Advice please: Who is responsible for errors ?

40 Replies

I recently purchased a property in Jacksonville Florida. The transaction had some bumps but we worked things out and closed on time. Later I found the original pro forma provided by the turnkey operator listed the rent at $1105, however upon receiving the current tenants lease it showed a rent of $1005. I based some of my decision based on the financials of the proforma. Who is responsible? Is there anything to do? I've left message with the primary contact but haven't heard back.

Was the house rented before you bought it? If so did they not provide a copy of the lease as part of due diligence? Also, if rented, did the tenants not sign an estoppel letter? 

My guess is that unless the seller guaranteed,  in writing, the rent amount there is not much you can do 

Originally posted by @Patrik Kusek :

 I recently purchased a property in Jacksonville Florida.   The transaction had some bumps but we worked things out and closed on time. Later I found the original pro forma provided by the turnkey operator listed the rent at $1105, however upon receiving the current tenants lease it showed a rent of $1005. I based some of my decision based on the financials of the proforma. Who is responsible? Is there anything to do? I’ve left  message with the primary contact but haven’t heard back. 

Disclaimer: I'm not an attorney, so just a layman's opinion. Proforma is basically a "maybe": it does not guarantee anything and therefore nobody is responsible. 

Think of it as a profile on a dating site. The person might have those traits and might look like that picture. Or not. Same with proforma.

If it was rented, why didnt you get a copy of the lease during due dilligence? Did you get any other info? usually you would request copies of any and all legal contracts (leases, prop taxes, utilities paid by landlord, etc)

Originally posted by @Patrik Kusek :

 I recently purchased a property in Jacksonville Florida.   The transaction had some bumps but we worked things out and closed on time. Later I found the original pro forma provided by the turnkey operator listed the rent at $1105, however upon receiving the current tenants lease it showed a rent of $1005. I based some of my decision based on the financials of the proforma. Who is responsible? Is there anything to do? I’ve left  message with the primary contact but haven’t heard back.

I know I'm not going to make friends by saying this, but to me it sounds like you're responsible. It also doesn't sound like an "error". A pro forma by nature is a document that projects the financial return of a property. Therefore it's more of a "best case" rather than an "actual" scenario. 

Someone dropped the ball on due diligence here, first by not asking for the leases and second by not getting a certified rent roll. I use to ask for estoppel agreements, but after having a couple of clever attorneys fight me about "the tenant doesn't have to sign this" I shifted my strategy as a realtor that focuses in MFR in CT to saying that we need a verifiable rent role from the seller.

Good luck, but it sounds like you will be out $100 / month for the remainder of this lease. 

@Patrik Kusek No one is responsible. A pro forma is just a projection. My guess is the rental amount number was just input correctly, easy to do. Your agent or yourself if you didn't use one should have asked for a copy of any lease documents during the due diligence period.

Then before closing make the tenants sign an estoppel agreement and make the seller sign an assignment of lease document. These are basically confirmations that the rent stated on the lease is what the tenant is actually paying. Also, will confirm if they are current, what their security deposit amount is etc...

Overall this is just a learning lesson and nothing to get down about. A lot of the lessons in this business cost a lot more than $1200 spread across a year.

@Patrik Kusek

It’s always on you when you and your money are involved. Use a professional to help with “due diligence” if your not sure or experienced.  Take the time up front to review, not after the deal is over. Fool me once shame on you-fool me twice shame on me. Consider this transaction as a class and any losses as tuition. You probably know all this now. Hopefully others can also learn from your mistake and not make it on their own. Thank you for sharing. 

Hi everybody thanks for the feedback. @Filipe Pereira I care less about making friends and more about learning which is why I appreciate honest feedback from you and others. Lessons I learned 1) I let my trust in this person get in they way of due diligence. 2) People can say what they want in a proforma. 3) Even highly vetted people can make mistakes. 4) Due dilegence doesn’t stop with numbers, it also includes people who need to managed. I hope my experience can help someone out there avoid my mistake. 

Ps On the plus side, the property is still cash flowing so hopefully and hopefully I can catch up. 

Originally posted by @Tony Figurelli :

@Patrik Kusek Who was the turn key provider?

The name of the turnkey provider is not important,  this can happen with any turn key provider that is providing a pro forma. More than likely they just made a clerical error.  While I understand I am responsible  for verifying all information,  I will be curious to see and the response from the turnkey provider who prides himself in outstanding customer service . At this point, I’ve heard crickets from him directly. But , it’s the holidays right?

@Patrik Kusek , Good news is you are cash flowing positive. Better news is, you can still raise rent, may be in excess of $1105. Long term, this will not be a deal breaker. I don't ever ask for estoppel from tenants, to me it's empowering them in a wrong way. All my leases read lessors as my company, their assignees and heirs for league purpose. I do always ask for leases immediately after acceptance of an offer along with recent maintenance log. Rent roll must be received and reviewed as part of due diligence. We also run our own rent comps to see how it stacks up.

Originally posted by @Al Pat :

@Patrik Kusek, Good news is you are cash flowing positive. Better news is, you can still raise rent, may be in excess of $1105. Long term, this will not be a deal breaker. I don’t ever ask for estoppel from tenants, to me it’s empowering them in a wrong way. All my leases read lessors as my company, their assignees and heirs for league purpose. I do always ask for leases immediately after acceptance of an offer along with recent maintenance log. Rent roll must be received and reviewed as part of due diligence. We also run our own rent comps to see how it stacks up.

Originally posted by @Patrik Kusek:
Originally posted by @Al Pat:

@Patrik Kusek, Good news is you are cash flowing positive. Better news is, you can still raise rent, may be in excess of $1105. Long term, this will not be a deal breaker. I don’t ever ask for estoppel from tenants, to me it’s empowering them in a wrong way. All my leases read lessors as my company, their assignees and heirs for league purpose. I do always ask for leases immediately after acceptance of an offer along with recent maintenance log. Rent roll must be received and reviewed as part of due diligence. We also run our own rent comps to see how it stacks up.

 I agree  long-term it will not be a dealbreaker.   

@Patrik Kusek I disagree about the name of the turnkey provider not being important. Even though we all agree with buyer beware, a good honest business would want you to be happy. It may be that they would do something else for you down the road to help take care of this issue. If they're on the Forum naming them would give them the opportunity to show their true colors.
@Clinton Fisher :  yes, I do agree with you in concept.  However I need to give this provider a chance to respond to me personally.    It would be unfair to him and everybody else on this forum if I name him or his company without giving him a chance to address the issue personally.  

Any professional or experienced investor would know to get copies of leases etc. 

My gut feeling here is you were taken advantage of. 

Always verify everything! Only you will really care about your money. This is why i dont agree with OOS investing with no hands on work.  You need to control your assets. 

Originally posted by @Clinton Fisher :
@Patrik Kusek I disagree about the name of the turnkey provider not being important. Even though we all agree with buyer beware, a good honest business would want you to be happy. It may be that they would do something else for you down the road to help take care of this issue. If they're on the Forum naming them would give them the opportunity to show their true colors.

it would be common in the turnkey world if the TK operator said rent was and it was not.. they would reimburse this guy his 1200 bucks.. although you don't want to get all stressed out over 1200 dollars.. that's not enough money to really worry about.. Stress comes from tenants doing 5k or more in damage.. that's the important thing making sure you have quality tenants.

Also most proformas are just throwing out best case scenarios.. you see it in commercial real estate all the time.. CAP rates are done at full potential rent and full occupancy even though the property may not be experiencing this.. when you buy a SFR rental that has just been rehabbed and put into service.. there is no way to know how it will perform. or what your actual tax's will be once reassessed that will throw off your numbers.. or maybe they plug in 60 bucks a month for insurance and your policy that you like is 80..

and of course no way to know if the tenant in the future is going to pay on time every time.. and or how much damage they will do to the house.. so for those that are super nerdy about proforma numbers and calculate things to  8.75% return and it comes in at 7.7 so its a failure those type are going to be in for a long ride in the rental business..  there are no guarantee's only projections if everything goes right and well we know people.. some do some don't and some are horrific. 

Originally posted by @Patrik Kusek :
@Clinton Fisher:  yes, I do agree with you in concept.  However I need to give this provider a chance to respond to me personally.    It would be unfair to him and everybody else on this forum if I name him or his company without giving him a chance to address the issue personally.  

 Patrik,

I can appreciate your integrity here in giving a service provider the opportunity to respond.  If my guess is correct in who you are working with, it would be out of character for them not to respond and not to some reparation.  I can tell you from managing over 5,000 properties and having managed for investors over the better part of 15 years that giving a projected rent is a best-educated-guess and even the best can miss.  I suspect that you were looking at numbers provided by the company and made your investment decision based on those numbers and the property rented at a lower amount before closing(?).  That does happen and sometimes communication can be lost.  However, if the property was rented and presented to you as a rented property showing a higher rent, then I would be shocked if the company did not cover that lost rent for the life of the resident contract.  

I think a lot of people like to come on here and give grief to passive investors over their questions involving out of state buys.  I can assume from reading your posts that you are already aware of some questions you need to ask next time and any additional due diligence you need to do on your part.  It is a learning process.  I certainly wouldn't beat myself up, rather just be direct with the provider on what your expectations are and hopefully they align with their own expectations of service.  

Good luck on this.

@Chris Clothier   that was my thought if there was a representation of rent and the rent was different most TK companies would do as you suggest.. make up for the slip up.

if its just a marketing profroma saying what rent could be .. then that is different.

as you know we also see some of these proforma's that bake in depreciation appreciation year over year rental increase and run those out 10 years to get to some pretty big IRR numbers.. and we know that investors just tend to focus on bottom line of these proformas..

@Patrik Kusek yea not much to be done but lesson learned to always get verified lease copies.

Hopefully you find some value add opportunities to get the rents close to where you want them!

@Patrik Kusek   Sorry to hear that.  Unfortunately the best you can do is lawyer up and get drawn into an expensive legal battle that probably net you anything in the end.  

Due diligence and triple fact checking are the key lessons to take from this experience.  Make them show bank statements with the rent coming in.  Also try to call the tenant to vet them and ask what they're paying.

Don't let this deal get ya down. Every investors road has bumps.  The successful ones are the ones who stay  the course. 

Good luck!