Multi Family closing gone wrong

[Maribel Alvarado]

My spouse and I are partners in our real estate ventures. I'm the analytical, behind the scene kind of person and she is the typical outgoing latina and spoke person for our business. After having 5 SFH, we decided to invest in multies to become financially free faster.

Since we had made a couple of thousand dollars mistakes, we decided to go with an agent in our first Multi-Family building purchase. Was in the market for couple months until we found one that made financial sense to us. We had a good experience during the contract and due-diligence steps, or so we taught. Fast forward to the day before closing I had to talk to the title company to include the closing cost the seller had agreed upon to the HUD statement. On closing day, the seller's agent didn't have copies of the keys, utilities info, like which unit me as an owner I'm in charge of, copies of leases, nor last readout of the utilities bill. I'm sure you know where this story is heading. So after the closing, I know, I know, rookie mistake, I asked my agent when we'll receive the pro-rated rent money from the owner? to what MY agent answer "we didn't ask for the pro-rated rent in the contract since he (the seller) had agreed to put money towards the closing o_O

Wait! Said that again?! I ask him to read the contract HE drafted and make sure I was interpreting it right, especially since English is my second language. After he read HIS contract, he agreed that the document states we get the tenant deposits and the pro-rated rent. I also contacted my lender, he also agreed, to which they reached the title company, and they said it was an oversight on both parties agents.

Now 48 hours later, my agent informed me the seller declined to make right on the contract agreement since it didn't get listed in the HUD settlement statement. I don't blame him; now he is couple thousand richer (blah). But wait! There's more; We still don't have copies of the keys, leases and had to pay the water bill balance. Initially, our realtor said he would make it up to us by reimbursing us from his commission, and now he said he would bring down his percentage when he "sells" our home at the end of the year.

Have anyone gone thru something similar or have any advice, or know how to get my monies back without me having to go storming and threat to sue the title company and my realtor. I’m dayton Ohio if that helps. 

[Tommy Spijkers]

Hi Maribel,

I’m so sorry you’re in this situation and have to deal with all this. Yes you made some mistakes but this is crazy!

I highly recommend talking to a lawyer. You have a legally binding contract, which overrules a settlement statement if I’m not mistaken. The contract is there for a reason, when I mistake is made at the closing the contract is binding. 

I would also contact our local board and report your agent. This is totally unacceptable and unethical. I’m a local realtor and cannot believe a colleague would tread a client that way, and roping them into selling the next property. This is not okay and you really should report it!

Best of luck, please let me know if I can be of any assistance. 

[Damon Pendleton]

I don’t understand why you didn’t get some docs during your due diligence period?  Like copies of the leases??

Also I’d never use that attorney again and probably step away from that agent too. Neither seems to be protecting your interest. 

[Dennis M.]

I’m sure glad I had my re lawyer at my closings and not a realtor . I don’t think there is much you can do here as far as money goes because it’s a done deal . but maybe the tenants can give you a copy of the leases and their keys to make duplicates . I realize your guy was a total crook and I’m sorry to hear that but were you high or drunk during the signing ? I mean didn’t you realize as you sat at the closing why you aren’t given all this Then ..this is just common basic closing 101 re practices to get the leases the keys the deposits and so fourth . Being you own several other rentals I’d think that should have been caught during the closing

[Caleb Heimsoth]

Always get utility, leases and keys up front

[Darrell Bratton]

@Maribel Alvarado I just went through this in Alabama. I caught the missing renter's deposit, the day before the closing but missed the pro rated rent. This is my first multi-family in 18 years so I am a little rusty. I am now fighting with the title company, which I will not use again. I agree that your realtor is gone. 

Darrell

[Maribel Alvarado]

@Tommy Spijkers, 

Thank you so much for your advice, I sent the realtor a message yesterday that I will call him today to talk. I will let him know how he should've done better. And that is not acceptable for him to try to "repay" later on hence there will not be another time. Especially knowing we entrusted him to guide and advice us with our first. My wife said, "mistakes happens" but I told her not when you are paying a "professional" to help you avoid them. Business is business. 

[Maribel Alvarado]

@Damon Pendleton, 

I did get the P&Ls, Rent Rolls and list of Deposit Balance during the due-dilegence process. But I had to trigger my agent several times to ask the seller's agent for documents and information. 

And I seen the concensus is to part ways with the title company and realtor.  

[Maribel Alvarado]

@Darrell Bratton, 

Same thing here, couple days before I had to tell my agent to request the seller for the deposit, leases, and keys. 

[Jay Hinrichs]

this is a closing company error they are the ones that preps the hud and accounts for the money not the agents.

[Maribel Alvarado]

@Dennis M., 

Ha ha, probably I would've made better decisions if I had drank some. I'm used to buying rehab homes so I have never inherent any tenants. But believe me, the Title company management will hear from me on Monday and also the Credit Union that is my lender, since they are their preferred title company. 

[Darrell Bratton]

@Maribel Alvarado,

Additionally, the termite report showed up on the morning of the closing. The seller did not want to pay for remediation so I threatened to walk away. The closing attorney had to hold back the remediation fee from the seller at closing for us to do the deal. What a mess this was.

We are all new to this and will get better with each deal. I am looking forward to my next deal.

[Damon Pendleton]

@Maribel Alvarado if you haven't already, check out the book Due Diligence for Commercial Real Estate by Brian Hennessey. 

[Maribel Alvarado]

Thanks @Damon Pendleton  Good looking out. I’ll get it since it will be the first and last time I’ll make this mistake. 

[Alex Price]

@Maribel Alvarado thanks for posting and sorry you had to go through this. My mother is looking at purchase of rental property and I have to keep reminding her the importance of doing due diligence. This seems like it can definitely be a lawsuit, by owner of the property having signed the contract  and title company error. Title company should have errors and omissions insurance so they need to cough up that money. I'd at least consult with a competent attorney. Sometimes the threat of suing and tarnishing a company's reputation is enough. 

[Stephanie D.]

Yes @Maribel Alvarado title company should have errors and omissions insurance. They’re mistake worth thousands—their insurance should take care of paying you both. Please don’t let this go with out a fight to get what you’re owed. Good luck!!

[John Casmon]

@Maribel Alvarado This is bad to hear. We just bought our first multifamily in Ohio (Cincinnati) and I was surprised about the differences in the process. In Chicago, the attorney handles everything and in OH, everything was handled by the agent.

You should put pressure on the agent to help remedy these issues or file a complaint. Not sure how you didn't get leases earlier in the process. Did you get estoppels at least? Was that not apart of the agreement either?   

[Paul Sian]

@Maribel Alvarado

This situation was poorly handled by your agent and the title company.  As others mentioned the title company is responsible for reading the contract and making sure monies are properly credited.  It did not seem like your agent either was aware of the terms of the contract.  

The seller may think they walked away with free money but the contract says otherwise and he could be held to account as well in court.  

I would recommend talking to the agent’s broker and see if they are willing to remedy the situation. Especially with no keys, no rent rolls, no leases?  You will be facing expenses to rekey the building so you have a master key.  You may want to mention to the seller at least provide the keys and leases and you could consider looking the other way for the rent money depending on how much it was. 

Also the title companies generally have both parties sign statements during closing which state that both buyer and seller agree to work with the title company to fix any errors.  This is a big error that needs to be fixed.  Title companies in Ohio are generally run and owned by attorneys.  I would be looking up the attorney who owns the title company who closed your deal and have them fix it ASAP otherwise there is liability issues for them.  Not just on the title company side but also you could complain about the attorneys failure to properly oversee this closing which as a closing officer they sign off on all closings. 

Feel free to PM me if you need some more guidance.  

[Priya Thomas]

Originally posted by @Paul Sian:

@Maribel Alvarado

This situation was poorly handled by your agent and the title company.  As others mentioned the title company is responsible for reading the contract and making sure monies are properly credited.  It did not seem like your agent either was aware of the terms of the contract.  

The seller may think they walked away with free money but the contract says otherwise and he could be held to account as well in court.  

I would recommend talking to the agent’s broker and see if they are willing to remedy the situation. Especially with no keys, no rent rolls, no leases?  You will be facing expenses to rekey the building so you have a master key.  You may want to mention to the seller at least provide the keys and leases and you could consider looking the other way for the rent money depending on how much it was. 

Also the title companies generally have both parties sign statements during closing which state that both buyer and seller agree to work with the title company to fix any errors.  This is a big error that needs to be fixed.  Title companies in Ohio are generally run and owned by attorneys.  I would be looking up the attorney who owns the title company who closed your deal and have them fix it ASAP otherwise there is liability issues for them.  Not just on the title company side but also you could complain about the attorneys failure to properly oversee this closing which as a closing officer they sign off on all closings. 

Feel free to PM me if you need some more guidance.  

 Well explained Paul. Don't let the title company and your agent off the hook. They have a lot more to lose than you !!

[Christina Carey]

First of all, in Ohio, not all title companies in Ohio are owned/operated by attorneys. I can think of at least two here locally off the top of my head that have no attorney involvement. Attorneys still handle deed prep and any other legal matters of basic process, but it is outsourced by the title company.

Secondly, the 7-page Realtor purchase contract template used by Dayton (and Cincinnati) has roughly 3 lines of text regarding security deposits and prorated rents in the section entitled "Other Prorations".  More importantly, in this case, the line that states "Seller and Buyer acknowledge that prorations are based on the information provided at closing and that actual amounts charged and/or collected for prorated items may differ; however all Closing prorations shall be final." Now, I'm not an attorney, but to me, that means the numbers on the HUD are what they are, and the seller is under no obligation to pony up any extra cash after the closing. The indemnity clause may also protect the agents involved, however, a good portion of brokers/agents will often be willing to make good out of their pockets anyway, because it's easier and cheaper in the long run vs. a civil suit or an Ohio Division of RE complaint.

Lastly, before your next deal, take some time to comb BP and Google for investor-friendly agents (and don't just take the agent's word for it), as one who does more with investment property will be more likely to catch missing/incorrect prorations, and better assist with due diligence. Based upon what I've read thus far, my opinion is that the agent in this case didn't know what he didn't know.

Again, the above is just my opinion - I'm a broker, not an attorney, and you should probably consult with a real estate attorney for advice on what you should (or shouldn't) do. I'm local to you, so if I can be of any assistance in referring one, feel free to contact me at the email address below.

[Gagan P.]

Pro-Rated rent should be part of "standard adjustments" unless you specifically waive it and have it given to the seller, as should utilities.

Rent deposit, same thing. Unless you specifically allow seller to keep it, it should be accounted for down to the penny including interest (if required to be paid on deposits by local/state law).

Seller putting money towards the closing is one thing, but not giving you the pro rated rent money in exchange for it? Definitely something not right there.

Water bill balance, this should have been on the statement of adjustments, or at the very least the water compnay should be billing the previous owner.

I would follow up with the title company, and the broker. Regardless of it not being on the HUD statement, the Seller is responsible for those items, and the title company screwed up, as did the agent. The Seller is of course liable as well since he is not honoring the agreement.

Since your lender AND title company agreed there was a screwup, the title company should be fixing it, rather than simply passing it off as an oops and saying it was just an oversight while (also rightly) blaming the agents.

If none of them make right on everything (leases are obviously very important, as are deposits, keys, etc), I would file complaints to the Ohio Division of Real Estate and Professional Licensing as well as whoever licenses the title company.

[Jeff Ronningen]

Many lessons learned and often lessons aren’t cheap. Your biggest and costliest mistake was not recognizing that prorated rents and security deposits were not credited to you at closing. I would stop the closing in its tracks immediately upon recognizing that. Always ask for the settlement statement prior to the closing so you can review. Study the statement and make sure you understand it. Despite your prior real estate purchases your miss of deposits and rent indicates you have some work to do here. Study your prior settlement statements and make sure you understand every number on it. No one else is going to look out for and care about your money more than you.

Always write into your offer that the seller is to provide copies of current leases. Since you don’t have them, notify your tenants and inform them the seller hasn’t produced leases. Furthermore tell the tenants you will assume they are all MTM with no security deposit unless they can provide documentation which proves otherwise. I’ve had sellers fail to provide leases before, not a huge deal unless falsified rent amounts were provided. But you should do your own analysis of market rent anyway.

Not having keys is a nuisance. But getting the locks replaced and new keys isn’t expensive and it’s not a bad idea. The seller apparently doesn’t run a tight ship so who knows how many sets of keys are out there. You want a secure building.

You should not have paid the water bill for usage prior to purchase of the building. Let the water company go after the previous owner. Switch utilities to your name the day of the closing.

Your real estate agent and title company are embarrassments to their profession. Unless they take action to make you whole, I would never use them again.

Despite these issues hopefully the property is a good investment. After some time has gone by the cost of these mistakes will seem smaller and you’ll have a good story to tell.

[Christina Carey]

With regard to the previous water bill, the water company will not pursue the previous owner. In Ohio, the bill stays with the property, so they have no incentive to chase anyone for payment. Considering that most water utilities in the region only bill on a quarterly basis, it's often wise to get a final read on the meter far enough in advance of the closing that the final bill can be calculated. That way it can go on the HUD to be paid from the seller's proceeds. It's better to eat a week's worth of water usage vs. 2 1/2 months' worth if the seller chooses not to pay the final bill.

To further convolute the matter, if a property sits vacant long enough and there was an outstanding water bill, it will be assessed to the property taxes. Additionally, water/sewer charges continue to accrue even if the service has been shut off (you pay for the privilege of being connected to the public utilities). So even with a vacant property, it's critical to check for past due bills, as well as any pending assessments, as most companies will not check for these issues.