Seller Financial Disclosure Problem
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.