In escrow and found out 3 out of the 4 tenants are struggling to pay rent

[David P.]

I wanted to get everyone opinion on something. I am currently in escrow for a 4-plex in the city of Long Beach California and during my due diligence stage I discovered 3 out of the 4 tenants are struggling. I am getting an awesome deal on the place. There were 3 identical buildings next to each other that the seller owned for decades and all 3 went pending within a week just to give an idea of how competitive it was priced. I am in contract 75k under list price of 1.2 mil. This property will cash flow as it sits right now even with a DSCR loan and a high rate of 7%.

Tenant #1- The highest paying tenant that just moved in this year.  I discovered a recent gofundme page by google searching their names and it shows they are barely getting by and asking for money to pay living expenses. They have 4 young kids. As of now they are still current on rent but did show a late payment in August. 

Tenant #2- Is currently 1 month behind and has a payment schedule to get caught up by end of November.

Tenant #3- Is current on rent but for whatever reason the property manager says she has not paid her gas bill and currently has no gas. Gas here in california is almost nothing each month so this part i don't really understand.

Tenant#4- Vacant unit that will be fully renovated by close of escrow. Can set to market rents and I can screen propertly. This is the one big bonus and perk.

I still need to do the property inspection but I was thinking of asking for sellers credit for this situation. It almost seems like at any day any month all 3 might stop paying rent. The expenses on this property will be about $7,500 a month. Do you guys think i have a right to ask for credit? If so, what would be the amount you would ask for?

 In california a eviction can be about 4-6 months of no rent and I will need to weather that storm. I don't have a ton of liquid reserves after closing but a lot in 401k that i could tap into if worst comes to worst.

Thanks everyone!

[Kevin Farmar]

What are the lease terms? If they are less than 12 months till expiration, I'd roll the dice. However if these tenants are locked into long leases, that could definitely be a headache. 

Playing devil's advocate here, credits will be tricky in this scenario especially as its hard to quantify. We can't really assign a dollar amount based on what "might" happen. That's like asking for credit because the roof might need replacing in a few years, or the furnace is beyond it's useful life but still working. Also consider if you would extend that courtesy to the buyer when you go to sell. The seller will likely say 'No' especially in a market that competitive. With multi-units, this is the risk you take on as a landlord.

Something else to consider - when these buildings close, they will then become comps and any seller is going to price at/above recent sales. Not only could this cost you time but real money in the long run.

If you trust your gut and the timing feels right, I say do it. Deciding factor to me would be the length of the leases.