Be sure to do your due diligence, for you info.
By: Dike Drummond
Submitted: 05:32PM on Thursday 30 October 2008
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Here are three of the most common “Dirty Tricks” Commercial Property Sellers can try to pull on you during the purchase process. And - here's the fun part - I will also tell you exactly how you can catch them in the act and turn the tables to your advantage.
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Dirty Trick #1 “Stack It with Felons”
Some Sellers, typically those in desperate straits, will polish the performance numbers on their property by lowering their tenant screening standards. They fill the property with inappropriate tenants in the months preceding the sale. This is especially worrisome in multifamily properties AND it can happen in all types of properties.
In Office and Retail Properties, the Seller can sign inferior credit tenants or higher risk businesses.
On paper, this looks like they've been an excellent property manager with a profitable property. And you won't know any different until you get into your own Due Diligence.
Here is how you catch them …
When you and your Property Manager are doing the walk through and Lease Audit, make sure you review the Tenant Screening Procedures on each and every Tenant. If the Seller hasn't screened tenants adequately - you may notice that they have literally stacked the property with felons… the jig is up. Since you will be doing your Lease Audit in the early portion of Due Diligence you will be able to get out of the Contract and get your Earnest Money back.
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Dirty Trick #2 “The Contract Bonus”
Multi-year contracts for services such as laundry often involve a large signing bonus. Some sellers will sign a new laundry contract either just before putting a property on the market or even while you're under Contract. They honestly think they'll be able to keep that $15,000 bonus to themselves… and that you won't find out.
Even worse, they will often take as large an upfront bonus as possible and leave you with a much lower split of laundry income for the life of the contract. The larger the upfront bonus, the less you will receive in profit sharing.
Example: the Seller signs a new laundry contract and take $20k up front as a Bonus and agree to laundry income split 80% to the laundry company and 20% to the owner … instead of a more favorable split arrangement.
Here's how you catch them …
Make sure your Purchase Contract states that the Seller will provide you with all Vendor Contracts. Make sure you also have a solid “Pro-Rations” Clause as well. A Pro-Rations Clause will ensure that the Seller only gets that fraction of the signing bonus equal to their fraction of their time in ownership.
Example: If the Seller signs a three-year Laundry Contract with a $15,000 bonus 90 days before your purchase is complete and you have a solid Prorations Clause in your Purchase contract … they will only get to keep 8.2% of that bonus … because 90 days is 8.2% of three years.
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Dirty Trick #3 “Let It Die”
It can be a long time between signing your original Purchase and Sale Contract and closing on the Property. 90 days is typical and even longer is not uncommon in today's market.
Often the Seller will simply stop maintaining the Property when it is under Contract. Tenants will put in work orders and the Seller will just ignore them. They just let the Property “Die”.
If you don't catch them, you may take over a Property where there are literally hundreds of active work orders on the day you take ownership. The tenants will be pissed and it will cost you a fortune to do all the repairs.
Here's how you catch them …
Make sure your Purchase Contract contains a clause stating the Seller will continue normal operations and maintenance activities during the Contract Period. And continue to review the Property Management reports from the Seller's Property Manager every week while you are under contract.
Stop in on the Property frequently while you are under Contract.
A well written Contract should give you rights to visit the property with 24 hours notice. Schedule a visit and review the Work Order Logs in person and verify the Seller is doing their job.
Keep them honest and hold them to the terms of your Contract.
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As you can see, a well written Contract is structured to decrease your risks if you're unfortunate enough to deal with an unscrupulous Seller. There are hundreds of other ways Sellers can try to sweep problems under the rug. These are the big three we have seen repeatedly.
And now you know exactly how to “Catch Them in the Act” and quickly turn the tables in your favor.
