submit offer before due diligence?

[Bao Nguyen]

hello everyone.

I am about to make an offer on a duplex, and I asked the realtor for the rent roll, the credit and background checks on the current tenants, and list of expenses.  I was on the phone asking A LOT of questions to the realtor, and his response was "put in an offer, and you have a period before closing to do your due diligence, and if you find something you don't like you can ask for a lower price or back out".

Can I put in the offer contract that my offer is contingent on the current tenants meeting my standards?  I've not heard of this kind of contingency before (most contingencies are from home inspections revealing infestations or crack foundations..etc) and wonder if anyone has done or heard of such things.   

So is this realtor playing right or is he trying to get me to commit into something I can't easily back out of if I don't like what I find out about the current tenants?

[Roy N.]

@Bao Nguyen 

The rent roll (scheduled rent) and finances are something the agent should provide to you up-front.   This information and a walk through are normally required to formulate an offer.

Copies of leases will typically not be made available until you have a accepted offer and have entered your diligence period.

When it comes to credit reports and background checks, they vender may not be permitted to share them with you.  In many jurisdictions it is a violation of privacy law (and, as a minimum would require the consent of the tenant).  In almost all cases credit bureaus/agencies forbid the sharing of credit information with third parties (many times with the subject of the report themselves).

You can have a contingency in your APS which requires the leases to be provided to you within X-days and be subject to your review and approval.   You should also collect estoppels from the tenants to validate/refute the information provided by the vendor.

[Bao Nguyen]

@Roy N 

Thanks for the comment.  I'll keep this in mind.

[Wayne Brooks]

If you were selling, would you be sending that info out to 20 different people, before you had an acceptable offer?

[Account Closed]

Yes, that is exactly how my last purchase went. I came up with the offer price based on the list of expenses, then had 30 days for due diligence which started AFTER they gave me all the documents I requested. That is also when I scheduled the inspections, talked to tenants, etc.

[Bao Nguyen]

@Wayne Brooks I'm not looking for personally identifiable information where I need SS# of the tenants.  Just looking to see if landlord/mgr did indeed run checks and what's the result of those checks: good credit/bad credit/no evictions/no felonies..etc    If I was the seller, I would give an indication of the quality of my tenants such as "yes, I do run credit checks on my tenants, and they all must have no bankruptcies or collections in order to qualify for my rentals" or "my tenants credit.score range is in the "600-650 range".    The reason why this information is useful is because I could imagine a lot of sellers filling up their multi-family units with less than perfect tenants just to be able to claim "100% occupied".   So yes, this would affect my offer  - since bad tenants = higher chance of loss of income.  But point taken, I wouldn't give out any personally identifiable info.

@Account Closed How do you think the seller would have responded if you came back after due diligence and said "I want to lower my offer by $6k to account for the high possibility that I might have to evict the current tenants because they don't meet my credit, background, and income criterias for this rental unit"?  Is that a valid reason to back out?

[Wayne Brooks]

@Bao Nguyen 

You are the one writing the offer.  You establish the terms in which you can back out, and the seller either agrees to them, or doesn't.  Here we have a straight inspection contingency period, and can back out within that time for any, or no, reason.

[Roy N.]

 Bao:

Depending on the jurisdiction and the size of the building, if the resident tenant pool was terribly weak in comparison to the location, we would either walk or request the property be delivered vacant.

[Bao Nguyen]

@Wayne Brooks Thanks Wayne.  I'm just a newbie offerer for multi-family units : vetting tenants in addition to a property inspection.  I'm learning though.  :-)

[Russ M.]

What are the lease terms?  That is something you can find out usually during the course of conversation during a walk through.  Here, if you buy a building you inherit tenants and must honor the existing leases.  You can't buy a property and void the existing leases and get new tenants.  Your offer should contain provisions to provide the rent roll and copies of leases within x number of days after acceptance.

[Bao Nguyen]

@Roy N. Thanks for the input.  I'm starting to prefer this unit vacant since it appears the seller doesn't vet his tenants at all.  I'm not aware that you can request the property to be vacant.  How will the seller kick the tenants out?  I didn't see such a clause that allows the owner to do so in the lease agreement.

[Bao Nguyen]

@Russ M. That's what I figured - we must honor the existing lease, which isn't as bulletproof as the leases I use for my other rentals.   The tenants on both sides of the duplex has 8 months left on the lease.  That's 8 months of headaches, and possible eviction (which is 6 months of no rent + destroy property).  I'm trying to calculate what this equates to in terms of dollars and reduce my offer accordingly.   The worse aspect is that the current seller has trained the tenants that they can get away with being bad tenants - even the lease spells it out "rent will be discounted $25 if tenant pays rent before the 5th of the month".  I can't believe the penalty for late rent is nothing!  Paying on time gets rewarded with a discount.  Wow.  No wonder the seller is trying to get out of managing this place.

[Roy N.]

Originally posted by @Bao Nguyen:

@Roy N. Thanks for the input.  I'm starting to prefer this unit vacant since it appears the seller doesn't vet his tenants at all.  I'm not aware that you can request the property to be vacant.  How will the seller kick the tenants out?  I didn't see such a clause that allows the owner to do so in the lease agreement.

 Bao,

Check the tenancy law in your jurisdiction and confirm whether vacant delivery is an option and if there are any constraints. In one area where we invest you may only request a unit/property be delivered vacant if you, or a family member are to make it your primary residence or if you plan to undertake such an extensive renovation that the building need be empty.   In another area where we operate, you can simply request that the building be delivered vacant.

[Bao Nguyen]

@Roy N. Thank you for this valuable info.  I didn't know such provisions exists.  I will check with Michigan laws.