What Clause Might Save Grief For The Real Estate Investor?
Posted @ 12:45 am - Filed under Real Estate Investing, Purposeful Planning, Buying Income Property, Investment Lessons, Real Estate Law, Definitions
Warning Warning Warning — Pictures found while reading this post have absolutely nothing, nada, zilch, to do with the subject at hand. I just like inserting them. I am open to requests though. Ok, that’s it — you may continue. 
Estoppel is a silly sounding legal word sometimes used in purchase contracts when tenants are involved. Of course there are many time an attorney might use the concept of estoppel, but since it doesn’t say lawyer on my expansive forehead, I’ll stick to the purchase of real estate investment property.
I’ve taught the concept, been taught the concept, partnered with a real estate attorney for a decade and listened to him pontificate endlessly on the concept. It’s a giant pain in the patute. Yet, I’m still gonna give it a shot here. If you really insist on confusing yourself you can click the above link, but I recommend you take two aspirin first.
Here Goes
You’re lookin’ to make an offer on some income property. You’ve gone over the offer to purchase three times, and are finally satisfied yer covered. Due diligence period — check. Subject to your inspection and approval of interiors/exteriors — check. Seller’s gotta turn over income/expenses last 2-3 years — check. 23 other things — check, check, and check. Eyes begin to blur, and the thought of watching a soccer game between East Toilet Seat, Wisconsin and Rubber Chicken, Kentucky is soundin’ pretty dang good about now.
Got it covered, right? Not so fast estoppel breath.
Estoppel is merely a legal concept (Dirt Lawyer welcome at any time.) (es)stopping someone from saying ‘blue’ when they clearly said ‘red’ before. It also helps if the other person in the contract believed them when the at first said ‘blue’ — and acted on it.
Let’s just cut to the chase here, OK?
Do not, I repeat, Do not, under any circumstances, buy income property without either an estoppel clause in the contract or its equivalent — whatever that might be. I’ll let the attorneys figure that one out.
Don’t believe the seller’s agent or the seller, or the lease agreements they turn over, or, and this one’s my all time favorite, their Schedule E form from their income tax return. What you want for your files is much more reliable, though not foolproof. You want copies of the rental/lease agreements for each unit. You then want estoppel agreement forms for them. You knock on each tenant’s door, and have them inspect the agreement their landlord is tellin’ you is the one the tenant signed and in force. If the tenant agrees it’s the correct lease and it’s their signature affixed to said lease, yer almost good to go.
You have them sign the estoppel agreement which generally takes a whole buncha words to say:
The lease attached to this form is the one I signed AND there are no special deals between me and the landlord not mentioned in the attached agreement. Now yer good to go. Caveat: Can the tenant be in league with the landlord to sell you down the river? You betcha. Only seen it once in all my years though. It’s fraud, and district attorneys kinda sorta frown on such shenanigans.
It’s not just so you can substantiate the numbers. How ’bout special deals with tenants? Countless times over the years we’ve come across buildings housing tenants claiming all sorts of rent discounts ‘cuz of some service they render. It may or may not be true, but if it’s not in the rental/lease contract it doesn’t exist. You should ask each tenant if there’s a special deal not in their agreement. If so, now you know to bring it up with the seller. Oops. Those conversations are always uh, entertaining.
Just make sure you make the purchase subject to and contingent upon obtaining signed estoppel agreements from all tenants — no exceptions.
See? Another answer to a question you most probably didn’t know to ask. How many more answers won’t you get ’till it’s too late?
Something to ponder.
Here’s something else to ponder. Why haven’t we talked yet? Come on now, get with the program. Let’s figure out where you are and where you wanna go — then let’s lay out a Purposeful Plan just for you. OK — this is where you click Contact BawldGuy.
This entry was posted on Thursday, July 3rd, 2008 at 12:45 am and is filed under Real Estate Investing, Purposeful Planning, Buying Income Property, Investment Lessons, Real Estate Law, Definitions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
