*sigh* why do sellers lie?

Question

I'm very disappointed right now, and trying to decide what to do.  I FINALLY got the requested paperwork from the seller of a property I'm interested in, and found out that they understated the expenses (said tenants pay their own electric, turns out landlord pays first floor tenant's electric AND it is part of the Sect 8 lease) and they overstated the rental income (again, found that out from the sect 8 lease), PLUS the first floor tenant has a pit bull (told us they only had 2 cats) which will increase the liability insurance, which now means.....no cash flow.

I'm so frustrated and angry right now.  I just paid for a building inspection, which turned up a few problems, which of course can easily be negotiated, but the now 0 cash flow is a real problem.  I don't see a way around that without at least a 5% decrease in purchase price, and I know for a fact at that point the seller will be taking a loss, and since the property is only recently listed, he won't go for it.

My RE agent seems less pessimistic about the revelations than I am, but then she's also seeing her commission slip away and she isn't the one buying the property.  Or am I being overly naive and pessimistic?  What would you all do?

Scott Miller · Answer

Overstating cash flow and understating expenses are the two common tactics sellers (and their representation) use to falsely inflate value.

This is not necessarily a show stopper, as you could adapt your offer based upon the new realities being presented.

However, if you decide to proceed, I wouldn't take their word without verification.

I surprised to read that your realtor allowed you to invest in the transaction without doing all the due dilligence first (getting the audited numbers), but like you said, it wasn't their money being spent.

As a banker, I am not particular fond of these circumstances and I attempt to safeguard my clients by doing the "foresenic accounting" in advance.

If you can not reach an accord on a new purchase price, withdraw your offer and take the seller to small claims court to recoup your investment in the inspection fees.

And get a new buyer's agent...

Regards,

Scott Miller

N/A N/A · Answer

Oh, I know I won't have any problem walking away from the deal with ALL my money back to me since the seller clearly misrepresented the property on his disclosures.  It's one thing to say "I didn't know the chimney needed a liner"--that's completely possible--but he signed off on the rental income and the division of tenant/landlord responsibilities....clearly a misprepresentation, not a matter of being unaware.

So my concern isn't being able to get out of the deal, really I'm just whining about it not working out the way I hoped. :D  Granted, not every deal works and that's part of the biz, but this was going to be my first "big" (I know it'd be small potatoes to most of you) deal and now I'm back to square one.

*sigh*

Such is life!  Hopefully something bigger and better is just around the corner!  I'll definitely still be keeping my nose to ground and my eyes to the skies!

Tom Wood · Answer

It's unfortunate that the seller wasn't honest, but the good thing about you sharing this experience is that now others (including myself) will ask to see the leases before we pay for any inspections and maybe before we sign a contract.

Thank you for sharing!  Sorry it isn't going to work out, I do agree with your decision to pass based on what you uncovered.

Matt H · Answer

If you can still walk away, then walk away and chalk it as a learning experience. Often you can still walk away after condition removal. Just create  a sob story and see if they will agree to let you go and just keep your deposit. Alternatively if you are so far into the deal or you've put too much down then just buy it, do some very basic renovations, such as paint, carpet, and whatever else, and then just operate the project like as though you're doing a "flip". That way you most likely will still come out on top. I keep telling people that Walmart sells paint for so dirt cheap it's not even funny! Just paint the inside. Paint the front. Make it look nice and flip it for a profit. One other thing to consider is this...in the words of "Carlton Sheets..."...."if you buy a break even property that's not such a big deal, because you're only 1 rent increase away from positive cash flow. Plus you're still making appreciation of the asset." Besides who doesn't ever go through these kinds of learning experiences on their way up. Nobody.

N/A N/A · Answer

well go wtith your gut instinct. if there's 0 cash flow then go by to why you are purchasing the property if it doesnt meet your goals then walk away and save your money/headaches. as far as the building inspection perhaps thats a small expense without having to deal with the larger expenses of when people dont pay rent? anyhow what are the numbers on the property? listed / value / comps / rent /

biggest thing though, you stated there is no cash flow and i assume that was your goal. If your goal isnt in the property why not walk away? unless u have other ideas.

N/A N/A · Answer

Thanks for the feedback, Michael.  The property was listed at $111,000; I offered 100, they countered 105 (expected), I accepted.  The owner bought it a few months ago at 80K, fixed up the 2nd unit (although it still needs some major cosmetics--he replaced flooring throughout, but there's some ceiling damage), fixed a leaky roof, and replaced all the windows.  It wasn't a flip, however (at least not a successful one); my research revealed he took out a mortgage for 93K, and got a terrible rate (12%), and is having difficulty meeting the payment--with my offer as it stands, he'll just break even after commissions.  He's eager to sell, but not yet desperate--but he will be after a couple of months.

Hard to get comps in the area, since it is surrounded by several buildings that have 8+ units.  It's on the cusp of "the ghetto" of the area, and near the largest church in the city (big catholic population there).  The STATED rental income was $1300, $650/unit--a bit high for the area, but from having looked at other buildings, I know the units are larger and nicer than most.  Turns out the first floor actually rents at $600.  I'm not sure now about the ability to rent the 2nd unit at higher, although it IS larger, cleaner, and nicer (and currently owner occupied).  Throw that loss in with the fact that my expenses just increased by $75+/month for electric, and there goes any chance of cash flow.

My goal wasn't entirely cash flow--but for this particular building, the cash flow was going to be necessary to set $ aside to take care of one major issue (chimney needs a liner) that's going to have to be addressed in the next year or two, and further address the cosmetics on Unit 2.  My plan had been to hold it for 5 years, then either sell (if it proved to be too much of a PITA) or tap equity, if it had good tenancy.  Now that there is no cash flow, it's going to turn into negative cash flow if I want to address the chimney--which I would want to do, it's a nightmare waiting to happen, the mortar is starting to deteriorate.

And you are right, I'll chalk it up to a lesson learned.  As it stands, I don't think it is going to be worth the hassle and personal $$ invested, unless I plan to hold the building for 10+ years, which I certainly do not.  Growth in that area, while steady, is slow compared to other parts of Maine.  So while equity was part of the plan for this particular property, it can't be all of the plan.