Buying a property, existing rent agreement cant be provided to me

Buying a property, existing rent agreement cant be provided to me

Investor · Los Angeles, CA · Member since 2016 · 2 posts · 0 votes

Hey everyone, I am buying my first 4-plex property in rent controlled Los Angeles. This is a probate sale with every strange twist you can imagine, however I have gotten to the point where my offer is in lead position and is likely to be accepted. One of the issues regarding this probate sale is that no one, including the executor of the estate, has access to any rental agreements or past payment history prior to the estate taking over except possibly for the estranged ex husband that refuses to cooperate. The rent being paid to the estate currently is essentially what the tenants claim they were paying prior to the home owner's death, but they all seem to be paying in cash and paying an amount way under value for the area. These re the rents I stand to receive once I take ownership. 

Is there any way I can determine the actual rent these tenants were paying prior to the original owners death? If there are no lease agreements being provided to me, does an agreement exist after I take ownership or are these tenants considered month to month? The tenants can sign an estoppel, but that only acts as a support to an existing agreement, correct? Do I have any right to evict these tenants if no lease documents can be provided to me, and if so am I responsible for the relocation fees? It also seems no one has paid Rent Stabilization Fees or kept the rental registration up for the city. 

I do not want to remove them, but the investment does not make much sense at the rate they are claiming to be paying. Any help is much appreciated!

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Chris MasonPro Member
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y

If it were me? Ya know what, I like being 0 out of 10 on the sketch factor. But this deal is already 4 out of 10 on the sketch factor.

I'd roll with it, and ratchet it up to 5 out of 10 on the sketch factor, and here's how. 

Tie it up in contract with an X day inspection contingency.

On day X-1, I'd submit my counteroffer that includes two things and one alternative:

- Whatever I want to negotiate on, re: inspection results. I'd make sure that I or my realtor sent the listing agent the full inspection results, in writing (email and/or certified mail).

- All leases, for all tenants, and 24 months of rent payment history for same.

- If they can't that come up with that paperwork, I'd take a ridiculous reduction in price as an alternative. Or I'd walk.

Or they can put it back on the market, having just wasted X days, and with the stigma of being a property that was in contract and fell out due to inspection results, and because you sent them the inspection results in writing they lawfully MUST disclose all material defects of the property to any future buyers OR they expose themselves to a crap ton of liability. 

That's how I'd play it. Probably about an 80% chance they wouldn't be able to cough up those leases and rental payment histories, which would mean that I either walk or get that stupid-high discount. So don't fall in love with this property. 

As for HOW they cough up those leases and rental payment histories? When there's a few hundred grand on the table, and you've got it tied up in contract, sellers have an AMAZING ability to suddenly cough paperwork up that they previously said was impossible to come up with. That's their problem, not yours. 

Note that as a lender, I only work on the buyer's side of transactions, so IDGAF about what is "fair" to sellers. It's not at all fair that I sent those inspection results to the seller for no reason other than "do what I want, and figure out how, or it's scorched earth," but that's how I'd roll in your shoes, given that this transaction is STARTING at 4 out of 10 on the sketch factor.

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  • Beverly Hills, CA · Member since 2015 · 38 posts · 10 votes
    10y

    Thanks for posting, @Alex Parish. I'm basically here as a spectator as this is outside my wheelhouse, but I have an idea that may/may not help to verify rents - Have you asked if you could review the deceased owners tax returns to verify rental income? 

    Best of luck. 

  • Broker/Investor · Los Angeles, CA · Member since 2016 · 12 posts · 11 votes
    10y

    Good evening Alex,

    Do check with the City of Los Angeles, especially since the property is located in a rent controlled area. There is a California landlord/tenant rights website and local advocates that can address many of your issues. I would also suggest you consult with a real estate lawyer. Unless the existing tenants have lease agreements, they are considered month to month. As the new landlord, you can send a mass letter to the tenants announcing change of ownership and/or go door to door and get a record of rental payments and leases (if any) from each tenant. Yes, an estoppel supports an existing agreement. I believe you are allowed to raise the rents by 3% per year for existing tenants. For a vacant unit you can ask for market rent. I would see if the current tenants want to remain once you take ownership and provide them with new lease agreements. It is best to check with the City, as to whether or not you are responsible for relocation fees. It sounds like you initially will have to cover some of your investment's costs before the property stabilizes and your rents can cover the mortgage. If you are using a Realtor, get them involved in assisting you with your upfront due diligence, such as finding out about the current rents/leases.

    Good luck! Karen

  • Investor · Los Angeles, CA · Member since 2016 · 2 posts · 0 votes
    10y

    Thank you for your replies :) 

    I just put in a request to the realtor to see if the estate can provide the deceased's tax returns, however she feels the ex-husband who took possession of all her documents will not be forthcoming. I think that was a wonderful idea and a good starting place. Thank you @Adam Phebus for that!

    I also will contact the Apartment Association for Los Angeles which claims to have advocates that represent landlord rights and can provide information, which I will then take to a real estate lawyer for verification. Great advice @Karen Foster :) 

    I will reply to this posting with any helpful information I find. Thank you both very much again! 

  • Member since 2016 · 13k+ posts · 12k+ votes
    10y

    I don't think you will have any way of actually confirming rents. Your decision to proceed with the purchase will depend on what your rights are in regards to terminating all the tenants after purchase and what that will cost. If you can not terminate the fact that you are locked into rent controls may kill the deal.

    My offer price would be based solely on the rent rates as you know them to be. That is the normal business practise as I operate. Find out what the normal cap rate is for your area  and adjust your offer accordingly. That is all the property is worth as it stands.

  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    If it were me? Ya know what, I like being 0 out of 10 on the sketch factor. But this deal is already 4 out of 10 on the sketch factor.

    I'd roll with it, and ratchet it up to 5 out of 10 on the sketch factor, and here's how. 

    Tie it up in contract with an X day inspection contingency.

    On day X-1, I'd submit my counteroffer that includes two things and one alternative:

    - Whatever I want to negotiate on, re: inspection results. I'd make sure that I or my realtor sent the listing agent the full inspection results, in writing (email and/or certified mail).

    - All leases, for all tenants, and 24 months of rent payment history for same.

    - If they can't that come up with that paperwork, I'd take a ridiculous reduction in price as an alternative. Or I'd walk.

    Or they can put it back on the market, having just wasted X days, and with the stigma of being a property that was in contract and fell out due to inspection results, and because you sent them the inspection results in writing they lawfully MUST disclose all material defects of the property to any future buyers OR they expose themselves to a crap ton of liability. 

    That's how I'd play it. Probably about an 80% chance they wouldn't be able to cough up those leases and rental payment histories, which would mean that I either walk or get that stupid-high discount. So don't fall in love with this property. 

    As for HOW they cough up those leases and rental payment histories? When there's a few hundred grand on the table, and you've got it tied up in contract, sellers have an AMAZING ability to suddenly cough paperwork up that they previously said was impossible to come up with. That's their problem, not yours. 

    Note that as a lender, I only work on the buyer's side of transactions, so IDGAF about what is "fair" to sellers. It's not at all fair that I sent those inspection results to the seller for no reason other than "do what I want, and figure out how, or it's scorched earth," but that's how I'd roll in your shoes, given that this transaction is STARTING at 4 out of 10 on the sketch factor.

  • Investor · Bothell, WA · Member since 2015 · 214 posts · 104 votes
    10y

    @Chris Mason seeing how hot the market is in LA right now, I doubt the inspection report is going to scare the seller. I've seen homes sold with very low rent in terrible conditions. And heard a buyer paid 10K+ out of pocket to relocate tenants under rent-control. LA is a crazy place now.

  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    10y

    I agree with Fay and KAren. You are getting great Intel here

  • Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes
    10y

    I've acquired many properties that were within the LA City rent control area that I had not initially considered. Call this on-the-job experience. 

    For example, I end up with a property with a Torrance, San Pedro or Harbor City address and zip, however the legal description indicates City of LA.

    As a busy trust and estate lender I had my eye off the ball and did not pay as much attention to the matter. It's only an issue, of course, when you become the owner.

    Now, as owner you discover that several of your units are in the Section 8 program. That information is not too hard to obtain from the agency that administrates the program. 

    REAP is another program to watch out for. I had a very nice family with a multi-unit that was in REAP hell and they had the darnedest time trying to get the property remediated and out of the program. My understanding is that it requires a full attendance of the board to vote in order to get off the involuntary rent capture program. 

    In a normal sale, escrow would send out rent estoppel letters, of course.

    It really boils down to available info and your ability to transfer or tolerance to risk. If you can extrapolate the remaining lifetime of each tenant you can guesstimate how long they'll be in your life.

  • Phoenix, AZ · Member since 2015 · 345 posts · 138 votes
    10y

    I like what @Chris Mason is probably right but make sure that extra risk by doing things like that doesn't ruin your bottomline or overall return on investment and definitely factor in all those numbers a few times over.  Might have to get creative with this one.  

  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y
    Originally posted by @Fay Chen:

    @Chris Mason seeing how hot the market is in LA right now, I doubt the inspection report is going to scare the seller. I've seen homes sold with very low rent in terrible conditions. And heard a buyer paid 10K+ out of pocket to relocate tenants under rent-control. LA is a crazy place now.

     You're absolutely right, it may or may not make any difference. Always gotta be ready to walk when a deal doesn't pan out! But at the same time, always worth trying to find a way to make a great deal happen, without compromising the "greatness" of the deal.

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