Section 9C of the current California Association of Realtors Residential Income Purchase Agreement (“RIPA”) contains a check box which the buyer must check in order to require the seller to provide tenant estoppels as part of the sale process. Make sure you check it. (And if your broker doesn’t check it for you, get a new broker!)
What’s an estoppel? It’s a form filled out and signed by the tenant that shows the tenant’s understanding of the terms of the rental agreement. It shows things like the monthly rent, the security deposit, any special rental incentives the tenant received from the landlord, etc.
Why is this so important? When you buy an apartment building, you’re buying a business. The value you pay for this business is based on the income it generates. When you write an offer on a building, you are basing your offer price on the rents the seller tells you he is getting. But you can’t be certain that the seller is telling you the truth.
Estoppels let you get at the truth. Once you have the completed estoppels, you compare them to the rent roll provided by the seller before you went into contract. If the actual rents are lower than the rents the seller advertised, you should demand (and receive) a credit against the sale price of the building.
How much of a credit should you get? Well, a good place to start would be to get a reduction equal to the GRM you offered multiplied by the annual amount of missing rent. So, if your offer price was equal to 11x annual rent, and you find out that the building is generating $100 less per month than advertised, you should ask for $100 x 12 months x 11 GRM = $13,200.
That’s a big credit, but that’s how much the missing rent impacts the value of the building. See why estoppels are important?!