Estoppels estoppels estoppels
Regular readers have heard me bang on about the importance of estoppels for months now. But two brokers have recently asked me to have my clients remove contingencies before providing them, so I feel like it’s a good time for a reminder…
NEVER REMOVE CONTINGENCIES WITHOUT SEEING ESTOPPELS
At this point, new readers are probably wondering what an estoppel is. It’s a document signed by the tenant setting out the tenant’s understanding of the terms of tenancy, including the rent, security deposit, how many occupants are allowed in the apartment, whether there is any pre-paid rent, etc.
Can you see why getting estoppels is so important? If you don’t get them, you’re relying on two sources for your information about the tenants and, more importantly, how much rent they pay: the rent roll (provided by the landlord) and the leases (provided by the landlord). Imagine how much trouble an unscrupulous landlord can cause by putting out a fake rent roll backed by forged leases.
Or imagine how an unscrupulous tenant behaves. You buy the building and go to collect rents. The tenant tells you he has an arrangement with the old landlord where he only pays half his rent. Or that he pre-paid his rent for the year two months ago and you should have got your piece from the landlord through escrow. No estoppel? It’s your word against his in eviction court.
Estoppels are an extra fail-safe mechanism to ensure you’re not walking into a disaster. They keep the landlord honest, by giving his tenants the opportunity to out him if he’s lying about the rents. And they keep the tenants from trying to use the opportunity of a change in ownership to pull a fast one on the new owner.
All listing brokers who do multifamily deals know this. But some of them try to avoid giving you estoppels at all, at least before trying to get you to remove contingencies. Why? In a word: Laziness.
Getting estoppels is a pain in the ass. You have to go get every tenant to fill out and sign a form. In a larger building, this is a real hassle. And no one wants to go through the hassle without being pretty damn sure they’re going to earn a commission on the deal. So, they try to wait until after you’ve committed to buy the property (by removing your contingencies) before getting the estoppels for you.
But, once you remove your contingencies, you’re in no position to re-negotiate if you see something in the estoppels that looks wrong, because you can’t back out of the deal without losing your deposit. So, always, 100% of the time , make sure you see estoppels BEFORE removing contingencies. And, if your broker tries to get you to go forward without seeing them, get another broker. I don’t write that lightly… this is that important.