Monday, December 7, 2009

Investment properties come with ticking time bombs.

Given the state of the economy, it is more likely than ever before that you will be stuck with bad tenants and pre-existing disputes when you buy an investment property.

  • Sellers will fill their properties with bad tenants just to show occupancy in anticipation of a sale.
  • Sellers are less likely to evict delinquent tenants when they expect to complete an imminent sale.
  • Financially distressed sellers are more likely to commingle and make use of tenant security deposits that should otherwise be segregated and turned over to the buyers and/or returned to the tenants.
  • Financially distressed sellers are likely to ignore maintenance issues, thus causing disputes with tenants and local governments.
  • Financially distressed sellers are more likely to make oral agreements with tenants for reduced rent in exchange for labor.
  • Sellers often have made promises to tenants (especially commercial tenants) regarding lease extensions (or options to purchase) at rates that are well below what the market will bear.

Sellers rarely disclose these issues to buyers unless the buyers exercise due diligence and force the issue. Each of the above issues can create litigation and/or eviction issues for the buyer after settlement. Disgruntled or delinquent tenants are likely to force the new owner to bear the cost of these problems with no consequence to the former owner. (These disputes would be, of course, in addition to problems related to undisclosed defects in the physical condition of the property.) But there are ways to discover and avoid each of these problems by taking action before settlement.

Check back for further updates.

update - 12-11-09 - Click here for solutions to these problems.

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