Question for Loan Officers regarding eviction during escrow

5 Replies

Long story short. 

In escrow on a 4-unit in rent controlled Los Angeles. In the middle of escrow I found out that 1 tenant is actually 6 months late in rent and I was horribly misinformed from the start. 

Seller has started eviction process but this will not finish before close of escrow, so I'm trying to get seller to agree to assignment of rights to let me continue the case on my own after escrow closes. 

Seller's agent is demanding we put all eviction agreements into escrow. I am almost certain that if my lender get's wind of it they will not fund the loan. I do not even want to ask. 

Loan officers... will you still fund a loan with an ongoing eviction? 

Maybe you can use this to your advantage. Tell the seller your lender won't fund the loan unless they put a year's worth of rent into escrow, and you deal with the eviction? Or they reduce the purchase price by that much? Do you have an attorney?

I would factor in the amount of delinquency and the possible legal and LARSO fees that may be wound up in this transaction and ask for that money to be credited in escrow. This is what I typically do in these events.

Good luck!

Aly NA My attny is advising an assignment of rights agreement. But without a cooperative seller, this can't be done. Seller is offering to leave $$ in escrow, but demands the eviction language stay in the addendum. I'm afraid my lender will not lend with this language in place. 

Hi @Dave Kay  - In my experience if you are getting a traditional residential mortgage, the fact that the building is vacant/occupied/paying/not paying/etc is not that important. They lender is underwriting YOUR individual ability to satisfy the loan obligation and the appraised value of the property as collateral.  I generally find that lenders will not take the rental income of the property into account - unless you can provide multiple years of financial statements on the property and then they hit it with a big expense and vacancy factor that usually makes it less helpful.

In a commercial loan, the rents, and the fact that one tenant is not paying and about to get evicted is much more important as they evaluate the financials of the property itself.

All that being said, I don't think it will cause a big problem if you are otherwise approved for the loan.  It sounds like you knew the tenant was not paying, you just didn't know how long the delinquency had been ongoing.  If you can acknowledge your understanding of the facts in writing, I would think the seller would be satisfied, and would not need to enter the eviction filing into escrow, whatever that means. 

As other BP members have mentioned, this is a good opportunity to try to negotiate a price reduction as it is a materially different fact that was represented to you prior to escrow.  If you think the deal can stand a reduction, go for it - on the other hand, if you really have a great deal here, I would just try to close it - there are other buyers out there looking for 4 unit properties, even with a nonpaying tenant. 

Good luck @Dave Kay , I'm sure it will work out but these things definitely cause anxiety. Evictions aren't pleasant. 

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