About to close on property, seller&#x27;s lied about rental contract

OP

Member since 2020 · 28 posts · 11 votes

6y

Hey @Mike Cumbie

I'm in NJ BTW. With respect to their lawyer, he did give me time to approve lease, but they did not provide the full lease during that time frame and it just fell to the wayside. My instinct tells me they were working me to push the deal through. I trusted my realtor who specifically detailed the tenant as MTM in various communications. I should have confirmed regardless.

I did just find out about the government protections being extended, so no it would have no teeth. It's 6 months and a loss of rent of $3k. I'm 15% down on 420k - so if I rent the bottom unit at a modest rate I'll be at $300 cash flow conservatively.

It still works, but sucks to tie up all this money without the expected $1000+ cash flow a month.

There isn't much recourse now and not a huge sum, but am I justified in feeling my lawyer and realtor dropped the ball here? This is a first time purchase. Thanks!

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

6y

I never heard of section being MTM.

9 Reply

Matt B.

Investor · Chicago · Member since 2018 · 113 posts · 51 votes

6y

Did your realtor know that it was a 1year lease that ends in Feb? If they knew and told you otherwise in order to get a sales commission then they may be liable for misinformation/misrepresentation.

In terms of doing DD I think its just better to check things out yourself or have a trustworthy team that you can share the workload with.

Hope things work out

3 Reply

Nicholas U.Pro Member

Member since 2020 · 65 posts · 44 votes

6y

You can probably get the realtor in trouble if you file a complaint stating they withheld information. Why working with same realtor is beneficial in many ways it puts more pressure on you to demand items in writing. I have learned that myself backing out of a property recently.

Mike McCarthy

Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes

6y

@Richard Singh do you have the statement from your realtor that it’s MTM in writing? I’d start there and go back to your realtor and lawyer and tell them that if you close you’re now out $xxx (figure out what that number is based on lost rent and delays) because of incorrect information provided on xx date and that you’re planning on backing out.

See what they say. Maybe you can all come to some agreeable solution. Even if it is your fault, you can base your decisions on presumably valid information provided to you.

4 Reply

Joe P.

Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes

6y

Your lawyer should be working in your best interests. If this is truly the case and all of the above checks out, how is your lawyer serving your interests in this case? Honest question.

4 Reply

Kim Knox

Real Estate Broker · Jacksonville, OR · Member since 2009 · 199 posts · 155 votes

6y

@Richard Singh

Section 8 is tricky, and YOU should call them directly specific to this purchase. Ask them 1. If they have done a rental valuation recently, as you are limited to keep within a certain percentage of the market value rents. 2. Are you obligated to continue to lease? (I think in the 1st year, yes. Perhaps the next year it could be different). Don’t blame your Realtor or the attorney, section 8 would likely need the Seller to request contracts). You might have to get a letter of authorization for such questions to be answered. You might have to extend your diligence period to satisfy your questions.

Tell Section 8 your plans and tell them your belief that it is under market rent by $800 a month, that is the best way to get the info you need to make a smart decision. Otherwise, depending on competition, you might be able to split some of the rental loss with the seller, in light of your discoveries. That is, if you made these things a part of your due diligence in your purchase contract.

13 Reply

Mike CumbieBusiness Member

REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes

6y

That's why @Kim Knox is a Broker! Beautiful answer!

OP

Member since 2020 · 28 posts · 11 votes

6y

@Kim Knox

Thanks for that, I’ll reach out and find that out.

So just to clarify we’re closing this week and far past that point. The mortgage company actually needed it and we had to reach out and get it directly, no authorization needed surprisingly, my lawyer just stated they were representing buyer. I have let them know this seems like something they should’ve done from inception.

I’m curious to know why the realtor or sellers lawyer are not at fault here? I have emails stating the tenant was MtM from their lawyer and realtor. Are buyers truly on their own here? I do acknowledge this is lesson learned of doing your own diligence.

We’ve been super accommodating with this transaction, but I do understand that doesn’t always count for much.

When I reached out to housing before I put in an offer, they told me that the tenant is not supposed to be in a 3 bedroom since it’s only her on the Voucher and she lives alone.

0 Reply

Todd Rasmussen

Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes

6y

Originally posted by @Richard Singh:

Hey guys,

I've reached out previously on some reno related questions on what was up to this point a smooth process.

Recap: I'm buying a 2 family in Guttenberg with an existing Section 8 tenant that was presented as month to month. Goal was to submit 60 day notice.

Update: I found out the week of closing after finally getting a lease agreement from the housing authority that the tenant is actually on a year lease ending in February. The tenant is paying about $800 under market value, and slows down my plans for renovation. My realtor's firm represents both buyer and seller. When asked for a lease, the seller's lawyer and realtor dragged it on and only sent HAP voucher details, but never a lease. We continued to ask but it was not presented, and somehow it just got skipped over and we went on their word. I clearly see my mistake in due diligence, but I give myself a pass since I assume this was my realtor's or lawyer responsibility to advise me here.

So my question is, where did I go wrong? Who's responsibility was it to confirm lease? What should I expect from a lawyer and realtor?

I've lost a-lot of trust in my realtor and their firm - and also my lawyer - but I do know at the end it's my responsibility. Would love to hear your opinions for future deals.

Trust but verify. Always and without exception. I think the takeaway is to eliminate single points of failure in your acquisition process. At the beginning a spreadsheet that has all of the documentation requested and dates it was requested/received that you review with your realtor weekly and/or before waiving contingencies would most likely have kept this on your radar.

Just don't repeat mistakes and you'll be ahead of most. Thanks for sharing so others can avoid this one!

OP

Member since 2020 · 28 posts · 11 votes

6y

@Joe P. I feel the same, which is why I needed to test my assumptions. I was naive to not trust but not verify.

@Mike McCarthy Yes, for sure have all those emails and have requested the rent difference. Their lawyer is claiming we had our time to verify, although he continually did not send the lease over. I find it hard that a lawyer that does this all the time thinks what he sent was acceptable. If I didn’t work in Finance, I would probably assume it was a innocent, but it doesn’t add up.

@Matt B. I can’t say for sure if they were aware, but again, hard for me to believe they pushed the HAP voucher instead of a lease. My suspicion is they were pushing for the double commission and did what they had to do. I get it, but it doesn’t sit well. I certainly didn’t feel well represented by my realtor, but I wouldn’t pursue this any further beyond trying to get the rent difference.

Thank you all for your input, doing my own DD is a must next time.

0 Reply

OP

Member since 2020 · 28 posts · 11 votes

6y

@Todd Rasmussen Right on. I’m better then this, I trusted my lawyer and realtor far too much, I’m always concerned about being too micromanaging but at the end of day, it should never be taken for granted. Thanks.

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

6y

Talk to section 8 and find out if they will reevaluate it as Kim suggested. If she's only supposed to be in a 1 bedroom, then maybe they will move her to another place. How many bedrooms in the bottom unit?

Kim Knox

Real Estate Broker · Jacksonville, OR · Member since 2009 · 199 posts · 155 votes

6y

@Mike Cumbie Thank you. :)

Jhanel Wilson

Rental Property Investor · Philadelphia, PA · Member since 2016 · 63 posts · 58 votes

6y

I rent to section 8 in philly. Here we can always submit a mutual dissolution of lease. And the tenant will get an emergency voucher to move.

Contact the housing authority and find out their procedure for dissolving the lease.

3 Reply

Kim Knox

Real Estate Broker · Jacksonville, OR · Member since 2009 · 199 posts · 155 votes

6y

@Richard Singh it seems to me that the Seller lied to the Agent and the Attorney when asked, OR I suspect he/she simply didn't know any better, but perhaps they did. There are contracts between tenant and seller, and tenant and HUD. Hud does a yearly inspection, but they don't provide Seller with updates contracts, so it is not unreasonable that Seller may not understand that lease period extended. I am a Realtor, but I only know this because I am a landlord and have one rental that is section 8. I would expect a property manager to know section 8 doesn't go month to month, but not a Realtor. However, the fact that a contingency of sale is to review the obligation to HUD is a small indicator that they did not have access to these contracts, or that they wanted you to discuss with HUD as the Potential Buyer.

Depending on your contract, you might be able to ask Seller to contribute towards your closing costs and keep the price the same, this is a minor change that a lender can process pretty quickly. Obviously, ask your lender. You have found out something unfavorable, which was the whole point of your personally verifying contracts.

Steven Westlake

Developer · Bellefontaine Ohio · Member since 2016 · 373 posts · 219 votes

6y

Question - does anyone know if a new buyer has to continue with existing leases? Im thinking you might be able to give a non renewal of rent 30 day upon sale closing. For example what if your plan was to move in yourself, or scrape it for a higher and better use? Or the building was not safe and needed some major repairs, such bad foundation , asbestos on the plumbing, or knob and tube wiring? I have used it, but the leases were already month to month, and nobody ever challenged it.

OP

Member since 2020 · 28 posts · 11 votes

6y

@Kim Knox This is a great explanation. I think it’s easy to assume wrong doing without knowing the details, but after this explanation it’s understandable how this could have been the scenario.

Although I feel my realtor and lawyer should’ve educated or looked out for me here from a diligence standpoint, it could be a case where everyone is going on the word of the seller’s.

Appreciate the detail.

0 Reply

Lisa Walker

Real Estate Agent · Fort Worth, TX · Member since 2019 · 20 posts · 25 votes

6y

@Steven Westlake- since I’m a Tx Realtor & you’re from Texas- leases survive the sale here. ( might be same in other states, I don’t know). So, if you buy with a tenant in place, you have to honor that lease.

[email protected]248-209-6824

Drew SygitBusiness Member

Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes

6y

@Richard Singh Section 8 allows MTM after first year of lease.

I'd send your agent, their broker and the attorney an email stating how they legally failed to execute their duties on your behalf. Then cover how much this will cost you and ask how they plan to compensate you. Be very friendly, but what you're really trying to do is get their attention that they screwed up big time. You want them firmly on your side and working hard to make right with you.

They can do so in several ways, 1) putting tons of pressure on the seller to be accountable for their misinformation. 2) contributing their commissions and fees to you too help cover their mistakes. 3) both! I don't believe there are any RESPA limitations on what they can give you and it's not any business of the lender. RESPA really only covers kickbacks between interested parties in a transaction.

If they don't play nice and accept responsibility for their screwup you may need to threaten legal action against everyone including the seller, tieing the property for months until court. That may be enough to get everyone involved to chip in to help migrate your loss.

Good luck!

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Laticia Braxton

Real Estate Consultant · Joppa, MD · Member since 2015 · 218 posts · 178 votes

6y

I totally agree with @Drew Sygit. I don't think you should have to take this hit lying down. They should compensate you in some way and although you don't have to lead with the threat of a lawsuit, do firmly ask what they can do for you. If they truly want to get to closing, they will offer something, even if they feel they are not at fault.

This reminds me of a deal I had a few years ago whereas I represented sellers who intentionally removed an expensive alarm system from their house the night before closing, when it was included in the purchase agreement. The buyer's agent and buyers called me in a panic that night after realizing it had been removed while doing their pre-closing inspection. When I asked my client why they removed it, they blatantly told me that they never agreed to leave it (a lie), that they would not be replacing it and that they left the cheaper ADT system in place (for whatever reason, they had two systems). The buyers flat out said they would not be closing the next morning if that specific system was not replaced or they were given a credit at closing. Long story short, my clients refused to comply, the buyer's showed up the next morning but refused to close (and rightfully so), and my client refused to replace the system or offer a credit. I personally ate the cost of the alarm system ($2,000) because at that point, tensions were extremely high, moving trucks were packed and on the parking lot of the title company where we closed and it was the only way we were going to close and each family could move on with their lives. The buyers personally thanked me which meant the world to me and after a few days of dealing with internal frustration with my clients, I got over it.

Point being, in your scenario, someone should step up and do the right thing. I truly hope this works out in your favor.

Laticia

Brian Ellis

Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes

6y

Originally posted by @Richard Singh:

Hey @Mike Cumbie

I'm in NJ BTW. With respect to their lawyer, he did give me time to approve lease, but they did not provide the full lease during that time frame and it just fell to the wayside. My instinct tells me they were working me to push the deal through. I trusted my realtor who specifically detailed the tenant as MTM in various communications. I should have confirmed regardless.

I did just find out about the government protections being extended, so no it would have no teeth. It's 6 months and a loss of rent of $3k. I'm 15% down on 420k - so if I rent the bottom unit at a modest rate I'll be at $300 cash flow conservatively.

It still works, but sucks to tie up all this money without the expected $1000+ cash flow a month.

There isn't much recourse now and not a huge sum, but am I justified in feeling my lawyer and realtor dropped the ball here? This is a first time purchase. Thanks!

IME, this happens pretty often. No one is ever going to try and secure your investment the same way you would. Whether its a lawyer, seller, or agent. Im sure you had a gut feeling something was up with the lease, but decided not to push the issue, otherwise you may have blown the deal.

Also, if your full intentions were presented to the seller, they may have walked themselves (then youd really be kicking yourself). The fact that it is section 8, it really isn't a bad time to have a secure tenant in place for another year. Im buying a property in a very similar situation, but have stressed that I WANT the tenant in there for another year regardless of market rent being low. This will give me a few options:

A. Security, the mortgage is paid and Ill still have positive cashflow

B. A full year without having to renovate the place, giving me time to adjust to market uncertainty

C. Good reputation within the community, which in turn could provide me more deals down the road. Why would I kick someone out who will have a hard time finding a rental elsewhere, especially with everything going on?

Good luck!

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Whitney HuttenPro Member

Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes

6y

@Richard Singh I'm glad to see you are getting some great guidance on how to handle your specific situation. For new investors watching this thread, this drives home an excellent point of follow up on your due diligence checklist, exercising your contingencies to get action (don't get pressured that a contingency doesn't need to be followed), and getting an Estoppel Agreement signed by the landlord and tenant confirming the terms of the lease. Even then things can go sideways, but then you have the PSA and a legal affidavit in had to back up your claims.

When I closed my second property years ago, the PM I purchased it from had the tenant to sign a two-year lease for $1100 (even at this price it was $150 under market rents). I asked for signed Estoppels from both the tenant and PM and got them. Right before close, I moved the property to another property manager (there were other things in the background that made me think the original PM was a problem). And wouldn't you know it... the tenant was only paying $900 a month and the old PM had been kicking in the rest. Because we had the paperwork in place, it was fairly smooth to get the old PM to make me whole on the lease for another 2 years.

Good luck! I've never heard of MTM Section 8 (I have two and we are always scrambling for recertifications right up until deadline it feels). That sounds like the best course of action for you to move the tenant.