1. OBTAIN COPIES OF ALL LEASES AND/OR A STATEMENT BY THE SELLER WITH THE DETAILS OF THE TENANCIES. The leases or agreements should be lawful; state names addresses, and telephone numbers; proper mailing addresses; and state all other adults occupying the unit(s). The Seller should state in writing the rent, terms of the rent, escalations, security deposits held, last months rent held, locations of the accounts, interest on the accounts, and perhaps even a statement regarding the status of the rent payments (or a copy of a ledger). Remember, although you may be a 'good faith purchaser' you may assume the liabilities of the prior owner's faults. This includes failure to account for security deposits, last months rents or interest payments. Generally, you must know what terms and conditions you are assuming from the Seller/Landlord. Brokers or Realtors should be very aggressive in seeking to obtain this information as early in the transaction as possible.
2. AFFIDAVITS OF CONDITION / BOARD OF HEALTH VIOLATIONS. Always obtain from the Seller a statement of condition of the units (preferably acknowledged by the tenants). Although the units may have passed a home inspection and an appraisal, these inspections are not conclusive evidence of compliance with the local and state health and sanitary codes. I always conduct or at least recommend that an inquiry be made at the local board of health regarding past, pending or outstanding complaints and violations. This will give you an idea of the issues and whether a Seller has been forthcoming with any information. In sum, do your due diligence to ascertain the condition of the units and all health and sanitary issues.
3. RENT, SECURITY AND LAST MONTHS RENT ADJUSTMENTS SHOULD BE PLACED ON THE HUD-1 AT CLOSING. This tip is self-explanatory. Sometimes there may be issues with placing these items on the HUD-1 (lender disapproval, separate adjustment agreements, etc…). In which case, I strongly recommend receiving certified funds or a bank check for these amounts. Also, there should be separate checks for each unit and/or a Schedule of Rents and Deposits signed and delivered by the Seller. This avoids any confusion, retains the individual integrity of the tenant accounts, identifies all sums for tax purposes and avoids any 'insufficient funds' issues with personal checks at closing.
4. IDENTIFY ALL ITEMS WHICH WILL BE DELIVERED IN THE PURCHASE AND SALE AGREEMENT. This includes the following: warranties; keys; garage door openers; list of maintenance persons and/or servicers; tools; security codes; account numbers; Lead Paint Certificates; and, service contracts. In the case of older homes, I like to obtain the names and telephone numbers of persons intricately familiar with the dwelling or equipment within the dwelling such as heating systems, ventilation, plumbing or electrical. Sometimes older homes always have nuances and details only known by the original installer or servicer. You might just avoid thousands of dollars in repair costs to chase down a crossed wire or a loose connection which has been a reoccurring problem in the past.
5. AT CLOSING:
a. Prepare and have the Seller acknowledge a letter to the tenants stating the change of ownership, the effective date and how future payments are to be made. Send them Certified Mail, Return Receipt Requested to each tenant;
b. If you are closing within the month, don’t assume the responsibility to collect rents directly from the tenants. Most rents are due on the first of the month. The Seller has the affirmative obligation to collect those rents from the tenants. The purchase and sale agreement reaffirms this responsibility and further states that ‘all rents shall be apportioned at closing’. Therefore, whether the landlord collects the rents or not, he/she must pay the buyer for the adjustment;
c. Insist on compliance with all of the conditions of the purchase and sale agreement. This means the removal of all personal property of the Seller on the premises. This includes cars, debris, and other property in the basement such as disconnected heating systems and old or unused building materials. Insist on an escrow holdback if necessary. Always assess the costs of removing property, especially if it’s difficult to remove or hazardous material; and,
d. Discuss with the Seller all recent developments with the property, requests for repairs and repair or maintenance issues which need to be addressed immediately. Formulate a plan and address these issues. Remember, once the deed is recorded, you are the owner of the property…and all the problems that may come with it.
In closing, keep in mind that sometimes a Seller is selling a multi-family property because it has been unprofitable. Some reasons may be poor administration, non-paying tenants, or severe repair issues. These issues should be identified prior to purchasing the property. There’s no such thing as a ‘once in a lifetime deal’. Every transaction has its benefits and detriments. Identify the detriments; listen to your professionals engaged in the transaction; and, conservatively allocate your budget.
Jonathan J. Moriarty, Esq.
Law Office of Jonathan J. Moriarty
53 South Main Street, Ste. 3
Randolph, MA 02368
Telephone: (781) 961-2200
Facsimile: (781) 961-0017
Email: jjmoriarty@verizon.net
Website: www.attorneymoriarty.com
