Got bit in a RE transaction. Not big time, but it still makes me pretty angry.
Buying a duplex and fourplex from a guy here in town. RE agent (his) tells me rents. I amke an offer and he accepts. Get a copy of leases and it all looks right. Two of the units are leased to grandkids. Right before closing the title company asks a questions about the leases and I look at the dates. One is dated from '05. Turns out instead of new leases they had just written EXTENDED at the bottom with signatures and get this…new lease rates. The grandkids got two year leases at lower rates than grandpa was charging them, which was already way under market.
Guess they got a fast one pulled on me. I didn’t read all six leases, just looked at the lease rates and read the text about payments and late fees and termination and such. Never considered that they would lower the lease rate beyond that which was advertised…one even after I was under contract on the property.
I got mad and threw a fit, and the seller got mad too, and there was nothing in the contract to prevent him from doing this…so I bought it anyway because it was still a good deal.
So…make sure that your contracts have lease rates agreed to specifically in them or else there is nothing in a residential contract to prevent the seller from doing whatever they want.
In future, when buying rentals, you need the contingency that you get to approve existing leases and also your offer should say that the seller can not enter into any new leases, rental agreements, or changes in the existing rental agreements.
I’ve got one right now, the seller signed a two year lease with a relative for $400 under market rate. He did it before he offered me the deal, so I knew going into the negotiations, but it will most likely make me decline the deal. I suspect that he thought I wouldn’t check the existing lease? $400 a month for 24 months is a large cut in potential income
I’ve heard about it happening often enough: the seller gets into escrow and then signs a long term lease with a relative for a low rate. Lease goes with the property, so teh buyer is stuck with it. Just head it off at the pass when you make your initial offer.
There is this thing called due diligence. This is the time after you get the property under contract and before the earnest money goes hard that feasibility is done. One of the things you do is a lease audit. The lease audit is when you look at the applications of the tenants to see what kind of person is in the property, look at the lease terms to see if there are land mines there, and if there is a problem then tell them thanks but no thanks. You can’t allow yourself to let a person pass their stupidity on to you.