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Updated almost 2 years ago, 01/24/2023
Seller refusing to provide financials
Happy New Year, BP Community!
I am currently under contract for a 14-unit MFH property. I was told that the seller is old (in her 70s) and both the seller's broker and her attorney are having a hard time getting things done because she is all paper-based.
The problem is, the seller is refusing to provide any rental history or financial information (it's been a week now), and the seller's broker is not returning my realtor's calls or messages. Her attorney also declined our request to do our due diligence including an inspection.
Before going under the contract, the broker shared a rough estimate of the income and expenses but now we are finding that there are no supporting documents. We do like the property because of its location and potential re-development possibility. What would be the best way for us to resolve this problem? Please share any insights! Thank you!
Sometimes in situations like this, you will not get all the details. Especially smaller multifamilies. Sometimes you have to make decisions based on your proforma, utility expenses, and price you are getting at. If they were supposed to give you all these details based on contract, maybe re-negotiate price and speak to your attorney about lease estoppels.
@Heeyeon Chung You can't force the seller to provide the financials. If she doesn't and they're important to you, then your only real option is to terminate the contract. If you're confident in the future value of the property and believe that you know the area well enough, then the seller's financials might not mean that much to you. In that case, your option is to forge ahead using your knowledge and expertise to move forward with the information that you do have.
@Heeyeon Chung
We provide an estimate of what we think they are adjust the price accordingly.
- Chris Seveney
Quote from @Ceasar Rosas:
Sometimes in situations like this, you will not get all the details. Especially smaller multifamilies. Sometimes you have to make decisions based on your proforma, utility expenses, and price you are getting at. If they were supposed to give you all these details based on contract, maybe re-negotiate price and speak to your attorney about lease estoppels.
Quote from @Charles Seaman:
@Heeyeon Chung You can't force the seller to provide the financials. If she doesn't and they're important to you, then your only real option is to terminate the contract. If you're confident in the future value of the property and believe that you know the area well enough, then the seller's financials might not mean that much to you. In that case, your option is to forge ahead using your knowledge and expertise to move forward with the information that you do have.
Thank you, Charles. You are right...the seller's financials are important for financing purposes. This is our first time getting commercial loans, and we are under the impression that commercial loans will not work without any financials. We have created the current rent roll and a proforma based on our knowledge and the numbers shared by the seller's broker. Should we share this with the bank to get it financed?
Quote from @Chris Seveney:
@Heeyeon Chung
We provide an estimate of what we think they are adjust the price accordingly.
Thank you so much. We are mainly concerned about financing it. If you have any insights, I'd appreciate it.
@Heeyeon Chung Are you planning to use conventional bank financing? Some banks might be flexible and willing to underwrite the loan based on your pro forma. You can definitely find bridge financing that would finance it without existing financials, but most of that is going to be very expensive right now.
Assume everything they said about income is wrong. You may need to evict 12 of the 14 tenants and you bear the burden. Add this into your costs. Were you able to walk into all 14 units? If no, they are a mess and major rehab needed.
You can inspect the roof with drone, walk around all the perimeter, get the utility bills, ask tenants and neighbors questions.
If you are only buying to redevelop or tear down then your real questions are: what does the planning department say about your site plan and battle to get a zoning hearing; how long from day architect has plans will you manage as is (my guess two years); what are carry costs; what will cost be to do what you plan; hoping you have a construction loan and having a written commitment are two centuries apart.
Quote from @Charles Seaman:
@Heeyeon Chung Are you planning to use conventional bank financing? Some banks might be flexible and willing to underwrite the loan based on your pro forma. You can definitely find bridge financing that would finance it without existing financials, but most of that is going to be very expensive right now.
Yes, we were planning to do conventional commercial financing.
It looks like our options are a) find a bank that will give financing based on my proforma or 2) find bridge financing. Is there anything particular you would share that we need to know before reaching out to different lenders? We reached out to one bank, but they seemed to be very conservative. Also, since it is zoned as a motel, but operated as an MFH, I think some banks may have a hard time financing it, too. Thank you so much!
Quote from @Caroline Gerardo:
Assume everything they said about income is wrong. You may need to evict 12 of the 14 tenants and you bear the burden. Add this into your costs. Were you able to walk into all 14 units? If no, they are a mess and major rehab needed.
You can inspect the roof with drone, walk around all the perimeter, get the utility bills, ask tenants and neighbors questions.
If you are only buying to redevelop or tear down then your real questions are: what does the planning department say about your site plan and battle to get a zoning hearing; how long from day architect has plans will you manage as is (my guess two years); what are carry costs; what will cost be to do what you plan; hoping you have a construction loan and having a written commitment are two centuries apart.
Hi Caroline,
Thank you for your insights. We were not able to walk into all 14 units. The seller refused to show us. We are aware of the fact that we need to rehab all 14 units and we took the construction fee into account when running the numbers.
I think the seller might be facing eviction problems. Is there any way we can request them to share the status of the tenants?
The redevelopment is definitely down the road...we will be running it as an MFH first and then consider redeveloping it later. Your questions are valuable; we will definitely take note of this if we acquire this property. Thank you so much!
@Heeyeon Chung Being zoned for use as a motel and operated as a multifamily property will probably make it challenging to obtain conventional financing, with or without existing financials. Have you spoken with a bank and explained that aspect to them? I can't imagine any banks being excited to finance that. Your best bet is probably negotiating a seller finance deal with the seller. If she's refusing to provide financials and if you can't obtain conventional financing because she's operating the property illegally, then your options are likely buying it with cash and refinancing it after everything is in better order or using creative finance (like seller financing).
Quote from @Charles Seaman:
@Heeyeon Chung Being zoned for use as a motel and operated as a multifamily property will probably make it challenging to obtain conventional financing, with or without existing financials. Have you spoken with a bank and explained that aspect to them? I can't imagine any banks being excited to finance that. Your best bet is probably negotiating a seller finance deal with the seller. If she's refusing to provide financials and if you can't obtain conventional financing because she's operating the property illegally, then your options are likely buying it with cash and refinancing it after everything is in better order or using creative finance (like seller financing).
Thank you. If we were to do creative financing, what would you consider a good deal structure in a case like this? Thank you for your insights.
@Heeyeon Chung are you saying that the broker/owner will not even provide a rent roll and which units are vacant? It depends on the lender what they require from you. I have taken out a lot of commercial loans where the only thing I have provided the bank are my PFS, tax returns and a rent roll.
You will, however, want to understand which tenants are currently in leases and which are month to month. You do not want to be on the hook for long term leases with weird terms/low rents. Are they refusing to provide those as well?
Quote from @Owen Dashner:
@Heeyeon Chung are you saying that the broker/owner will not even provide a rent roll and which units are vacant? It depends on the lender what they require from you. I have taken out a lot of commercial loans where the only thing I have provided the bank are my PFS, tax returns and a rent roll.
You will, however, want to understand which tenants are currently in leases and which are month to month. You do not want to be on the hook for long term leases with weird terms/low rents. Are they refusing to provide those as well?
Yes, the broker and the seller are not even providing a rent roll and a record of her tenants. I believe they are all month to month (actually, week by week). We have no idea who is living for how much and how long they are staying.....The broker is not responding to my realtor's calls/ messages which is very worrisome. I wonder why the seller signed the contract if she was not going to provide any of this ;(
@Heeyeon Chung Being that seller financing is very negotiable, I would negotiate whatever terms help the deal make sense. I'd probably aim for somewhere between 70% LTV and 100% LTV with a 6% interest rate because that's what many sellers seem to be accepting right now (but if you can get it lower, so be it). You'll probably get anywhere from a 2-5 year term with seller financing. Push for as long as possible in case it takes longer than expected to legally convert the property from motel to multifamily. Some sellers will also give you interest-only payments throughout the term and others will give you a balloon payment with no payments due for some or all of the loan term.
Quote from @Charles Seaman:
@Heeyeon Chung Being that seller financing is very negotiable, I would negotiate whatever terms help the deal make sense. I'd probably aim for somewhere between 70% LTV and 100% LTV with a 6% interest rate because that's what many sellers seem to be accepting right now (but if you can get it lower, so be it). You'll probably get anywhere from a 2-5 year term with seller financing. Push for as long as possible in case it takes longer than expected to legally convert the property from motel to multifamily. Some sellers will also give you interest-only payments throughout the term and others will give you a balloon payment with no payments due for some or all of the loan term.
Thank you so much. We will propose this to the seller and see what she says. Thank you again for your help!
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@Heeyeon Chung ever hear the idiom 'pig in a poke' this is it. I think you are being set up since no one is forthcoming, and they are hoping you will go through with the purchase without looking under the covers. Sounds like there are too many risks here before you even get to the tenants! All the best!
Hire someone to door knock if you are not local. Speak with every tenant, take names, phone numbers, notes on what they do or don't pay. Half will be untrue. I can recommend a company if you need one, or get your agent to do the interviews.
Probably unable to get a conventional loan even if the motel is legal nonconforming. What does city/county planning say? Red tagged?
Location?
Sounds like transitional housing??? VERY HARD to MANAGE you need onsite manager, cameras, security
I would use a Hard Money/Bridge Loan that finances renovations.... get everything in order and rehabbed, take time into consideration and then refinance at the time you're done with a new value.
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If you plan to operate or ever sell as a MF property, the zoning is a deal breaker. The only way to purchase this property is contingent on a zoning change...or to get a massive discount that any future buyer would also expect due to the inability to get financing. Forget about documents...zoning is the real issue.
Just my opinion from what you have provided, but I would walk, no RUN, away from this. It's in the middle of a huge nightmare and you and your partners will be sorry the minute you take possession!
You'll be investing so many hours, days, weeks, even months in getting financed. I dont think there are many underwriters willing to walk the plank on this one.
It might help if you could do a face to face with a couple of the occupants. Also look into the history of the property which should be available from the assessor. Any crumbs of facts you can collect will help. How many times has the seller had to evict tenants? Maybe the sheriff has some knowledge. How about chatting with the USPS delivery person? They know about daily/weekly activities at a property. Has the bui.ding commission issued permits for contractors to do repairs to the property in the last 10-15 years? Wishing you luck but warning you to dig deep for the truth of this deal.
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Lots of good advice above... echoing what everyone else has said, I'd recommend doing A LOT of due diligence on the ground level here to find out exactly what's going on with this property. Typically I like to include what is required of the seller in a due diligence docs clause of the contract, including rent roll, T12, estoppels, utility bills, etc. Whether or not you had all that in the contract is irrelevant now however, if the seller is being uncooperative. They would just be in breach of contract and you'd have the option to terminate and get your EM back (which is probably what I would do here unless this is a really, really good deal even when running numbers using a worst-case scenario # on the unknowns). I'd reach out to the listing agent one more time and let them know that if they can't help with your due diligence requirements in good faith through the proper channels, you'll be knocking on doors to get what you need or simply terminating the contract. Then I would try to get estoppels from the tenants, call the local permitting, zoning and police departments, knock on neighbor's doors, talk to local PM's, commercial brokers who know the neighborhood really well, etc. to see what you can uncover. As far as financing, I'd contact a local credit union and see if they can work with you on it. I have a great one that would take on something like this based on pro-forma numbers (if they work obviously). They know almost every property in our area and if they don't want to lend on it, I don't want to buy it anyway.
Small multifamily (40 units and under) often have no records, bad records, unreliable records. It isnt going to be any better with other properties in this segment of the market.
You can go unit by unit and get estoppels signed by the tenants. This will get you to at least what the gross rents are.
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Is it on the contract that is has to be provided? They are definitely hiding something here, I would think worst case scenario on current rents and expenses and see if it's still worth it.
@Heeyeon Chung We just purchased a MFP with a similar situation. We proceeded with the purchase because we know what kind of profit the property will bring under our management plan and the profit margin will be great. 🙂