Current deal just took a strange turn

145 Replies

Went under contract on a 5-unit office/retail property this past week. Was on the market for a year, few offers made but none good enough for seller to accept.

Was able to talk seller into a lease with option (seller financing) at a good price and very low interest rate that banks can’t touch.

This is a turnkey property, all five units occupied but two leases expiring soon. I was told both of those tenants intend to renew so I’d be taking ownership fully leased.

Today, out of nowhere the broker is telling me one of those tenants does not intend to renew and another is probably leaving as well (both expire end of April). Also informed me they received a cash offer that the seller is very interested in and kind of what he wanted all along versus seller financing due to his age and health. They are asking for a mutual release from the contract so he can take the cash offer.

Obviously it’s up to me to decide what to do since we’re under contract. Seems that they’re trying hard to get me to back out of the deal. I hate the thought of taking ownership with two vacancies but I can also get new, longer leases in there at market rates. Just always a risk not knowing how long I’ll have to float those vacancies.

Really wasn’t expecting any of this and kind of blindsided today, expecting to close around April 13th.  I know it’s my decision ultimately, but I guess I’m just looking for advice or opinions...? 

This is my first commercial office/retail deal, in a great location and I don’t want to screw it up. I liked the idea of a fully leased property, and the idea of two vacancies from the start are kind of scaring me a little.

Also questioning if those tenants really do intend to leave or if it’s a “scare tactic” to get me to release the contract...

I would call the two tenants and ask them their plans.

@Bjorn Ahlblad thinking about doing that Monday, just wasn’t sure if that’s professional or appropriate to do since they aren’t technically my tenants.

I would call those Tennant's or do a site visit. Would it still cash flow nicely with the two vacancies?

Sean Carroll, Contractor

Joseph, You said you were under contract? No, they are not your tenants-yet. It is an essential piece of homework; especially given the circumstances. I'd say it is very professional, and you had already thought of doing that! ;<)

@Sean Carroll it would still cash flow some, considering those two tenants  combined only make up about 24% of total rents, but obviously not as nicely as if it were full which was what I initially expected. Other three units leased until spring/summer 2020. Smaller property with one national tenant, other mom & pop businesses.

I’ll also be paying principle down quickly, nearly double the amount annually as I would have with bank financing due to low interest rate (2.5%) that we agreed on with seller financing. So still plenty of positives, but it’s just thrown me off with the vacancy possibilities combined with my conservative nature and given the fact it’s my first office/retail deal.

@Joseph Parker I would go through with it then if the numbers make sense with two vacancies. Plus now you have the chance to increase the rents to market rates. If worse comes to worse you could always go below market rates. not ideal but then you would have the vacancies. It sounds like you have a great opportunity, I would stop talking yourself out of it and pull the trigger.

Also when you talk to them ask them why they are leaving and see if you can help them resolve the issue so they stay. Do a site visit to make it more personal.  

Sean Carroll, Contractor

@Joseph Parker I think whether you should be nervous or not depends on how quickly you think you could fill the potential vacancies.  As a general statement, commercial spaces take longer to lease than residential apartments.  Is there a demand for the type of commercial space that will be coming available?  Are current market rents similar to, above, or below what the current tenants are paying?  Will you need to make significant renovations to the existing units, or can you leave them as-is for the next tenant to fit up?  Those will be important factors to consider with whether your deal makes sense to move forward.  

Matt Lefebvre, Real Estate Agent in NH (#070207)
603-554-2309

@Joseph Parker  One reason the tenants might be moving out is that they may have heard that the property is being sold and maybe they don't like the uncertainty that comes with that. 

In any case, I think that is a bit of plus because you can go in and do a quick light rehab and get those rents to market rate (if you already getting seller financing, perhaps you some capital set aside for rehabs). 

The main issue I think is this CASH OFFER that came out of nowhere! I think you can get into a bit of a legal pickle if the situation isn't handled properly. Perhaps, try speaking to the Seller offering him another option to quickly refinance him out of the deal in 12months or 24 months, solving his age and health issue. 

Remind him that the cash buyer might still back out after he/she hears about the pending vacancies or finds any other issues with the property. Try to Speak to the Seller directly and not through the broker. 

Hope this helps. Goodluck and remember if it is meant to be, it will be your deal, if not, NEXT! (don't force it)

Thanks! - Ola 

The biggest issue is not the tenants leaving or the all cash offer...it's that your future business partner no longer wants to be your partner.  Tough way to start a relationship.  

Not sure how long the seller has had this asset and if they have a large capital gain and/or depreciation recapture or what they plan to do with the proceeds with an all cash offer.

I'd recommend moving forward with the deal if the numbers still meet your criteria.  And see if you can strengthen the relationship with the seller (your partner) by having open professional conversations and trying to solve any problems he has (taxes, access to cash, reinvestment of the proceeds, etc.).  Good luck.

@Mike Dymski from what the broker is saying (and he’s related to the seller), the main concern is his age and health and not being able to fully the realize the “fruits of his labor” by taking the seller financing option.

Strange thing is he received a cash offer for slightly less than my purchase price offer shortly before I made mine, and he didn’t even consider that cash offer. Now he gets another which can’t be for much more and wants me to back out. He’s owned the property 14 years so will have depreciation recapture plus capital gains.

Received multiple messages from the broker this afternoon saying he’s sorry to put me in this situation, that the seller really wants the cash offer and even sending me other listings that he thinks I’d like if I agree to release the contract on this deal. 

Tough situation.  Quid pro quo...have him reduce the price because it's no longer a seller financed valued deal and get bank financing...everyone gets what they want.  If the other offer happens to be higher, that's fine and they will have to get comfortable with that fact...you would already be significantly accommodating them by allowing them to break their contract (and integrity).

Take your time, use the best information you have to make a decision (even if you are uncertain), and don't look back...you win or you learn...either way you win.  Buckle up and have fun...real estate can be a wild ride.

Thanks Mike, I don’t want to drag this on for both my own sake and that of the seller’s, but i do realize the ball is in my court and I need to make the best decision for me. I just haven’t found the clear answer that I was hoping for! Ha

Tough one, but if you have a contract and have acted in good faith, you could always sue for specific performance.  But that is a whole other set of issues and one I don't recommend.  If the broker and seller are related, you are definitely not in a great spot there either.  Not sure what the numbers are, but see if the seller will pay you a termination fee to get out of the contract.  Real example: a family member of mine had a contract on a condo in FL, very good deal, seller got cold feet at the last minute, ended up not wanting to sell after all, paid her $40K to cancel the contract...

Tom Burns, Real Estate Agent
404-449-3278

@Tom Burns this deal is $400k purchase price, $72k down, $1800/mo payment for 10 years and balloon of $180k due at year 10.

I’ll keep the early termination fee in mind, definitely not one to go the legal route as frustrating as things can get. Wish I knew what his latest cash offer was.

Seller is broker’s father in law. 

My advice is to rerun the numbers. I know you want to help the man and his family, but at the end of the day this is your business. You have to do what's best for you. You don't know the true and full circumstances of which they are trying to revamp this offer, only what they tell you. You can't make an emotional decision of other people's circumstances but you can make an informed one. Do your due diligence. Talk to the tenants and make sure they are really leaving (as long as it doesn't void your contract). See what the demand is, and what's the value of a rerent. Also check the tenants areas to see how much work they need. These are the factors you need, not the man's age and health. For all you know his family is making him sell for cash because they want the money. Again, you only know what they have told you. Run you numbers and make your choice the business way not the emotional way. JMO.... (just my opinion...) Good luck!!!

@Joseph Parker  That would be nice to get a 40k early termination fee, but remember if you are able to make the deal work for both parties (you and the Seller), you may be making much more than that lol. 

Find creative to add value by solving sellers' problems and making him happy!

@Tom Burns  @Mike Dymski @Matt Lefebvre  

UPDATE: may have learned a valuable lesson, but not experienced enough to know!

Question - is the earnest money time frame specified within a purchase agreement based on "business" days, or just general days?

Contract signed and dated Wednesday, March 28th, 4:00pm

Specifies 2 days to submit earnest money, and broker told me"no rush at all" with that since it is a seller financing deal, we'll be closing quickly so it won't be cashed until close to closing date and that we've all had good communication with each other during the process.

I was out of town Thursday. Went to agency on Friday to give check to broker, realized it was Good Friday and they were closed. Left in dropbox over the weekend and was picked up this morning when their office opened. Is that 2 day time frame referring to actual days, or "business" days? I had always assumed business days so was in no rush. It was only $1,000 on a $400,000 deal.

Obviously, as stated earlier, the broker and seller have been trying to get me to agree to a mutual release of the contract since Saturday afternoon so that the seller can take the cash offer he received Friday while under contract with me.

Received email around noon today stating "Unfortunately my seller has decided to terminate this agreement based on the fact that the Earnest Money was not delivered in the time frame that is allotted within the Purchase Agreement. I am terribly sorry that we have worked so long and hard to make this come together and in the end, it is not going to happen. If you take a look at Section D of the contract is stats "If the buyer fails for any reason to timely submit Earnest Money, Seller may terminate this agreement upon notice to Buyer." It is the decision of my seller at this time to terminate. Attached is the documentation for that."

The dates and signature times within that document are incorrect (future signature date after 5pm today?), but that's not important I guess.

Was emailed the Mutual Release agreement shortly afterward, again showing an electronic signature time of after 5pm, which might just be a computer error on their part but still strange.

I haven't signed anything yet.

Could someone PLEASE just let me know if I learned a valuable lesson here? Or are they being creative by using this to get out of the deal in order for the seller to accept the cash offer he received Friday??

@Jay Hinrichs that's why my assumption is that this is a valuable lesson learned. I don't believe Good Friday is technically considered a non-working day, or holiday, in Indiana. Their office just happens to be closed that day, however, companies like the one I work for were open.

JUST for the future..  anytime your doing these deals  ALWAYS have your EM check written and handed in with the contract.. then there is no issue...... especially when your dealing with these tiny amounts of money.

@Jay Hinrichs Will keep in mind. The contract came together last minute one day when seller agreed to the lease option deal, so I did not have a check with me and broker wasn't worried about it at all. This would've have only been my second deal, so not much experience built up yet.

And to me, the $400k purchase price is not a tiny amount of money, and neither is the $72k down payment. That's why I'm on here trying to gain as much knowledge as possible for future deals that might come my way.

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