4 out of 5 new tenants evicted or arrested....

[Matthew Morrow]

Hey everyone,

We’re in a tough spot with a recent client purchase. They bought their first 5-unit property (and their first deal altogether) a few months back, and since then, all but one tenant has either been evicted for non-payment or arrested. It’s frustrating, especially because our due diligence came back clean, leases were solid, and the property had just been fully renovated. Unfortunately, the previous owner (who was also a licensed agent) didn’t accurately represent the tenant situation. We’ve since tightened up our due diligence process.

Has anyone else dealt with an unexpected 80% vacancy in what seemed like a stable property? Frustrating, to say the least!

[Charles Carillo]

@Matthew Morrow

I have seen similar situations when the previous owner/seller loads the property with unqualified occupants. During the due diligence process, did the buyer walk the property, unit by unit? Usually, you can speak to some of the tenants during a walk-through. Also, did they run the current tenants through state databases looking for previous evictions? These are a couple of things we do during our lease audit process.

This is a prime example of why investors need reserve funds. If they have the funds to evict and re-rent to good tenants, they have solved the problem. Without reserves, they might be unable to evict tenants or prepare the units once they are vacant.

[Henry Lazerow]

Sue the seller, any payment delinquencies should have been disclosed. Especially if seller just received a windfall from the sale it is definitely worth suing for damages. Can name their brokerage in there also to go after insurance. 

[Tanya Solomon]

Quote from @Henry Lazerow:

Sue the seller, any payment delinquencies should have been disclosed. Especially if seller just received a windfall from the sale it is definitely worth suing for damages. Can name their brokerage in there also to go after insurance. 

 OP said: It’s frustrating, especially because our due diligence came back clean, leases were solid, and the property had just been fully renovated. Unfortunately, the previous owner (who was also a licensed agent) didn’t accurately represent the tenant situation.

These statements contradict themselves. Maybe get it straight b4 paying an attorney a retainer to sue and or choose an attorney who can and will go after EVERY possible avenue to make your client legally/$ whole. IMO Most of the time, people lose lawsuits or settle for much less due to laziness and lack of rock-solid knowledge about the illicit/illegal acts the opposing side committed.  

For instance, how did the due diligence "come back as clean" and the "leases were solid" if the rent was not paid up to date and paid REGULARLY?  Im not an attorney or anything close to it but it seems a simple P&L statement that is broken down monthly could reveal the tenants not paying their rent on time enough to warrant eviction. If even 1 tenant was not paying on time, it would report a loss. Then a "surge" when the tenant paid up months later bc usually a tenant has to not only fall behind but MONTHS of rent have to go largely unpaid to warrant eviction.

If the P&Ls were "doctored" by the seller, that seems like pretty big cause. Also, was there a background check on the tenants possibly having criminal backgrounds and or background check to determine if the tenants had ever been evicted in the past? Seems like that would reveal the tenant(s) that have since been arrested (and presumably jailed/prison long enough to "lose" the lease/apt). 

You prob will start off in arbitration and if that does not yield a good result, go to court. I hope you help your client with this bc in a way, you helped them get into this mess. Not only is it the right thing to do to help them get their legal ducks in a row about knowing SPECIFICALLY what the seller did wrong, ie did not disclose and can prove it was done for the sole purpose of deception to make the sale "smoother" but it can help you look good and have you learn how to avoid in the future (as you say "tighten up your due diligence")

It sucks when agents "help" 1st time or largely inexperienced buyers long enough to make the sale and get their commission but then peace out on the client when something like this happens.It It seems like you are attempting to do the right thing which is admirable bc at the end of the day, the court system is the closest thing to a "business police" that ppl can get. 

This is why in addition to apathy that bad players get away with as much as they do as frequently as they do. It is not easy to sue. It takes time and work. In any deal/investment that goes south like this, your/buyer's side is responsible bc "buyer beware" is as old as time. It sucks to admit that there wasn't tight oversite on the deal to ferret this out b4 the sale happened and its subsequent consequences and it sucks for your client that they have made, for at least the time being, an investment that is not going to be in the black in the immediate future. 

I hope you and the buyer are successful in going after the seller. As H. Lazerow said if you act promptly, the seller will have a greater likelihood of having some of the "windfall $" to pay your client when a judgment or decision in your camp's favor is rendered. Usually, acting promptly has little downside. 

[Breeya Johnson]

Hey Matthew! that is horrible. What have you've done to tighten up your due diligence process to make sure that does not happen again? I would love to learn from this if you are willing to share. Also, can you sue the previous broker and seller for failure to disclose or at least report it to the local board?

[Sarah Brown]

Were the tenants brand new during the due diligence period?  Did the seller not provide honest financials?  Generally, both of these situations don't just happen overnight.  Since many have been evicted or arrested, be grateful you get to get new tenants and stabilize the property.  Use it as an opportunity to add value to the property. 

[Matthew Morrow]

Quote from @Tanya Solomon:

Quote from @Henry Lazerow:

Sue the seller, any payment delinquencies should have been disclosed. Especially if seller just received a windfall from the sale it is definitely worth suing for damages. Can name their brokerage in there also to go after insurance. 

 OP said: It’s frustrating, especially because our due diligence came back clean, leases were solid, and the property had just been fully renovated. Unfortunately, the previous owner (who was also a licensed agent) didn’t accurately represent the tenant situation.

These statements contradict themselves. Maybe get it straight b4 paying an attorney a retainer to sue and or choose an attorney who can and will go after EVERY possible avenue to make your client legally/$ whole. IMO Most of the time, people lose lawsuits or settle for much less due to laziness and lack of rock-solid knowledge about the illicit/illegal acts the opposing side committed.  

For instance, how did the due diligence "come back as clean" and the "leases were solid" if the rent was not paid up to date and paid REGULARLY?  Im not an attorney or anything close to it but it seems a simple P&L statement that is broken down monthly could reveal the tenants not paying their rent on time enough to warrant eviction. If even 1 tenant was not paying on time, it would report a loss. Then a "surge" when the tenant paid up months later bc usually a tenant has to not only fall behind but MONTHS of rent have to go largely unpaid to warrant eviction.

If the P&Ls were "doctored" by the seller, that seems like pretty big cause. Also, was there a background check on the tenants possibly having criminal backgrounds and or background check to determine if the tenants had ever been evicted in the past? Seems like that would reveal the tenant(s) that have since been arrested (and presumably jailed/prison long enough to "lose" the lease/apt). 

You prob will start off in arbitration and if that does not yield a good result, go to court. I hope you help your client with this bc in a way, you helped them get into this mess. Not only is it the right thing to do to help them get their legal ducks in a row about knowing SPECIFICALLY what the seller did wrong, ie did not disclose and can prove it was done for the sole purpose of deception to make the sale "smoother" but it can help you look good and have you learn how to avoid in the future (as you say "tighten up your due diligence")

It sucks when agents "help" 1st time or largely inexperienced buyers long enough to make the sale and get their commission but then peace out on the client when something like this happens.It It seems like you are attempting to do the right thing which is admirable bc at the end of the day, the court system is the closest thing to a "business police" that ppl can get. 

This is why in addition to apathy that bad players get away with as much as they do as frequently as they do. It is not easy to sue. It takes time and work. In any deal/investment that goes south like this, your/buyer's side is responsible bc "buyer beware" is as old as time. It sucks to admit that there wasn't tight oversite on the deal to ferret this out b4 the sale happened and its subsequent consequences and it sucks for your client that they have made, for at least the time being, an investment that is not going to be in the black in the immediate future. 

I hope you and the buyer are successful in going after the seller. As H. Lazerow said if you act promptly, the seller will have a greater likelihood of having some of the "windfall $" to pay your client when a judgment or decision in your camp's favor is rendered. Usually, acting promptly has little downside. 

You bring up some great points, especially about the importance of thorough due diligence. If P&Ls were manipulated or tenant histories weren’t properly vetted, that’s a serious issue and could form the basis of a strong misrepresentation claim. Gaps in rent payments or undisclosed tenant issues should have been red flags.

It’s good to see the OP trying to help their client navigate this, as acting promptly is critical for any chance of recovery. This situation highlights why working with a solid team and prioritizing financial and tenant verification is essential. Hopefully, the client can find a resolution and use this as a learning opportunity to avoid similar issues in the future.

[Matthew Morrow]

Quote from @Sarah Brown:

Were the tenants brand new during the due diligence period?  Did the seller not provide honest financials?  Generally, both of these situations don't just happen overnight.  Since many have been evicted or arrested, be grateful you get to get new tenants and stabilize the property.  Use it as an opportunity to add value to the property. 

Great perspective—turning this into an opportunity to stabilize the property and add value is key. If the seller provided dishonest financials or tenant histories, that’s something to investigate further, as it could support a claim for misrepresentation. Challenges like this can ultimately set the stage for a better-performing asset in the long run.

[Matthew Morrow]

Quote from @Breeya Johnson:

Hey Matthew! that is horrible. What have you've done to tighten up your due diligence process to make sure that does not happen again? I would love to learn from this if you are willing to share. Also, can you sue the previous broker and seller for failure to disclose or at least report it to the local board?

Thanks for the support! We’ve since implemented stricter due diligence practices, like deeper tenant screening, verifying payment histories, and cross-checking financials with third-party records. As for legal action, we're exploring options for misrepresentation and considering a report to the local board if warranted. Always happy to share lessons learned!

[Matthew Morrow]

Quote from @Charles Carillo:

@Matthew Morrow

I have seen similar situations when the previous owner/seller loads the property with unqualified occupants. During the due diligence process, did the buyer walk the property, unit by unit? Usually, you can speak to some of the tenants during a walk-through. Also, did they run the current tenants through state databases looking for previous evictions? These are a couple of things we do during our lease audit process.

This is a prime example of why investors need reserve funds. If they have the funds to evict and re-rent to good tenants, they have solved the problem. Without reserves, they might be unable to evict tenants or prepare the units once they are vacant.

Great points—walking the property and speaking with tenants during due diligence is a practice we now prioritize, along with running tenant histories through eviction databases. These steps can reveal potential issues upfront.

You’re spot on about reserves; they’re critical for navigating situations like this. Having the funds to handle evictions and turn units quickly is the key to stabilizing the property and protecting the investment. This experience has been a tough reminder of why those measures are non-negotiable.

[Stevie Kim]

Quote from @Matthew Morrow:

Quote from @Breeya Johnson:

Hey Matthew! that is horrible. What have you've done to tighten up your due diligence process to make sure that does not happen again? I would love to learn from this if you are willing to share. Also, can you sue the previous broker and seller for failure to disclose or at least report it to the local board?

Thanks for the support! We’ve since implemented stricter due diligence practices, like deeper tenant screening, verifying payment histories, and cross-checking financials with third-party records. As for legal action, we're exploring options for misrepresentation and considering a report to the local board if warranted. Always happy to share lessons learned!

Hey! Sounds like a nightmare come true, sorry you had to deal with that mess. I have a couple of questions as a newbie:

1. Did you use background checks initially and if so what did they miss if anything?

2. Are you now using one piece of software to help with your newer due diligence process or are you ad-hoc performing "deeper tenant screening, verifying payment histories, and cross-checking financials with third-party records."?

Thanks in advance! Right now I house hack, but am looking to properly get in the game by end of next year, so I'm trying to be prepared.

[Michael Garofalo]

I purchased a 9-unit apartment complex in 2020 (closed on it in February weeks before Covid hit and everything shut down). All but 1 tenant had to be evicted, was arrested, or went missing due to mental illness. I got a very good price on the building (about $25k per door), but it was a ton of work as in addition to tenant issues, there was TONS of physical distress (foundation repairs, sewer line and water line repairs, electrical upgrades, new roof, and apartment renovations needed for all units). 

That being said, if I could do it all over again I wouldn't change anything because I learned more about real estate investing and property management over the past several years from that deal alone than most people will learn in a lifetime. I also wouldn't be where I am today in terms of my contacts and relationships with vendors, to be in a position to self-manage confidently out of state.

All that being said, if another deal with the same amount of hair on it presented itself to me today, I would pass simply because my risk profile has changed. My due diligence process was certainly tightened up after that deal and analyzing properties and understanding what things will cost is now 2nd nature to me. 

[Adam Bartomeo]

We have dealt with these situations many times. Some of our owners like to buy value add properties and it is up to us to raise rents, rehab properties, and make it a stable asset. We have inherited apartments with grow labs, felons, roach infestations... almost anything that you can think of. But, we and the owner have always known what we were getting into. Sounds like you might have been a little uninformed.

[Ashish Acharya]

@Matthew Morrow I had a house it was a drug ring and couldn't evict for 6 months. Don't feel bad, this happens a lot.

Facing 80% vacancy and tenant issues can be tough, especially on a first deal. Strengthen due diligence with thorough tenant screening and independent verification. Prioritize filling units with well-screened tenants and consider hiring a property manager for oversight. If the seller misrepresented tenant conditions, consult a real estate attorney about potential legal action. Communicate with your lender if cash flow is tight. Use this as a learning experience to refine your investment strategy and prevent similar issues in the future.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Gregory Schwartz]

Agents like the one who sold you this property give us all a bad reputation. The worst part is that it's usually way too easy to get your license, and the consequences for these sleazy agents are usually non-existent or not harsh enough. 

Sorry this happened to you. For your due diligence, you can also ask to see the tenant's original application and screening reports. 

[Evan Polaski]

@Matthew Morrow, I am a little curious on how you are involved on the deal and what your relationship with this client is?  Were you an agent?  Are you the seller?

While I have not had this happen to me, as others noted there are a lot of steps that could be taken to avoid it.  Full application review is almost more important than lease review, as you are seeing.  Were incomes and employment verified?  Were background checks performed?  This should be on file, but not in lease.

Tenant interviews should be a part of all due diligence when buying with tenants in place.  Even if this is a high income, no delinquency type property, tenants will be much more open about condition of property than seller.

As for P&L, I would say it is not as simple as just reviewing a P&L.  If LL uses accrual method, they can book revenue without receiving.  So it is really looking more at bank deposits, but most mom and pop owners won't share bank statements.  Aging reports would be another avenue to explore, but again, may not even have these.

Lastly, while maybe this property is in a desirable area of town with strong demand from highly qualified tenants, but I get the impression this is a rough part of town, with very limited demand from tenants. While this amount of evictions seems higher than normal, even for a rough area, in general low end areas = fewer qualified tenants = more tenant fraud and more consistent evictions.