In escrow for property-Should seller or buyer pay cash for keys

29 Replies

Hi Guys,

Currently in escrow for a tenants occupied duplex in Los Angeles. We already got the tenants to agree to cash for keys to move out. They agreed to accept $2500 each (1 months rent) upon move out Oct 2020. Back story on the tenants-Both families are super covid fearful and not allowing anyone inside the property at all. No buyers/inspectors/apprasal period. Good news is i already have inspection/apprasal reports of when it was in escrow in Feb 2020 and the numbers all still make sense. Im getting the duplex 100k off list price while majority of properties in the area or selling over list. Problem right now is the sellers do not want to front any money at all to pay the tenants upon move out. Its is a complicated situation where 7 family members own the property and none want to come up with the cash. I already agreed to compensate the cash for keys and add the extra $5k to my total cost which they will get at closing. The sellers do not want that and rather want me to pay the tenants upon moving out because they have no money to give (its hard to believe that).


In my mind I think it would be a huge risk for me to front the $5k to the tenants before i close correct? The day the tenants move out will be the first day I will enter the property to look inside. I already seen some pictures in the inspection/apprasal report and know a good idea on the repairs. My main concern is not being 100% confident in being able to close. You never know what these lenders may say until the loan fully funds and i am out $5k. I do have loan contingency until end of escrow so my deposit is not at risk. Do you guys have any suggestions on what i should do?

I had a few ideas but neither sound like solid ideas. One was for the seller to provide the tenants last month free instead of paying them cash at end. That idea can work against us in case the tenants try to abuse it and stay longer. Another was to ask the sellers to hold onto last month rent and repay it back upon cash for keys. Its a complicated situation where 7 family members are fighting for the proceeds of the sale through the courts so i think that is a big reason they don't want to come up with money on their side.


My main selling point is to let the sellers know that since the tenants  are not allowing anyone into the property  it will cause an issue for any potential future buyers and not just me and that they should just be happy im willing to help them recoup the cost of cash for keys.

@David Pai

There are some major read flags for me on this. That is ridiculously low cash for keys amount for LA. I cannot stress this enough - do not close until the property is vacant. Those cash for keys agreements are voluntary and the tenants can back out. 

I also do not believe that the seller's who are about to make at least 800k but likely more can't come up with 5k. Really watch out here. You have never been inside the property? If you notify the tenants have to let you in. I'm not your agent and I'm not giving you legal advice but someone needs to be looking out for you on both fronts. I can't tell you how much of a red flag all of this is. Be very very careful. 

Originally posted by @Lee Ripma :

@David Pai

There are some major read flags for me on this. That is ridiculously low cash for keys amount for LA. I cannot stress this enough - do not close until the property is vacant. Those cash for keys agreements are voluntary and the tenants can back out. 

I also do not believe that the seller's who are about to make at least 800k but likely more can't come up with 5k. Really watch out here. You have never been inside the property? If you notify the tenants have to let you in. I'm not your agent and I'm not giving you legal advice but someone needs to be looking out for you on both fronts. I can't tell you how much of a red flag all of this is. Be very very careful. 

Thanks for the reply. In regards to the low cash for keys amount..your right in regards to that but I do not think are bad tenants that are trying to abuse the system. They are tenants that live there for 10 years on month to month leases and paying well below market rate and apparently they felt bad for the sellers after the sellers explained that their restaurant business went down and they filed bankruptcy. The property title is under a LLC among 3 brothers who are in court fighting for the proceeds. They are actually quite a famous 7 thai brothers who had restaurants up and down LA to San Diego from the 80s until now.

The most current proposal we have so far is that both me and the sellers are going put $5k into escrow. The escrow will use my $5k reserves to cut check to the tenants if and when they do move out. If for any reason i do not close on the deal or if the tenants do not move out fully (say only 1 of the units move out but other one doesnt), then I can recoup the amount they took from my reserve and tap into the sellers $5k reserves. It sounds super complicated and im not sure why they don't just use the sellers money first but that is the best proposal i have so far from the realtor. The realtor explained that it has something to do with the property being in a LLC and the proceeds are distributed through a court. I plan to have it all written very carefully in the addedum. Do everyone think as long as its written up very clearly i should be fine with this process of cash for keys in escrow?

 

"In my mind I think it would be a huge risk for me to front the $5k to the tenants before i close correct?"


Who wants the tenants out you or him?  My gut is you and you're making the seller take the vacancy.  What happens you don't close?

Suggestion - Make $5K non-refundable to him based on buyer default.

He's doing this for your benefit and not his, so you need to take some risk.


Originally posted by @Steve Morris :

"In my mind I think it would be a huge risk for me to front the $5k to the tenants before i close correct?"

Who wants the tenants out you or him?  My gut is you and you're making the seller take the vacancy.  What happens you don't close?

Suggestion - Make $5K non-refundable to him based on buyer default.

He's doing this for your benefit and not his, so you need to take some risk.


I want the tenants out since Im trying to move my family into one unit......But truthfully the matter of the situation is that these sellers need to get the tenants out regardless if they plan to sell during covid. Like i mentioned earlier...the tenants are not allowing any outsider into the units. Meaning any potential buyer cannot do a proper inspection or apprasail until covid settles down. They haven't let anyone in since March. They were oppose to meeting their own landlord for a meeting to discuss cash for keys which would of been done at their own property in the front yard. They did the entire cash for keys meeting over Zoom.

I do appreciate the sellers trying to make this work and from their perspective it is probably best interest to not disturb the tenants or get them angry. They are probalby worried now the tenants will stop paying rent knowing they want them to leave which is true. But if they are hungry to sell this property i don't think any buyer can go along and not do any form of interior inspection or get a proper apprasail done. 

 

Well, again, you haven't answered the main question, seller pays $5000, tenants leave, and you walk.  Now what?

Seller is out $5K and stuck with an empty unit thanks to your request.  You need to consider this.

Originally posted by @Steve Morris :

Well, again, you haven't answered the main question, seller pays $5000, tenants leave, and you walk.  Now what?

Seller is out $5K and stuck with an empty unit thanks to your request.  You need to consider this.

Well, I actually told the realtor its a win win from both sides. They get the covid fearful tenants who are holding the property hostage out so they can now reclaim their property and show it to buyers or they can just re-rent it out to market value. The tenants each were paying about $500-700 below market value for what they were getting. In long beach they were paying $2500 for a 2400sqft home with garage with yard. I looked on zillow and for that rate it is 2/2 bath territory or a SFH ~1500 sqft if they are lucky so again i am not convinced at all the tenants will move out until it happens since they are getting a super deal.

@David Pai

It's a good point about making sure it's clear who losses their EMD and under what circumstances, it should spell out in the amendment you make what happens in both a seller default and a buyer default. The tenants actually can't refuse to let people in, or they have to let people in if notified. Anyway, don't close until they are out.

Not sure this applies directly to your situation, but 10 years ago I purchased a triplex foreclosure from Bank of America that had a squatter in it. Per the terms of the contract they were supposed to get the squatter out before close, but during escrow they informed me that they were doing no evictions in California in response to the Robo signing issue that was all the rage back then. Solution was we knocked 5K off the price and closed with the squatter there. After close, I showed up and gave the squatter a credit application with a stated rental rate. Fortunately, they decided to move out on their own shortly thereafter, no cash for keys necessary.

Originally posted by @Lee Ripma :

@David Pai

It's a good point about making sure it's clear who losses their EMD and under what circumstances, it should spell out in the amendment you make what happens in both a seller default and a buyer default. The tenants actually can't refuse to let people in, or they have to let people in if notified. Anyway, don't close until they are out.

The sellers are letting have my loan contingency till close of escrow so my EMD should be pretty safe. The cash for keys addeddum needs to be written out very carefully so I can recoup in event I back out or can't close.

Regarding tenants not allowing entry into property... it seems like tenants got all the power these days and not much a landlord can do.

If you can get the seller to agree to:

1) $100,000 under fair market value

2) Allow you to hold your contingencies until the minute of close with no penalty to you

3) Remove their tenants and take on the risk of vacant units if you decide you no longer want to go through the deal

4) Front the Cash to get their tenants to leave and if you decide to change your mind it becomes their problem with no pain to you.

Then go for it. 

Originally posted by @Mike Cumbie :

If you can get the seller to agree to:

1) $100,000 under fair market value

2) Allow you to hold your contingencies until the minute of close with no penalty to you

3) Remove their tenants and take on the risk of vacant units if you decide you no longer want to go through the deal

4) Front the Cash to get their tenants to leave and if you decide to change your mind it becomes their problem with no pain to you.

Then go for it. 

Novel approach, I like the hardball aspect of it.

I don my chapeau to your sir!!!

 

Originally posted by @Mike Cumbie :

If you can get the seller to agree to:

1) $100,000 under fair market value

2) Allow you to hold your contingencies until the minute of close with no penalty to you

3) Remove their tenants and take on the risk of vacant units if you decide you no longer want to go through the deal

4) Front the Cash to get their tenants to leave and if you decide to change your mind it becomes their problem with no pain to you.

Then go for it. 

 All those points sound to favor me but they are trying to sell the property without allowing the buyer do any due dilegence. If a buyer wants to finance the property he would at least need to get an appraiser in there which the tenants are not allowing. I won't be able to do a proper apprasal until the tenants move out 3 months from now but I am trying to ask my lender if they can do a desktop apprasal with the apparsil they had 6 months ago and for them to find new comps.

If i didn't have the prior inspection reports and the limited pictures they had available, it would be a major gamble even to come up with an offer price to begin with. I know hardcore investors buy property all the time sight unseen but this property is over 1 million so its a lot to risk when you don't even know the layout inside and all you have are specs and limited pictures. I have walked the neighborhood day and night and am familiar with the area so at least i know location is good. The 100k below market is just right now since everything is inflated due to lack of inventory but im buying it at least in mind as a deal to prepare if there is a real estate correction. I almost feel like i am purchasing a mail order bride and everything looks great in pictures until you actually get to meet the person to see what you really got.

I agree that there are major red flags. I am in Los Angeles, and if these are LA City rent controlled units then you can not even offer $2500 for them to leave as Cash for Keys, even if the tenant agrees to such terms. There are minimums the city has put into place, and not only that but the City has to be notified and actually approve of the terms (really ridiculous I know). The minimum is $8,500, and under other conditions go higher up to $18k. So I agree, DO NOT BUY until the unit is emptied. You can find more info here:

https://hcidladev.lacity.org/buyout-agreements?lang=czech

What I would do if I was you would be to "loan" the money for the cash for keys to the Seller and let them get the tenants out before you Buy the place. I think it is worth the risk. Just my two cents. 

Originally posted by @David Shaw :

I agree that there are major red flags. I am in Los Angeles, and if these are LA City rent controlled units then you can not even offer $2500 for them to leave as Cash for Keys, even if the tenant agrees to such terms. There are minimums the city has put into place, and not only that but the City has to be notified and actually approve of the terms (really ridiculous I know). The minimum is $8,500, and under other conditions go higher up to $18k. So I agree, DO NOT BUY until the unit is emptied. You can find more info here:

https://hcidladev.lacity.org/buyout-agreements?lang=czech

What I would do if I was you would be to "loan" the money for the cash for keys to the Seller and let them get the tenants out before you Buy the place. I think it is worth the risk. Just my two cents. 

The units i am buying are actually zoned 2 detatched condos on 1 lot. No HOA. From my understanding...condos and SFH do not fall under LA rent control.

@David Pai I feel like you keep brushing off the fact that tenants have to allow others into their homes, notifications should be given then the owners of the home can enter. You’re going to buy a house sight unseen in your own backyard with an Inspection reports from 6 months ago? Do you trust that report? Was it your inspector who conducted it? $100k under asking may seem like a deal now but maybe not in the future. I’d really understand local laws regarding getting into that property, you can enlist the help of the local sheriff

Originally posted by @Nic S. :

@David Pai I feel like you keep brushing off the fact that tenants have to allow others into their homes, notifications should be given then the owners of the home can enter. You’re going to buy a house sight unseen in your own backyard with an Inspection reports from 6 months ago? Do you trust that report? Was it your inspector who conducted it? $100k under asking may seem like a deal now but maybe not in the future. I’d really understand local laws regarding getting into that property, you can enlist the help of the local sheriff

 They were letting people see inside prior to the pandemic but have since locked themselves out and not letting anyone in or meeting up even outside the property. Anything that requires a sheriff or law enforcement probalby has to be done with a lawyer and these sellers do not want to spend anymore money. Legality wise i think you are right...you can give 24 hour notice to enter property but these sellers also did not want to piss off paying tenants.


On the inspection...yes i do trust them. They were a 3rd party inspection company and I checked their website/yelp reviews and all looks legit to me. The previous buyer in escrow paid for them so it was not related to anything from the seller side. The house was built in 1993 so majority of the work is all cosmetic...does need a new roof, fumigation, entire interior can use updating.

@David Pai

"All those points sound to favor me but they are trying to sell the property without allowing the buyer do any due dilegence."

Not at all trying to be mean or argumentative. However this is a Million dollar property you are getting for 100K under value. You have the ability to walk away up to the day of closing (and get EMD back). However you are concerned with a number of $5K (That costs the seller tenants if you are unhappy) ? Sadly, I walked away from a 400K property during DD and it cost me 8K in inspections and surveys a couple months ago (BAM... COVID). It is the cost of doing business. Basically you are paying 5K to step foot inside and affirm what you believe to be true. You have free inspections, reviews etc.

If you want to stand your ground over 5K on a Million dollar deal, that's your risk level. Of course that is your money and your decision. It just sounds like you are not willing to put a penny in until you are sure it won't come back out. You may be able to convince the sellers to go along, and if so great! Your decision is .005% of the sale price. 

Originally posted by @Mike Cumbie :

@David Pai

"All those points sound to favor me but they are trying to sell the property without allowing the buyer do any due dilegence."

Not at all trying to be mean or argumentative. However this is a Million dollar property you are getting for 100K under value. You have the ability to walk away up to the day of closing (and get EMD back). However you are concerned with a number of $5K (That costs the seller tenants if you are unhappy) ? Sadly, I walked away from a 400K property during DD and it cost me 8K in inspections and surveys a couple months ago (BAM... COVID). It is the cost of doing business. Basically you are paying 5K to step foot inside and affirm what you believe to be true. You have free inspections, reviews etc.

If you want to stand your ground over 5K on a Million dollar deal, that's your risk level. Of course that is your money and your decision. It just sounds like you are not willing to put a penny in until you are sure it won't come back out. You may be able to convince the sellers to go along, and if so great! Your decision is .005% of the sale price. 



Good points made all around. Its a complicated situation where I want both tenants out. Another added complication is both tenants want to leave at seperate times. One in Sept and one in end of Oct. Therefore if i were to offer my 5k, there is no assurances that both tenant leaves as planned for the cash for keys. Last thing i want is to close on the deal with a tenant that knows i want them out and perhaps stop paying rent. I think its the complication of the deal that makes it difficult. Me offering the 5k at end of closing made more sense to me and even if i don't close the seller would benefit too at least in my eyes.

 

One thing I forgot to note in the first post was the seller agreed in the original offer to give me one unit vacant. That was part of the deal so they knew I at least want one of the units vacated to move family into. 

Originally posted by @Dan Schwartz :

@David Pai can you not at least get a FaceTime walkthrough of the property to ensure that it's been maintained properly during their lockdown?

 Good question. We actually brought that up to the realtor and the realtor said that is "pushing it". From my senses, the sellers wants to be very hand off in bothering the tenants. We got a verbal cash for keys accepted and they are having the tenants sign a cash for keys offer contract. At this point i rather just inspect the property in person once they move out.