Deal feels Squirrely

14 Replies

I would like to bounce a situation off y'all.  I am currently under contract on a commercial property that is 11 residential units.  This is only our second multifamily property so we are far from experts.  The sellers would not release financial information until the property is under contract, which it now it.  Now they are dragging their feet and won't release numbers until they have earnest money, which I was planning on wiring today.  This has made me a little nervous and I am being told that the delay has been because they have to separate some other business dealings from the numbers, and that the son of the seller is their financial advisor and accountant.  From my limited knowledge is seems that no other business dealings (a florist shop, not affiliated with the property, was mentioned) should be mixed in with the financials of this property.  Am I just being paranoid, or does this seem strange?  How can I ensure the numbers are legit?

I would not give any EMD until you can see the financial numbers. Best of luck!

Can you back out of the deal if the financials aren't what you were told? Giving them the EMD makes no difference as they aren't holding it the escrow company is.

If you're locked in some weird deal where they keep your EMD if you back out I would not do it and let the deal die.

No business should merge different income streams especially from different sources that are completely unrelated in services. 

My rentals all run their own P&L and accounting. So if I sell something then buyer sees only the accounting for that property. 

I would get together with your agent to get as much information as possible. generally the contracts are fairly buyer friendly so that you can back out due to inability to get financing (just dont get financing if you want to back out), upon inspection, etc.

generally sellers are worried that deals will fall through and tend to want to release more information earlier so that should something get into contract, the deal will go through. if the deal falls apart, they are stuck with yet more monthly payments while the deal is in contract then have to put it back on the market which will take time to court ankther buyer.

this leads me to believe that they are suspect or are worried and/or trying to hide information. they could be just poor negotiators thinking they want to take you for everything.

id say:

a) be totally comfortable walking away from the deal even if you have already put some $ down for inspection and what not bc it’s better to lose a little money than to get stuck win a big mistake long-term to lose even more money

b) see if the other side would be down to just sit and lay out some next steps so everyone is on the same page. can use this meeting to listen and just use some empathy to figure out what’s going on on their side, why they’re playing the deal this way. it could be that they don’t trust you yet so they are guarding themselves

(614) 286-9248

Thank you for your input, Derek.  I just learned there is no schedule E for this property.  Is this also a red flag?

I wouldn't cut the emd directly to them. Get a title company/lawyer/real estate agency involved to hold it as an 3rd party. I don't know if I'd be 100% sketched out at this point, but I'd start putting time limits on them. A lot of people are VERY bad book keepers and have terrible organization. This may be the case here. Just make sure to insulate yourself with escape contingencies and never give them anything that they can disappear with. Good luck!
Michael Ablan, Real Estate Agent in NY (#10401289490)

@Nikol Noll Any time someone says they will do 'x' as soon as you do 'y', then when you complete 'y' moves the goalpost causes me pause and think. 

However, more details would help. 

If you found this property through an agent you've work with before who uses a large title company/ well known law firm I would chalk this up to the seller and their agent being disorganized and not all that professional. Sad, but it happens. 

On the other hand, if you found this sitting on loopnet for 507 days, only their agent is involved, no one you know has worked with the agent or them, the title company/law firm is small and/or some out of town operation I would tread much more carefully.

Originally posted by @Bill F.:

@Nikol Noll Any time someone says they will do 'x' as soon as you do 'y', then when you complete 'y' moves the goalpost causes me pause and think. 

However, more details would help. 

If you found this property through an agent you've work with before who uses a large title company/ well known law firm I would chalk this up to the seller and their agent being disorganized and not all that professional. Sad, but it happens. 

On the other hand, if you found this sitting on loopnet for 507 days, only their agent is involved, no one you know has worked with the agent or them, the title company/law firm is small and/or some out of town operation I would tread much more carefully.

 Thanks for the input.  The deal is through a trusted realtor and a reputable title company.  Would it concern you that there is no schedule E?  Or do we just also chalk that up to the sellers being unorganized, etc. ?

@Nikol Noll - Tax returns tell all.  Request past three years of tax returns and a YTD financial statement.  I hope that you have a due diligence period in your contract that allows you to review financials.  There's very few circumstances where a seller shouldn't be able to produce tax returns, and if they can't, then you'd better tell them to get their CPA to certify the financials they send you and put their name on the line if they weren't truthful.  

Whatever your contract says to do, do it. Its not unusual for sellers to wait until they have a contract to release all financials. Just because they might not be giving up their financials right away, that doesn't justify you not sending an EMD. Two wrongs don't make a right. Follow the contract and enforce the contract... if it doesn't work out, it makes it a lot easier down the road to prove you were more than cooperative and the seller was not.

Matt Lefebvre, Real Estate Agent in NH (#070207)
603-554-2309
Originally posted by @Nikol Noll :
Originally posted by @Bill F.:

@Nikol Noll Any time someone says they will do 'x' as soon as you do 'y', then when you complete 'y' moves the goalpost causes me pause and think. 

However, more details would help. 

If you found this property through an agent you've work with before who uses a large title company/ well known law firm I would chalk this up to the seller and their agent being disorganized and not all that professional. Sad, but it happens. 

On the other hand, if you found this sitting on loopnet for 507 days, only their agent is involved, no one you know has worked with the agent or them, the title company/law firm is small and/or some out of town operation I would tread much more carefully.

 Thanks for the input.  The deal is through a trusted realtor and a reputable title company.  Would it concern you that there is no schedule E?  Or do we just also chalk that up to the sellers being unorganized, etc. ?

To me, this would be a huge red flag.  Sellers who aren't reporting taxes are sellers who will scam you, cheat you and lie to you.  If they'll do it to the government, they'll do it to you.

If this property is buried in their other business, then that may be legit. It is possible that the property is owned by an LLC or S-Corp and they've mingled it in with their other business (sound like that's why they couldn't get you a P&L either), in which case that would NOT be a red flag. I have insurance agencies, hair salons and mechanic shops as clients whose real estate issues are buried in with their other business. Not a strategy I would recommend, but they were like this when I inherited them (I swear!)

@Nikol Noll . Plenty of red flags here. I would definitely proceed with lots of caution and plenty safeguards.  

Good Luck !!!

(919) 434-3132

@Nikol Noll

Hi Nikol

your first mistake was to put in an offer without actual numbers. Welcome to the world of Mom & Pops, a great niche but challenging. I would have written in the contract due diligence doesn't begin until I receive all financial numbers. Analyze your deal quick and re trade if the numbers don't work

Good luck

Gino

How can you be “in earnest” about buying without seeing the full picture? I would not put up a dime without a seller signed statement that the earnest money is a prerequisite to the seller divulging financials and in no way obligates you to buy the property and is 100% refundable.

@Nikol Noll  

Hey Nikol, with mum and pop type owners, it is expected that the books aren't going to be either accurate or available at all. 

So, I think this is where you shine with your due diligence expertise and you can always use an estoppel to get the true rents from the tenants, and some have said that they realized that the rents reported by tenant were higher than what the owners reported. 

As a result, if the area and asset match your investment criteria, then the T12 should be taken with a pinch of salt.

Expect the unexpected, but this where you seal the deal, sir

Hope this helps. Goodluck. Thanks! - Ola 

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