Due diligence shows major misrepresentations (seller or broker?)

[Scott P.]

Hi,

I submitted an offer for my first multi-family (8 apartments plus one commercial unit), and it was accepted, and signed the P&S. I got the due diligence documents on the same day as the inspections. And it turns out there was a lot of misinformation in the listing and offering.

The biggest issue is that the commercial unit, on a newly signed 7-year NNN lease, was supposed to pay for half the real estate taxes, half the maintenance, half the water/sewer. But it is actually about 1/3rd the real estate taxes (perhaps as little as 1/5th; "percentage of ground floor to entire building", but SF numbers for the floor and building vary), they pay their own maintenance and water/sewer but nothing beyond that. The building was also laughably listed as Class B, "minimal management", "easy to manage." It's 98 years old, and not in the best neighborhood , so I took that to mean a Class C, but with little if any deferred maintenance. It needs a new roof, new driveway, new boilers, new HVAC, and every unit needs work to get them up to code. There was lots of shoddy work done in the past.

For the misinformation, it could any combination of the seller providing incorrect information, error(s) the broker made, or just simply me not understanding what was presented. But the broker hasn't pointed out any errors in what I have presented (he's trying to sell "potential" and "upside", making it sound like my fault, etc.).

I've already put in quite a bit of money (attorney fees, inspections). I'd like to work something out with the seller. But I am strongly suspecting that the broker made a number of the errors in the listing, and if so, I imagine the seller and I won't be able to come to an agreement.

Any thoughts? I could easily bail on the deal, but lose a lot of money. I'd like the deal to work, but if the broker made most of the mistakes, I doubt the seller would get to a price that works.

[Robbie Reutzel]

@Scott P., 

Unfortunately this is on you. For commercial buildings, we usually use an LOI instead of an offer and it lays out due diligence (i.e. physical inspections, rent audits, T-12) before the P&S is even signed. While we try not to re-trade if the due diligence uncovers what was represented, if it is grossly misrepresented, as it seems to be here, we have no problem revising our offer. The numbers still have to work.

Hopefully you're not out too much money but chalk this up to a learning experience! FYI, I know a great attorney who specializes in investors if you would like a referral. Also happy to share our LOI template if that would help.

PM me and I will share.

Good luck!