas for February and March, then the new owner gets stuck with that usage. That is one benefit to the new owner of having vacant units at closing - no worries about this sort of thing, the former owner gets the unpaid gas deducted at settlement and new owner knows it will not get crazy usage. Not unusual to hear of tenants leaving windows open in winter while heat (that they are not paying for) is on.

    0Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    8y

    @Steve Babiak I think the tenants have to be out as of closing or the deal is dead. 

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    1Reply
  • Lana Lee
    Philadelphia, PA · Member since 2017 · 364 posts · 109 votes
    8y
    Originally posted by @Steve Babiak:
    Originally posted by @Tom Gimer:

    @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.

    You are correct - the lien without notice was declared to be unconstitutional. But I have not heard of any changes in PA legislation to address this. And it is PA state law that grants municipalities the power to lien for unpaid utilities, and that law as far as I know does not require notice to a property owner. 

    PGW has a Landlord Cooperation Program (LCP) that was in place prior to that court ruling; landlords must enroll in LCP to receive the lien protections, and it is recommended that the lease addresses the LCP with tenants. If a landlord has not enrolled in the LCP, as I stated in an earlier post many do not, then the protection from a gas lien is not there. And landlords that have enrolled must also cooperate (the C in the middle) when PGW seeks a shut off - and that won't happen until April 1 due to PA PUC shut off moratorium over winter. So still some risk if gas goes unpaid, and the new owner would still have to enroll in LCP - it isn't automatic.

    Maybe @Chris K. has something to add here.

     Could you please recommend the exect words that I can use to " address LCP" in a lease? How to protect myself from non payment of utilities by the tenants? I do participate in LCP  but don't quite understand how that will protect me from the lien?

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    8y
    Originally posted by @Lana Lee:
    Originally posted by @Steve Babiak:
    Originally posted by @Tom Gimer:

    @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.

    You are correct - the lien without notice was declared to be unconstitutional. But I have not heard of any changes in PA legislation to address this. And it is PA state law that grants municipalities the power to lien for unpaid utilities, and that law as far as I know does not require notice to a property owner. 

    PGW has a Landlord Cooperation Program (LCP) that was in place prior to that court ruling; landlords must enroll in LCP to receive the lien protections, and it is recommended that the lease addresses the LCP with tenants. If a landlord has not enrolled in the LCP, as I stated in an earlier post many do not, then the protection from a gas lien is not there. And landlords that have enrolled must also cooperate (the C in the middle) when PGW seeks a shut off - and that won't happen until April 1 due to PA PUC shut off moratorium over winter. So still some risk if gas goes unpaid, and the new owner would still have to enroll in LCP - it isn't automatic.

    Maybe @Chris K. has something to add here.

     Could you please recommend the exect words that I can use to " address LCP" in a lease? How to protect myself from non payment of utilities by the tenants? I do participate in LCP  but don't quite understand how that will protect me from the lien?

    I cannot dispense legal advice like that. I suggest you join HAPCO - HAPCO has a number of documents specific to Philadelphia for landlords that are made available to HAPCO members at no additional charge.

    2Reply
  • Lana Lee
    Philadelphia, PA · Member since 2017 · 364 posts · 109 votes
    8y
    Originally posted by @Tom Gimer:
    Originally posted by @Steve Babiak:
    Originally posted by @Tom Gimer:

    @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.

    You are correct - the lien without notice was declared to be unconstitutional. But I have not heard of any changes in PA legislation to address this. And it is PA state law that grants municipalities the power to lien for unpaid utilities, and that law as far as I know does not require notice to a property owner. 

    PGW has a Landlord Cooperation Program (LCP) that was in place prior to that court ruling; landlords must enroll in LCP to receive the lien protections, and it is recommended that the lease addresses the LCP with tenants. If a landlord has not enrolled in the LCP, as I stated in an earlier post many do not, then the protection from a gas lien is not there. And landlords that have enrolled must also cooperate (the C in the middle) when PGW seeks a shut off - and that won't happen until April 1 due to PA PUC shut off moratorium over winter. So still some risk if gas goes unpaid, and the new owner would still have to enroll in LCP - it isn't automatic.

    Maybe @Chris K. has something to add here.

    So the unique thing here is OP wants the tenants gone at closing, whereas ordinarily you would want them continuing to pay rent and utilities. Request a final reading/bill and allocate to the seller... let seller collect from the tenants.

     As the author of this post stated there are no leases in place. What if they are members of family or friends live there for free. I've read you can't evict someone if their tenancy wasn't proved. There has to be a different more complicated procedure to get them out. 

    0Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    8y
    Originally posted by @Lana Lee:
    Originally posted by @Tom Gimer:
    Originally posted by @Steve Babiak:
    Originally posted by @Tom Gimer:

    @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.

    You are correct - the lien without notice was declared to be unconstitutional. But I have not heard of any changes in PA legislation to address this. And it is PA state law that grants municipalities the power to lien for unpaid utilities, and that law as far as I know does not require notice to a property owner. 

    PGW has a Landlord Cooperation Program (LCP) that was in place prior to that court ruling; landlords must enroll in LCP to receive the lien protections, and it is recommended that the lease addresses the LCP with tenants. If a landlord has not enrolled in the LCP, as I stated in an earlier post many do not, then the protection from a gas lien is not there. And landlords that have enrolled must also cooperate (the C in the middle) when PGW seeks a shut off - and that won't happen until April 1 due to PA PUC shut off moratorium over winter. So still some risk if gas goes unpaid, and the new owner would still have to enroll in LCP - it isn't automatic.

    Maybe @Chris K. has something to add here.

    So the unique thing here is OP wants the tenants gone at closing, whereas ordinarily you would want them continuing to pay rent and utilities. Request a final reading/bill and allocate to the seller... let seller collect from the tenants.

     As the author of this post stated there are no leases in place. What if they are members of family or friends live there for free. I've read you can't evict someone if their tenancy wasn't proved. There has to be a different more complicated procedure to get them out. 

    That’s the seller’s problem. 

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    1Reply
  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    8y

    @Janine Covello Typically, when Sellers lie about some things, beware because you just know what else they haven't disclosed to you. 

    You'd be better off going with your gut feeling. There are many more deals to come your way. This one just sounds so dodgy that it feels like there might be more drama down the road. 

    Hope this helps, Janine. Goodluck. Thanks! - Ola 

    2Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    8y
    Originally posted by @Cameron Novak:
    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.

    Get a new real estate agent while under contract with a closing date of 2/6?

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    0Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    8y

    @Janine Covello If 2/6 comes and the units are still occupied and this is a deal still worth pursuing... I would arrange a flat-fee agreement with a local eviction attorney, approach the seller with a purchase price reduction (add plenty of $ your inconvenience), and move forward to closing.

    There is drama in every real estate transaction if you bother to get bogged down in it.

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    1Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    You are attached to the deal, based on the descriptions about the conditions. Inspections look good but it needs this and that. That is redflag 1. Extremely potential cash flow if the tenants move out... Cash on cash return is 14.8% is based on what analysis?  Your realtor senses that is not the case and suggest not to deal with.  In our area if the tenants need to be evicted you gave a 2 months of notice and they can stop paying rent. Taking them to the Superior Court can take several more months.  Suggest you serve a non-performance notice to the sellers and end the contract by XX days.

    I will not hesitate to walk away today if I can find of the similar properties that is newer and no constraints. Is that property also in Eastchester area? 

    1Reply
  • Account Closed
    Realtor · Detroit, MI · Member since 2015 · 211 posts · 104 votes
    8y
    Janine Covello sounds like a good deal, some are worth waiting for. If the duplex can bring that good of return, minimum repairs and under market value. Ball is in your court if you don’t mind handling an eviction or send an addendum to the contract asking the seller to evict tenants. Are you willing to negotiate costs incurred for eviction...either way know the law on eviction in that state.
    0Reply
  • Antonio Artusa
    Rental Property Investor · Oakalla, TX · Member since 2015 · 67 posts · 24 votes
    8y
    Walk away. I have fallen in love with houses and I’m trying to break the habit.
    0Reply
  • Janine Covello
    OP
    Rental Property Investor · Eastchester, NY · Member since 2017 · 39 posts · 36 votes
    8y

    Everyone- I am very appreciative of all of the advice and input you have given me on this situation. It was helpful and I took a bit of everything!

    Right now- it is looking like we are going to be able to get these tenants out before closing, and things are moving along. Closing in aprox 10 days. 

    So hoping for the best- but definitely going to see 5 more properties tomorrow- in case this doesn't work out and we need to exercise our right to last minute terminate contract. (Thank God for that addendum!)  

    0Reply
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