No Leases or Rent Roll? Previous Owner Flipped from Auction!

[Ashon]

So I entered into my due diligence period on a 4-Plex, and when I requested the The Rent Rolls and lease contracts of the tenants the Sellers Agent came back to me saying that the Landlord purchased the property at Auction and had none of that information.

So I am looking for some guidance on this.  Here is the Email that I received from the Agent:

As we have explained before, the seller purchased the property at auction, and was not given any records regarding the property or tenants.  He has attempted to speak to the tenants of the three occupied units, but they are being uncooperative.  The fourth unit is vacant and I have been told that it has been painted and cleaned.  The seller wants to begin eviction proceedings against the three remaining tenants, but wanted to find out from the buyer first if this is what he would like him to do or if he would like the seller to leave them there and he will try to negotiate leases with them after close of escrow. 

I offered a premium because of the 75% occupancy.  But now I am seeing nothing but large challenges and problems looming ahead of me.
 
1 - Uncooperative Tenants -
  a - Served with an eviction notice they might do damage to the property. 
  b - When presented with a new lease offer counter that there is an existing lease

2 - If he has held the property for more then 30 days, he hasn't collected rent?  Tenants are living rent free? 

3 - Security Deposits?  If it went to auction, did the bank claim them?  The original Owner Keep them?  And how am I going to be responsible for damages to the units?

4 - Who is liable for anyone of this?  Me? Him? or the Pre-Auction owner, who I assume is going to be difficult to deal with.

I plan on speaking to a R/E lawyer tomorrow about this situation, but would like to hear any input that you may have on the situation and any guidance from experience that you can share that a lawyer may not.

Thank you

[Gold River]

Hi,

    You can use local data and information to rebuild (Make Projections - Estimate) the rent rolls, cost's and expenses, debt service by estimating cost of your purchase, and through this information can project Net Operating Income NOI.

Deposits did not come with the property at auction, however you could ask for $xxx.00 dollars per unit from the seller paid to you at close of escrow for occupied unit  deposits! The current owner is responsible for him or his representative going to each tenants door, introducing themselves and finding out if leases exist, what tenant has been paying, and collect any current rents due from auction date to current, he or she needs to do this to stabalize the property prior to a sale!

Buying at auction is buying as is, there are no warranties, no guarantees and no further responsibilities from the time of auction, I would guess it was an REO!
If an existing lease exists it has to be honored by law if this was a foreclosure and subsiquent REO, although you could try to pay the tenant to move and obviously could evict for non payment!

You don't own it yet, so unless you except responsibility you don't have a part in it until you were to close!

You either take it as is and handle everything once you own it, or ask seller to make evictions and remove tenants if he can (Not Foreclosure) and you inspect premises prior to closing! I am going to guess this investor bought this to flip so he may be unwilling to much of anything prior to a sale!


                    GR

[davewindsor]

I plan on speaking to a R/E lawyer tomorrow about this situation, but would like to hear any input that you may have on the situation and any guidance from experience that you can share that a lawyer may not.

I think you have a pretty good idea of the issues.  If it was bought at a foreclosure auction, it's probably because those tenants weren't paying rent.  You were wise enough not to buy it through an auction, so why should you inherit his nightmare?  With problems like this, I would demand either 100% vendor financing or rents (any rental losses covered by the vendor) guaranteed by the vendor for a year or both.  If he doesn't like those demands, tough.  He'll be stuck with this nightmare because nobody else wants it either and the agent won't get a commission either if he doesn't want to present such an offer.

[justin0419]

Dave and GR are right.  The agent isn't helping the situation either.  The seller and seller's agent are basically claiming ignorance about everything.  That's not good for you in any sense.  Did the seller just buy this at auction and immediately put it on the market?  Is the seller just trying to flip it to you for a higher price?  You will have to start over with no tenants.  If they're being uncooperative with the current owner, they will be with you.  There are dirtbags out there who won't comply with rules and then there are other people who will do what they're told.  The trick is finding the latter.  You are right in assuming there could be damage when all of them get kicked out.  If there are no records of anything, the tenants could take all of the appliances, a/c units, etc and no one would be able to prove that they were supposed to stay with the building.  Be very careful here.  If you can get it cheap enough, it can be worthwhile.  Just understand the risks and possibilities.  It sounds like you've already thought quite a bit of this through.

[jfpen]

So I entered into my due diligence period on a 4-Plex, and when I requested the The Rent Rolls and lease contracts of the tenants the Sellers Agent came back to me saying that the Landlord purchased the property at Auction and had none of that information.

So I am looking for some guidance on this.  Here is the Email that I received from the Agent:

As we have explained before, the seller purchased the property at auction, and was not given any records regarding the property or tenants.  He has attempted to speak to the tenants of the three occupied units, but they are being uncooperative.  The fourth unit is vacant and I have been told that it has been painted and cleaned.  The seller wants to begin eviction proceedings against the three remaining tenants, but wanted to find out from the buyer first if this is what he would like him to do or if he would like the seller to leave them there and he will try to negotiate leases with them after close of escrow. 

I offered a premium because of the 75% occupancy.  But now I am seeing nothing but large challenges and problems looming ahead of me.
 
1 - Uncooperative Tenants -
  a - Served with an eviction notice they might do damage to the property. 
  b - When presented with a new lease offer counter that there is an existing lease

2 - If he has held the property for more then 30 days, he hasn't collected rent?  Tenants are living rent free? 

3 - Security Deposits?  If it went to auction, did the bank claim them?  The original Owner Keep them?  And how am I going to be responsible for damages to the units?

4 - Who is liable for anyone of this?  Me? Him? or the Pre-Auction owner, who I assume is going to be difficult to deal with.

I plan on speaking to a R/E lawyer tomorrow about this situation, but would like to hear any input that you may have on the situation and any guidance from experience that you can share that a lawyer may not.

Thank you

I am in the Northeast so my frame of reference may be different than yours. I would first visit the tenants myself and get an idea of what is going on. Remember, tenants lie all the time. Take anything they say with a "grain of salt." Find out how long they've been there and listen to their stories.  If the tenants are uncooperative, you don't want them. As it stands now, the current owner is responsible for any security deposits and/or leases. If the current owner wanted to evict the tenants there is probably a good reason.  Here is the thing, if the tenants have a lease it will be very difficult (next to impossible) to get them out for any reason other than non-payment of rent. If they have not paid the rent, you can only evict them when they owe YOU money. Meaning you will have to wait at least one month to file. You will have a minimum of 2 months and most likely 3 or possibly 4 months of no income. Unless this is a great, and I mean GREAT deal, I would ask for the place empty or for a significant price reduction. Otherwise, I would walk away and loose my earnest money if necessary.

JP

[Ashon]

With problems like this, I would demand either 100% vendor financing or rents (any rental losses covered by the vendor) guaranteed by the vendor for a year or both.  If he doesn't like those demands, tough.  He'll be stuck with this nightmare because nobody else wants it either and the agent won't get a commission either if he doesn't want to present such an offer.

Excuse my ignorance here, this is my first deal after years thinking about it.  So, when you say 100% vendor financing, what does that mean?  

I do love all the creative solutions here, and this is exactly why I wanted to come to the club and hear the feedback.  Make the Seller Guarentee rents for a year!  Heck yes!  Make the Seller put the security deposit on each occupied unit.  

Fortunately I am dealing in Nevada (I am local, now) and foreclosure auction actually voids any and all leases.  But it is illegal to offer $$ to a tenant move before end of the lease.  

Here's what I'd like to get out of the seller with your inputs having gone through my mind: Seller must evict all current tenants, and bear the cost of making the units market ready, and provide buyer a discount on the price equal to 2 months of full occupancy.

[justin0419]

Dave meant owner financing where you could get favorable terms from the owner...maybe no or very little down payment.  You're not going to get everything from the owner.  He's not going to evict everyone, make the building rent ready, and give you a discount.  Otherwise why would he sell.  You can expect to get maybe one or two things, but I'd say that would be it.  Then you'll have to determine if the hassle is worth it.

[motivatedceo]

Based on what you said, I would only buy that property with no "premium" at all. Personally I only buy properties with rather extreme discounts, so there is far less risk on my part.

I would buy it assuming the 3 remaining tenants are 100% worthless and need to be evicted, and also you will need to pay for repairs that they may or may not cause.

However AFTER you close on the property - I would approach each tenant, and tell them (a) they can move out on their own ASAP, (b) they can be evicted and have their credit ruined, or (c) you would sign him/her to a new lease with your company. If you choose option C you can do something creative...like do a new lease with NO deposit (clearly explain the original deposit disappeared with the first landlord, the property went into foreclosure and the tenant will need to get it from the previous landlord "legally"), and just take the gamble that the person will pay his rent and that you may have to evict him later. Not all people are deadbeats, and that may give you the chance to keep a good tenant. OR you could require they do a whole new application, deposit, etc - but they might use that opportunity to just move and you could lose a potential good tenant.

Good luck!
 

So I entered into my due diligence period on a 4-Plex, and when I requested the The Rent Rolls and lease contracts of the tenants the Sellers Agent came back to me saying that the Landlord purchased the property at Auction and had none of that information.

So I am looking for some guidance on this.  Here is the Email that I received from the Agent:

As we have explained before, the seller purchased the property at auction, and was not given any records regarding the property or tenants.  He has attempted to speak to the tenants of the three occupied units, but they are being uncooperative.  The fourth unit is vacant and I have been told that it has been painted and cleaned.  The seller wants to begin eviction proceedings against the three remaining tenants, but wanted to find out from the buyer first if this is what he would like him to do or if he would like the seller to leave them there and he will try to negotiate leases with them after close of escrow. 

I offered a premium because of the 75% occupancy.  But now I am seeing nothing but large challenges and problems looming ahead of me.
 
1 - Uncooperative Tenants -
  a - Served with an eviction notice they might do damage to the property. 
  b - When presented with a new lease offer counter that there is an existing lease

2 - If he has held the property for more then 30 days, he hasn't collected rent?  Tenants are living rent free? 

3 - Security Deposits?  If it went to auction, did the bank claim them?  The original Owner Keep them?  And how am I going to be responsible for damages to the units?

4 - Who is liable for anyone of this?  Me? Him? or the Pre-Auction owner, who I assume is going to be difficult to deal with.

I plan on speaking to a R/E lawyer tomorrow about this situation, but would like to hear any input that you may have on the situation and any guidance from experience that you can share that a lawyer may not.

Thank you

[Ashon]

I got the seller to agree to eviction/or new lease because of the complexities of Tenant Laws here in NV, and got him to agree to a new due diligence period when the evictions or leases are signed.  So it'll mean pushing back the close date, but I'd better be the tortosie than the hare when it comes to acquiring problems.

[Gold River]

Hi Ashon,

             I hate to be the bearer of bad news, although I am only the 200 lb gorrilla in the room!!

According to the Federal "Protecting Tenants at Foreclosure Act of 2009 - Federal Section S-896. Any Tenant has the right to remain in a Foreclosed Property for 90 days without a lease or for the term of the lease if they have the lease in their possession!

You can not change the terms or conditions of the lease for the full term of the lease if tenant has a lease in possession or 90 days! This Federal laws was passed through the House and the Senate and signed by President Obama on May 21, 2009 and does not expire until December 31, 2012.

So you "Can Not" evict a tenant from any foreclosed property until 90 days or their lease expires! Which ever is longer!

The state of Nevada can not over ride this Federal Law! 90 days starts at the time a sale notification is presented to the tenant, this allows those without leases time to plan to move 90 days later!

Welcome to Las Vegas!


                           GR

[jfpen]

I got the seller to agree to eviction/or new lease because of the complexities of Tenant Laws here in NV, and got him to agree to a new due diligence period when the evictions or leases are signed.  So it'll mean pushing back the close date, but I'd better be the tortosie than the hare when it comes to acquiring problems.

Tortoise, Hare? Slowly acquiring a problem doesn't make it the smart thing to do!  I'd rather not acquire the problem at all !!!
   
     Do you know if you even want the tenants? Why would you leave it up to the current owner to choose either an eviction or to renew the leases? Why would he choose a costly eviction at his expense over simply renewing the leases? Or, worse yet renewing the leases at below market rates? Easy out for him! You need to find out from the tenants directly what their story is!!!  Find out how they get along with their neighbors. Find out if they are working and/or paying rent. Disruptive tenants who have leases and pay rent on time are far worse than non-paying deadbeat tenants. Maybe that is the case and no paying tenant wants to live there? Right now, you do not have enough control of the deal for my comfort. I would want to know what is going on at the property. I would rather take the property empty than get new leases signed with tenants who don't cooperate.

JP

[jfpen]

Hi Ashon,

             I hate to be the bearer of bad news, although I am only the 200 lb gorrilla in the room!!

According to the Federal "Protecting Tenants at Foreclosure Act of 2009 - Federal Section S-896. Any Tenant has the right to remain in a Foreclosed Property for 90 days without a lease or for the term of the lease if they have the lease in their possession!

You can not change the terms or conditions of the lease for the full term of the lease if tenant has a lease in possession or 90 days! This Federal laws was passed through the House and the Senate and signed by President Obama on May 21, 2009 and does not expire until December 31, 2012.

So you "Can Not" evict a tenant from any foreclosed property until 90 days or their lease expires! Which ever is longer!

The state of Nevada can not over ride this Federal Law! 90 days starts at the time a sale notification is presented to the tenant, this allows those without leases time to plan to move 90 days later!

Welcome to Las Vegas!


                           GR

GR,

This may or may not be a problem. It is good information to have and the OP should know what it means for him/her in this situation. Anyway, I would assume that if the tenant never received a sale notification the 90 day timer hasn't started ticking. However, the OP is purchasing it from someone who bought it auction. Correct me if I'm wrong. I would think it would take at least a couple of months to go from foreclosed to being auctioned off. And, some time has passed since the auction as well.

[Ashon]

GR,

Thanks for being the Gorilla! 

The seller has agreed too reopening of the Due Diligence after either new leases (that must be approved by buyer) or eviction has occured. Which means he will be enduring the additional holding costs of the 90 days, if they have not already passed.  Or he will work quickly to get leases re-signed.

One of my original concerns, was that the flipper did not have copies of the original leases.  And that I would be on the hook for some bad leases.  Which is why I bring up the fact that in NV, the buyer of a foreclosed property has the option of honoring leases presented to him, or evicting the tenant.  It seems to me that if the 90 days passes from foreclosure that then NV law kicks in and he has the option to evict.

Hi Ashon,

             I hate to be the bearer of bad news, although I am only the 200 lb gorrilla in the room!!

According to the Federal "Protecting Tenants at Foreclosure Act of 2009 - Federal Section S-896. Any Tenant has the right to remain in a Foreclosed Property for 90 days without a lease or for the term of the lease if they have the lease in their possession!

You can not change the terms or conditions of the lease for the full term of the lease if tenant has a lease in possession or 90 days! This Federal laws was passed through the House and the Senate and signed by President Obama on May 21, 2009 and does not expire until December 31, 2012.

So you "Can Not" evict a tenant from any foreclosed property until 90 days or their lease expires! Which ever is longer!

The state of Nevada can not over ride this Federal Law! 90 days starts at the time a sale notification is presented to the tenant, this allows those without leases time to plan to move 90 days later!

Welcome to Las Vegas!


                           GR

[Ashon]

JP,

Looks like my analogy was not accurate.  I'd rather move slow and not acquire problems, then race to close, and deal with the problems later.  As I stated in response to GR, part of the addendum was the new leases being approved by the buyer.  So if he does attempt to go below market or offer crazy terms, then we can deny the lease. 

I too would prefer to take the property empty then to have tenants who are problematic.  Which is why I gave him his Either/Or option, with buyer approval. Start fresh.

 

I got the seller to agree to eviction/or new lease because of the complexities of Tenant Laws here in NV, and got him to agree to a new due diligence period when the evictions or leases are signed.  So it'll mean pushing back the close date, but I'd better be the tortosie than the hare when it comes to acquiring problems.

Tortoise, Hare? Slowly acquiring a problem doesn't make it the smart thing to do!  I'd rather not acquire the problem at all !!!
   
     Do you know if you even want the tenants? Why would you leave it up to the current owner to choose either an eviction or to renew the leases? Why would he choose a costly eviction at his expense over simply renewing the leases? Or, worse yet renewing the leases at below market rates? Easy out for him! You need to find out from the tenants directly what their story is!!!  Find out how they get along with their neighbors. Find out if they are working and/or paying rent. Disruptive tenants who have leases and pay rent on time are far worse than non-paying deadbeat tenants. Maybe that is the case and no paying tenant wants to live there? Right now, you do not have enough control of the deal for my comfort. I would want to know what is going on at the property. I would rather take the property empty than get new leases signed with tenants who don't cooperate.

JP

[jfpen]

JP,

Looks like my analogy was not accurate.  I'd rather move slow and not acquire problems, then race to close, and deal with the problems later.  As I stated in response to GR, part of the addendum was the new leases being approved by the buyer.  So if he does attempt to go below market or offer crazy terms, then we can deny the lease. 

I too would prefer to take the property empty then to have tenants who are problematic.  Which is why I gave him his Either/Or option, with buyer approval. Start fresh.


 

I got the seller to agree to eviction/or new lease because of the complexities of Tenant Laws here in NV, and got him to agree to a new due diligence period when the evictions or leases are signed.  So it'll mean pushing back the close date, but I'd better be the tortosie than the hare when it comes to acquiring problems.

Tortoise, Hare? Slowly acquiring a problem doesn't make it the smart thing to do!  I'd rather not acquire the problem at all !!!
   
     Do you know if you even want the tenants? Why would you leave it up to the current owner to choose either an eviction or to renew the leases? Why would he choose a costly eviction at his expense over simply renewing the leases? Or, worse yet renewing the leases at below market rates? Easy out for him! You need to find out from the tenants directly what their story is!!!  Find out how they get along with their neighbors. Find out if they are working and/or paying rent. Disruptive tenants who have leases and pay rent on time are far worse than non-paying deadbeat tenants. Maybe that is the case and no paying tenant wants to live there? Right now, you do not have enough control of the deal for my comfort. I would want to know what is going on at the property. I would rather take the property empty than get new leases signed with tenants who don't cooperate.

JP

        My point is that you really owe it to yourself to know who is in YOUR building. You should care less about the lease and more about who the lease is with. You are not going to do this by looking at signed leases the current owner presents to you. You need to meet the people. You need to approve the people.  If you any apprehension at all regarding the current tenants, why in the world do you want a lease? The only thing I can think of is that you need signed leases to get financing.  Do you know if you can sue for rent owed if the tenant breaks the lease? In my neck of the woods you could try but you are not likely to collect.

Here's how this would play out in my area if the tenants were bad and the current owner had the addendum/incentives in place that you have:

The owner would go to the tenants and explain that he would like them to sign the new lease. Here's what he would say:

       "I'd like you to sign a year lease that will lock in your current rent payments. We'd like you to stay for at least year but we understand if you need to leave earlier. Their is really nothing the future owner can do to you if you leave early other than keep your security deposit if you have one. But, you can always use your security deposit as the last months rent to prevent that from happening. "



 This is four unit building not a 100+ unit complex. One bad tenant in a property this small can mean negative income for the whole property for months! You could have constant turnover in the other 3 units while the problem tenant who you can't get out for a year pays on time!! This is not uncommon!!

It is also very common for flippers of small multifamily properties to fill vacancies with anyone with a pulse! They claim 100% occupancy while showing you the leases. Why should they care if they are filling the units with deadbeats? It's not their problem for long!!

Another thing, The fact that you heard through the owners agent that the tenants are not cooperative is a big red flag. Giving him the option of signing leases that you will have to honor is unwise.

You need to knock on doors and get some face time with the tenants. Have them sign a statement  stating whether or not they have a security deposit. Get credit for the security deposits.

Also, I would never give the option of evict/lease to the current owner. He just wants the building sold. He will act in his best interest, not yours.



JP