Would you try and re-negotiate this deal?

I have a property under contract that I believed to be a great deal with tons of upside potential. That is, until I started doing my financial due diligence. The 8 unit building is 100% occupied with rents averaging $395 a unit. However, the seller didn't make his tenants sign leases and according to his agent doesn't "do" Schedule E forms. If his stated numbers are to be believed I'm getting this building at a 16% cap rate. There is also loads of potential in the front building as well to rent and increase the value of the property.
How concerned should I be about the lack of signed leases and the sellers failure to produce a schedule E form? Should I try and re-negotiate price or should I dis-regard the facts because it appears to be such a great deal?
Looking for advice from veteran investors who have been here before.
In Buying Property - Asked by Jacob C. - Dec 23, 2008
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Answer(s)

Carlos N.
Owner/Investor
Houston, TX

Its good leverage for you to try to renegotiate, no leases is not the end of the world, a lot of times they will all be willing to sign, if not, you said you can get higher rents.

Dec 23, 2008
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Aron Z.
Owner/Investor
Englewood, NJ

Without leases it may be difficult to remove the tenants as courts today are very pro tenant should you want to get a higher rent base

Dec 24, 2008
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Christopher K.
Owner/Investor
Red Bank, NJ

tenants without leases are considered month to month and can be evicted for non payment or other legal and viable reasons. i would be more concerned that they pay their rent and he should be able to show bank records to confirm such. this also gives you the opportunity to have new leases signed with rent increases included if needed. he may also be collecting the rent in cash and is not reporting it, hence no schedule...
also is it a legal 8 unit building?
time to get an attorney?

Dec 24, 2008
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Kenneth P.
Farmers Branch, TX

I would agree wholeheartedly with the previous response suggesting that verification that the rent is actually paid to the owner. I've seen the situation where a seller gets family members/friends sign leases in order to make the building appear 100% occupied and raise the cap rate, when in actuality the building was less than 50% occupied and very unprofitable. I would be very wary if the seller cannot produce copies of checks actually received.

Dec 28, 2008
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Chris S.
Broker/Agent
Coeur D'alene, ID

Yes, renegotiate or back out of the deal entirely. I would not touch the deal unless he (seller) can provide some type of proof of rent receipts/deposits.

Jan 5, 2009
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