Just bought a Fourplex and what do i find?
Dublin, CA · Member since 2011 · 10 posts · 0 votes
So I just closed on a fourplex in Stockton and I have a guy collecting rent who I inherited from the previous owner. He tells me yesterday that he has everyone's rent and we start going through the numbers and I notice he's offby $100 on each unit and $150 off on 1 of them and I say no that's not right. I have the leases and estoppels right here and they are stating something else. Now this is what I based all of my calculations on and if its less $450/mo then this property I just closed on is a dog and a monthly loser.
So the rent collection guy says that this is the rent everyone has been paying for a long time and if I raise it the people will leave. This is a concession the previous owner made to everyone verbally. So I say to myself what the heck? The lease and estoppels have been wrong and forged and information not disclosed and now what should I do?
Ideas welcome. Looking for help and guidance from our wonderful community.
Why would someone sign a paper saying they were paying $550/month when they were paying $450/month? Let them know that this is what they signed and stated and you need to collect what was in the lease. If they balk or threaten to leave, maybe you should let them.
Look at market rent. If you're within market rent, let them know that they can move, but they're just going to be paying $550/month somewhere else and they have the headache of moving.
@Sorab Gakhar Did the tenants sign in writing that they were paying $550 per month and you are only collecting $450/month?
First, talk directly to the tenants, to make sure your collections guy isn't just skimming. Not sure if the Estoppels are binding enough there to legally force the unwinding of the sale. Good luck, do keep us posted.
if the documents are forged you need to talk to your attorney. Call the previous owner first with the information and see how he reaacts, try to settle outside of court first. Good luck and report back how things play out.
The estoppels state the correct price which are signed. The signed leases show the correct price. They gave the rent collector the verbally agreed to price.
i Know what your thinking. Make them pay what they signed. I'm worried this will lead to vacancies and these people have been here for years. This will cause a lot of investment to fix up the units.
But it also sounds like $450mo lost in income, at some point its going to be worth it to raise the rents. Maybe 50 or $75 in hopes people wont leave.
Why would someone sign a paper saying they were paying $550/month when they were paying $450/month? Let them know that this is what they signed and stated and you need to collect what was in the lease. If they balk or threaten to leave, maybe you should let them.
Look at market rent. If you're within market rent, let them know that they can move, but they're just going to be paying $550/month somewhere else and they have the headache of moving.
Yes, that is definitely an option.
Look at market rent. If you're within market rent, let them know that they can move, but they're just going to be paying $550/month somewhere else and they have the headache of moving.
Actually, the units are right at market or slightly lower. but with the $100-$150 lower rent its below market. I think the previous owner did it so he could have the units full to sell the property. But yes, your option is a good one as well. The question is, now that the rent collector has accepted their rent, how do i go back and request they pay the rest?
I would hammer the sellers on this one. Get them to pay you the difference in rent. They lied on the contract. You purchased a property under false pretenses.
I have started that process by working through my Agent and their Agent. In this whole process i have not actually spoken with the seller face to face. Its soon going to be that time.
If there are r/e agents involved, they have errors & omissions insurance, might be able to go after them. Eitherway it smells like fraud. I'd find out from the tenants if the leases were forgeries, if they were *I would* be contacting the district attorneys office to see what charges could be filed. A call or visit from one of those guys would make your seller be more inclined to do the right thing. If it was a short sale & the owner was insolvent...you might not be able to get blood from a stone. That's where criminal charges might at least give you some form of satisfaction.
Great feedback, thanks. I will definitely pursue this once i have more details and will also update this thread as soon as i get an update from the sellers agent and hopefully what the sellers say as well.
George, why do you think the agents would have any liability when the owner and tenants provided false documents.
When something bad goes down, everyone gets sued, or at least gets threatening letters from a lawyer demanding a settlement. Any lawyer involved by the buyer would list anyone involved in the sale, if the seller ate a Big Mac at the closing, the lawyer would probably list Mc D's as a defendant too. I've seen where agent/brokers have been sued, or just threatened with a suit and payed up for things like, listing a Jacuzzi tub, were it wasn't the name brand & a buyer squawked and got a Jucuzzi brand tub, or stating new water heater when buyer finds out it's three years old and broker pays to replace. Septics in our area are the latest issue. If you list a house as a 3 br because it has 3 br's, it better have a 3 br septic. That's because 2,3 br homes sometimes have extra rooms that were turned into extra br with out updating the septic system. As an agent you have to do your due diligence when taking a listing, CYA because innocent people do get sued & loose money. The other thing is that lawyers know who has the deep pockets, not the agent or the broker, lawyers know there is an insurance company behind the agent that will most likely settle to make things go away.
When I would take a listing for a house on a septic, I would go to the county health Dept to find out about the septic br limits. Sellers don't all know & sometimes lie.
Agents are held to a professional standard, they should know, they should double check sellers info, especially on investment property where reported income & expenses are the backbone of the sale. Even if the agent wasn't a part of any wrong doing or had any knowledge of wrong doing, I wouldn't want to be in that agent / brokers shoes having to defend myself.
Agents here on BP, this is yet another lesson to CYA...
George, I agree it's usually a "sue everybody" mentality, it just seemed you were promoting that approach. I've seen other guys suggest squeezing the realtors, not because they did anything wrong, but because they might be easy targets, or they "need to contribute some money too, to make this deal work for me". Maybe because I worked as a subcontractor and had GC's constantly trying to cut my throat, I take a more aggressive stance when someone tries to take my money, just because it's there in front of them. I spent $60k once, chasing $19k. Got $81k in the end which was satisfying, not that I'd necessarily recommend it, but I wish I could been there when the guy had to sign the check.
You have estopple letters that were actually signed by the tenants, right? I'd get with the tenant and ask them what they're paying. If its different than the amount on the estopple letter, ask why?
Have you ruled out that this "rent collection guy" (who is that, anyway, property manager?) isn't just skimming $100 off each unit?
I agree with everyone here. If the collection guy is ruled out of scheming, the seller is at fault here. A misleading or fraud case can be formed.
I also employed a tenant as collection guy in some situations such as late or last minute payment, but I only allow him to pick up money orders, not cash.
A reminder/suggestion:
Obviously you didn't have the following casual conversation with any of the tenants....
How's life?
How's the neighborhood?
How's the land lord?
How's the apartment?
How long have you been here?
How much rent do you pay?
How long do you think you'll stay here?
I always have this conversation, whether the seller/seller's agent like it or not.
@George C. I may get to that, and its good to understand my options in this case. I will definitely keep your latest thoughts in mind and this may be my long term goal. Immediately however, i'm working on wresting control of this situation. Maybe it involved lawyers, or maybe it requires detective work.
@Jon Holdman I had the same thoughts, is the rent collector skimming? After finding out that this happened, i opted to get a hold of the seller as the rent collector was the sellers for the past 10 years or so. Where i was not sure is if this is a new thing, the seller has done this and the rent collector is continuing the bad practice or what. That's what i'm trying to get to the bottom of. Unfortunately because i live in the bay area and this property is in stockton and i work full time, i have to go out there this weekend to find out. I'm going to request a copy of his receipts as well. If this guy does not work out, i'll be hiring a PM. Also, this guy lives in one of the units. What i plan to do when i get to the property tomorrow is speak with each of the tenants and not ask why but quite the opposite. I plan to state plainly that they signed the estoppels and they have signed the lease. They need to pay or plan to move out. I will have my 3 day notices ready and filled out as i meet each tenant. Regardless if they had a verbal agreement with the previous seller, they signed the estoppels and they signed the lease.
@Yiv L. Exactly, the rent collector does live there.. working on ruling out the rent collector and tenants.
@Wayne Brooks You are correct, Since its a fourplex, unfortunately a lot of the people who lived there do not speak English. I was very interested in looking at the property and ensuring its foundationally ok and repairs would not break the bank. I did ask the people who do speak English how they liked living here, but most of the tenants are long term, have had one tenant there for over 10 years another for 4 so the idea of them living there for a while was not something i thought of asking, Also the rents are below market already and if i leave them that way for a little bit, i can build up some reserves and then raise the rent. Also, i've never run across an issue with tenants stating rent is different than what they signed stating it was (estoppels).
Great feedback everyone, thanks for the input. I will update later letting you know what happened. The current plan:
- Show up on Saturday and talk to the rent collector, get a copy of his receipts.
- Decide if the rent collector guy is worth keeping or hire a PM.
- Speak with each tenant and have a copy of their lease and estoppels and a 3 day notice to pay rent or quit in hand and expect to collect rent.
- Begin Eviction process if needed
- Try to gather information of fraudulent activity and involve a lawyer if necessary.
I hate the idea of having to evict immediately, but if its the tenants playing a game, i do not need the hassle and i don't mind bringing new people on. I was worried about the idea of having to fix up units and spend the money right after closing on the property, but that's the cost of doing business, i should not let the worries stop me from being decisive about my business.
Not that this will help you now, Sorab, but when you value a building for cash flow, you should really consider the market rent, not what anyone says the tenants are currently paying. They could be paying more or less, as reflected in the paperwork -- or not.
The market rent is what you can expect to charge as your tenants leave. If you can’t make money with that, then over the long run you will lose money on the property.
We ran into a similar problem years ago while looking at a larger building than yours. The leases all indicated the building should cash flow like crazy, yet it was turned back to the lender. When queried, his broker responded to us in gibberish, which we never understood, but it was certainly a red flag.
Shortly into our due diligence process, we found the previous property manager. He told us that though the leases were legitimate, market rents had dropped to where they just accepted whatever the tenants could pay at the time. (As you might imagine, this wasn’t exactly Trump Tower.) Clearly, there wasn’t enough cash flow to support the place, and we don’t like doing business with scoundrels, so we walked.
Hopefully, it’s not too late for you, and it sounds like you might have to suffer the inconvenience of some tenant turnover.
“I was worried about the idea of having to fix up units and spend the money right after closing on the property, but that's the cost of doing business, i should not let the worries stop me from being decisive about my business.”
You have the right attitude, Sorab!!
Jeff
Quick update:
Seems the renters were paying less money and none of them could read. The previous owner came by for their signature but since they couldn't read they still signed and did not know what they were signing.
The previous rents were a verbal agreement the previous owner gave because he did not have time to deal with the issues of the property.
What i have done:
- Show up on Saturday and talk to the rent collector, get a copy of his receipts.
- Decide if the rent collector guy is worth keeping or hire a PM. Will keep him for now.
- Speak with each tenant and have a copy of their lease and estoppels and a 3 day notice to pay rent or quit in hand and expect to collect rent. Everyone signed a copy of their new lease and agreed to appropriate rent going forward. I have had to give concessions to a couple tenants for this month with the understanding that next month the rent will be agreed to price.
At the end of the day it was a process that blind sighted everyone and noone is happy. The renters lose because they did not pay attention to what they were signing, the previous landlord was wrong for not explaining what they were signing and i'm the bad guy because i bought a new property and i'm forcing them to pay the rent that they signed on, even though they did not know it.
Is it a happy ending? heck no, but i'll have to deal with being the bad guy for the time being and see how this plays out over the next few months, i don't doubt that i will probably lose a few tenants over this as it sinks in.
Also, even at the agreed to rents, its still at or below market value so i'm not terribly worried. I should be able to find other renters at this price.
Thanks for everyones feedback, it really helped me come up with a plan for attacking the problem.
Here are steps that I did:
1. research the market rent before even putting offers. Best is considered what was the rent $ history.
2. Before putting in offer, get a copy of the lease from the seller.
3. Talk and interview the tenants before contigency removal.
4. before closing, screen your tenants. sign new lease with tenants.
1. research the market rent before even putting offers. Best is considered what was the rent $ history.
2. Before putting in offer, get a copy of the lease from the seller.
3. Talk and interview the tenants before contigency removal.
4. before closing, screen your tenants. sign new lease with tenants.
Thanks Richard, I did 1, 2, 3 and was told i cannot do 4 until after close, which is what i was working on. I spoke with all of the tenants only did not ask them their rents because that's on the lease and on the estoppels. But learned my lesson, i will be asking in the future :)
@Sorab Gakhar I'd agree you can't really do #4 until after close, a lease is a legal agreement and since you don't have legal right to the property yet I don't see how you could enter an agreement. You could also only do #4 assuming that the previous leases are expired otherwise you are bound by the terms in the current lease unless you can get the tenants to agree to cancel the existing lease.
Sounds to me like you tried to do everything you should have prior, and actually did. You just didn't realize the question you didn't ask because you covered it in the estoppel.
Have you considered going after the seller in court? I'm curious less from a "making you whole" perspective and more from the he committed fraud perspective and would like to see him punished. Though I do know that sometimes it's just not worth it.
oh... I see. i was a bit luckly. I did step 4 before closing. I even get the security deposits & first month prorated rent being credited through the escrow. Also, the tenants is a pharmacist making good money.