My immediate family is selling our apartment building, and we are finally nearing the end of escrow. It was initially scheduled to close on January 15th, but the buyers had an option to extend until the 29th, and they exercised that option. So now we’re just under two weeks from close of escrow, and I wanted to give you an update on how things are going, and what my next steps are.
Extension of Escrow
Back at the offer stage, when we were negotiating with the buyers, they asked for a 60-day escrow, and an option to extend escrow by two weeks. According to our broker, they were nervous about being able to secure financing in time. I figured 60 days was plenty of time to get their financing in order, but either way, we weren’t in a huge rush to complete the sale, so the 2-week extension was fine.
I was surprised at the end of December when the buyers actually exercised the option, however. I was concerned that it was a sign that the buyers were really getting cold feet about the purchase. Our building had already fallen out of escrow once before. Those earlier buyers were still in the contingency period and were shopping other buildings. They decided to get a building in Texas instead, which had a better cap rate, and since they could cancel and get their entire deposit back, they did.
We are past the contingency period now, so these newer buyers would stand to lose their $125,000 deposit if they canceled the sale. Nonetheless, that amount is still a fairly small percentage of the purchase price, so I was still concerned. But after having to deal with their bank this past week, I am 100% convinced that they needed the extra time to get the financing in place.
Dealing with the Bank
In any profession, you’re bound to run into the occasional employee where you start to wonder how they got their job. Or how they’ve hung on to it for as long as they have. Bank employees are no exception. Our escrow coordinator—who is a very competent lady, by the way—forwarded me some bank forms that allegedly had our operating income and expense data for the past three years. The bank wanted us to sign under penalty of perjury that they were correct. I double-checked the numbers and they were wrong. The bank employee who had filled out the form used the “market rent” number for collected rent.
Market rent, as you might imagine, is the total of the rent that the apartments would bring in if they were all rented right now, at full market rate, without any vacancies. You never have a building full of “market rent” apartments because there are always some people who have lived at the building for some time and who haven’t yet had a rent raise to bring their rents up to the current rate. Also, market rent doesn’t account for vacancies, or tenants who missed a rent payment.
So, long story short, the bank overstated income by several thousand dollars. The expense numbers weren’t any more accurate, either. I told our escrow coordinator that the statement was inaccurate, and gave her the example of the market rent being misstated as collected rent. She sent the statement back to the bank to have them correct it. When the bank re-sent the statement, they filled in the collected rent number properly, but they still didn’t account for late fees or credit applications, so the income numbers were off. The expenses were way off. It appears that an employee just filled out certain categories and didn’t make sure the totals matched.
Be Careful What You Sign
I took the form and filled it out properly myself. What’s frustrating about this whole exercise was that the bank had copies of all of our operating statements. It’s not that they didn’t have the correct information all along. But they wanted it typed up on their own form so we could sign it under penalty of perjury, and they typed it up incorrectly. Maybe it doesn’t seem like that big of a deal on the surface, but can you imagine what might have happened? Say we signed the form that misstated our income by several thousand dollars. Imagine the buyers later default on their loan. If the buyers don’t have sufficient assets to collect against, the bank will be looking for some way to collect. If the bank found out that the building earned less than what we swore to under penalty of perjury, we could be sued for fraud. It might not happen, and you might think I’m being alarmist, but would you risk your finances and potentially your freedom on it? No thanks.
Keeping the Building Full
We had two vacancies in the month of December and another one scheduled to come on-line on January 1. In an earlier post, I wrote about the challenges of filling vacancies during the holiday season, which were compounded by the fact that our management company had mistakenly forgotten to advertise the available apartments online. Ouch.
The good news is that they promptly put up the online ads using Postlets, and as soon as Christmas was over, we had a flurry of activity. Our resident manager busted her butt showing the property to potential renters, and within a few days after the holidays we had one unit rented, and another approved renter scheduled to move in on January 20th. The third vacancy was filled by January 15th. We got good rents for all three units, so that’s going to look good for the buyer and the bank.
After Selling Our Apartment Building, I Need to Find a Replacement Building—FAST
All that’s left to do now is wait and hope that escrow closes on the 29th. I’m hoping the bank proceeds quickly with their loan approval process, since there is not much time left. I’m a little concerned about that, especially since they’ve already blown by 60 days and they’re still stuck on basic income and expense numbers, but I guess we will just wait and see.
In the meantime, the clock is ticking for me to choose a new investment property. As I mentioned in an earlier post, I am carrying a loan from our current property to the next one, which means that the minute escrow closes, I have that new payment obligation. So the quicker I can find and close on a replacement property, the better.
I had a number of possibilities picked out, and I was hopeful that December and January would see very little activity, so my favorites would still be available on close of escrow. Weirdly enough, however, there was one week in December when THREE of my favorites went into escrow. I had read an article in the Wall Street Journal that said that there is usually a real estate boost in the second week of December, but I didn’t believe it until I actually saw it happen.
I was starting to get nervous because after those buildings went into escrow, new buildings hadn’t hit the market to replace them. My second and third tier properties were still available, but nothing new at all was coming on-line. This past week, though, two new buildings hit, and one dropped its price into my range, so all of them seem like reasonable possibilities. I’m going to start researching their demographics and driving by the neighborhoods. Stay tuned!