I had a deal collapse on me at the closing table recently. While in the end, the reason for its postponement turned out to be a non-issue, the initial hassle could have been prevented had the investor better understood the nature of rent collection.
The issue, underneath it all, was the buyers’ concern that they would not collect all the rent after the closing. This is a very natural fear. And by all means, I could have done a better job of helping the buyer understand that when buying rental property, the seller simply can't guarantee that rent will be paid in full at the time of closing. It's simply impossible.
The buyers were nervous that the tenant would mail the rent check to the seller and not to them. Since we were closing on the first of the month, this was a likely scenario. We remedy this situation, which happens often, by instructing the seller to alert the tenants via a notice that they will receive instruction on where to mail or drop-off rent. We also instruct the buyer to stop by the property with a notice of the same mature, thus covering all bases. This was not agreeable.
We then offered to the buyer the chance to meet the manager at the property after closing to collect rent personally, be introduced to the tenants and let them know where to send rent from that point forward. That didn't work either. So, as is common when things can't be agreed upon about a property, the closing was delayed.
The property closed a couple days later once it was established that the rent was collected in full for the month and the proper amounts could be pro-rated on the closing statement.
It's very important for early investors to understand that buying rental property is a risk, just like any other form of investment. Rent is often late and even the best tenants can disappear in the middle of the night, even the night before a closing. It happens.
This is why it is essential to approach owning rental property like a business. If a customer doesn't pay, you have an option. Stay firm on your rent collection policies, watch for signs of a shaky tenant and remember that after you buy a property, it's yours. A landlord is free to set new rent collection dates and policies. Do what makes you comfortable and that which will ensure a smooth ownership transition.
Most importantly, though, understand the risks of investing in real estate.
2 comments:
In this case the investor did nothing wrong. I have closed on as many as 20 investment properties and never chose the 1st. This is absolutely the worst date you can choose. You should choose day 7-5. Then at closing the seller is responsible for paying pro-rated rent and the seller is thus on the hook for collecting that month's the rent. The investor in fact did make the right decision. The investor did what any seasoned would do and backed out. I would too. In this case the realtor did not represent the buyer rather the seller.
Marc W. Andersen, Ph.D.
Raleigh, NC
Author: "Retire Rich from Real Estate". See www.retirerichfromrealestate.com for reviews of this book.
Not a bad point. The buyer chose the original date and then postponed it to the one selected, which was then postponed again b/c of the issue discussed. So, it was moved twice. Many buyers/sellers like to close at the end of the month to ensure a smooth transition and that all rents will be collected and it's a clean break. One of the reasons for that is so there aren't any issues with rent collection. It can work both ways. Most investors we work with don't cancel a closing b/c of a rent issue.
And having closed over 1,500 investment transactions, this was the first the company has heard of a "rent holdback." Nevertheless, things change and maybe we'll see more of them.
But again, the buyer did have the right and true to their word, closed the next business day. And to the original point of the post, even if a closing is set for the fifth or seventh, the rents are never guaranteed.
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