When is it best to close a deal?

Question

Hello everyone! I'm going to close on an apartment complex(s) tentatively on the 31st of this month. Considering rents are due on the 1st of the month, is there foreseeable problems by closing on the last day of the month?

Pro-rations have to be done etc...but my question is will I have a problem come the 1st when it's time to collect the current tenants rent $?

When is the best time to close on an apartment complex? Beginning of month? Middle of month? End of month?

Not sure on when I should tell my lender when I would like to close.

All suggestions/advice welcome!!

Thanks!

Chris Winterhalter · Answer

@Nik Suri this was already said in a private message but I thought I would relay it on here.

Closing depends on the size and type of property, HOWEVER I like to close in the middle of the month with smaller (less than 75 units) C-class mom & pop managed/owned properties.  They tend to allow tenants more leniency (not always) and issues can arise.  Did you check actual bank statements from the seller showing rent deposit dates? If you did not then I would close on a Tuesday in the middle of the month.  If you did check actual bank statements did you see any late deposits?  Closing in the middle of the month allows you to get pro-rated rent from the seller and it allows you to notify all the tenants of the change, get updated contact info etc.  Those two weeks really help leading up to the following 1st of the month.

Nik S. · Answer

@Justin Knapp I like your approach.

I've decided to close on August 11th. Yes, the current owner will have to have deal with it. Pro-rations will be done in regards to utilities, taxes, rents etc...but per my management company, we want to ensure a smooth transition for the tenants more so than for us. My goal is to retain the current tenants (there are a few M2M tenants). By giving the tenants ample time to make arrangements in order to satisfy our payment preferences. I don't want to disrupt the tenants therefore I'll let the current owner collect August's rents. Your absolutely right though, some tenants may take advantage of the situation at first so I wan to avoid such thing.

Thanks!

Tim Cooper · Answer

As you mentioned, all rents etc. should be prorated, so based on this it shouldn't matter.  All of your future tenants should be notified ahead of time the next payments will be made out to you or your property manager.

Nik S. · Answer

@Ben Leybovich

Hi Ben, initially my goal isn't to increase rent until I create a few reasons to do so. Rents are mostly at market but with a few amenity / property improvements, in a few months I plan to change some of the rents minimally, say $10-25$ more. I am closing on the 11th, it is an odd day but It was just the way the schedule landed. I am getting utilities, rents, taxes all pro-rated. So essentially the seller will still be able to make a little income for the last time on this property. My lender did say I will receive the pro-rations in a form of a credit in regards to close, so less cash I will need to bring to the table.

Next time I would prefer to have letters sent to the tenants mid month & then close on the last day of the month to help create a smoother transaction at closing (minimal pro-rations). Lesson learned this time.

Appreciate your solid info!

Ben Leybovich · Answer

When you close is a function of your plan.  If your plan is to give notice of rent increases, which requires 30 days notices prior to beginning of rental period, then 31 is perfect.  If, however, you want to be escrow-ed as much money as possible, then if you close on the 2nd, for instance, then you be prorated 29 days of rent (in a 31-day month).  This money can either come to you in a form of a check, or be applied as credit to your closing costs, and on a large apartment community this can be quite a substantive sum...

Ann Bellamy · Answer

You should get letters of estoppel from each tenant.  This is a letter the tenant signs stating how much security deposit they have with the current owner, any appliances that they own as opposed to the current owner, and that they are uptodate on rent.  It prevents issues afterwards such as "I gave two months security", or "I prepaid my rent last month".

This is something your closing company should be able to handle, if not, your own attorney can draw one up.  The current owner/property manager will see they are completed.

You probably didn't include them as a condition of closing, so you may have a little trouble getting the seller to agree, but you can give it a shot.  Just assume that they are always done automatically, and you may be able to get the seller to comply.

Besides documenting where you stand with each tenant, it puts the tenants and the seller on notice that you are a pro and smooths your path.

Nik S. · Answer

@Jean Bolger Thanks Jean! The last thing I want to do is give a tenant a reason to bark about. I am changing the current business model from Ma & Pop business to a more professional model. I know some of the tenants will have an issue so turnover may be a result but sometimes thats part of the game. I think the title agency can handle the pro-ration situation better than the tenants can handle the new allocation of their rent checks!

Thanks as always!

Jean Bolger · Answer

That's a good plan. I had to close on the 31st (that property in Columbus that we've talked about) and the management guys were out knocking on doors the next day. They did manage to collect, but it was confusing for the tenants and more hassle than it needed to be.

Glad to hear your deal is going thru!

Justin Knapp · Answer

Assuming you reach out to current residents as soon as you close, or even better convince the current owner to send a change of management form to the tenants which you prepare, ahead of time, then the specific day you close shouldn't be much of an issue. There are always going to be some tenants who will try to push the envelope with the new owners/mangers to see what they can get away with, but if you put your rules in place from day one and take a hard line with offenders you should be good.

Bob E. · Answer

If any payments go to the old owner / management company they should forward them so should not be a problem.

That said I did read one post where the buyer said his strategy was to close on the 8th so he could apply his share of the prorated rents to his down payment.  That could add up to a lot of money on 47 units.

When is it best to close a deal?

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