I just came across an issue from the purchase of a multifamily building and wonder if anyone else has seen this behavior before and what should I do about it. By the way, I have contacted my attorney for actual advice and next steps, but she hasn't gotten back to me yet.
I purchased a 30 unit Multifamily last November. The seller supplied me with the leases, rent rolls, and financials. I did due diligence and everything matched, there were no discrepancies.
All the leases submitted in due diligence were already in month to month status. The seller never renewed any leases in his 30 years of ownership. The rent increases and stated rent were written on the old lease. Some of the leases were from 2001 to give you and idea how old they were.
Rent rolls matched those numbers and financials also matched what he submitted.
When we started getting rent, one of the tenants payments was lower than expected. I couldn't figure it out, partly because the old owner was really lax on leases and documentation. There was also some poor communication with the property managers and myself. But I just defaulted to the tenant until I could figure out the issue.
This tenant is also a problem tenant. So we are attempting to evict them, since I thought they were on a month to month status it should be easy, then out comes this lease. It turns out the seller issued 1 lease renewal, for 18 months, to this tenant days before closing. It was not disclosed prior to the sale. He also lowered the guys rent by $40 a month. He did this on the 1st of the month I purchased, meaning he didn't see any decline in revenue, but only I would get less.
As to why he would do this. It turns out he has some kind of mentor relationship with this person. Has been looking out for him.
I think this is fraud by the seller. He actually lowered the returns on the building intentionally to benefit this tenant. By changing the financials, he also changed the value of the building at purchase considering Cap Rate valuation methods. Technically he would also have been overpaid in rent payments for that few days at the beginning of the month.
I know this seems small and probably not worth the effort, but the seller is a bad nightmare that just keeps coming back up. Forcing this issue, if it is one, is a way for me to get him to go away.
@Jeffrey Wannberg Congrats on the purchase! 30 units and this is your biggest bad apple? I'd say you scored if the rest is good. People try to avoid these situations with Estoppel certificates; but this might still have slipped through. Everything you posted about changing values etc.is correct by the way; the seller is a sleaze. Do you really want a potential law suit to consume your energy when instead you could be looking at ways to increase the utilization and cash flow. All the best!
I figured lawyer could handle this, so other than me obsessing and digging through records for the past couple days, it becomes only money from here on.
The seller is a sleaze. I almost had to sue him right after the sale because he wouldn’t endorse the money orders he collected for rent prior to closing. They were all in his name. His lawyer got him to comply before I filed on him.
His life was these apartments and he can’t seem to disengage and retire. He just keeps popping up and meddling in this eviction I am trying to proceed on.
If I have to honor the remainder of the lease crammed by the seller, I have been told other tenants will leave.
We are trying to evict on the disturbing other tenants clause, but the seller came in and was a character witness for them. The judge issued a continuance until next week so my PMs can get statements from the other tenants. If all goes well he will be out, if not I am stuck with him for 6 more months. Unless I try and buy him out.
So if I can claw back money from the seller I will have made him pay for the issue in the long run
@Jeffrey Wannberg idk if it’s fraud, but it’s definitely bad faith on the sellers part.
Attempt to evict (will probably be difficult if they’re paying rent), or else just non-renew to tenant.
I once heard of an investor who bought a property where the seller did something like this, except the rent was less than half of market value, and the lease went “forever”. Literally there was no end date on it.
I agree with @Bjorn Ahlblad and take it a s a lesson learned about scumbags. Look at the end game and smile when you exit, if thats your plan.
@Jeffrey Wannberg buy out the tenant to leave. Don’t waste your money on your attorney on this issue with the previous attorney.
Thanks for the advice all.
There are many ups and downs in real estate. Learn to avoid people that waste your time. You have better days coming ahead
@Jeffrey Wannberg Not sure about OR but in WA any lease more than 12 months has to be notarized to be valid.
Sorry to hear about this my friend. That has to suck. I'd honestly put it past me and move on. Paying thousands and thousands to an attorney will drain most of your energy, when can focus on how to make things better. Things will come back full circle for that seller. It ALWAYS does. You'll benefit. Sounds like just one tenant you're having an issue with. Take care of that and improve from there. In the future don't move forward until the seller can present with you the last 2 years tax returns and bank deposits. This will give you another way to justify the rents beyond an estoppel. Good luck.