Operating Statement: Just ask?

Question

How do you get an operating statement for a property that’s for sale?  Is that something a broker or agent has to request or can an investor just ask?

Steve K. · Answer

@Morgan Merritt MLS listings for investment properties usually include a breakdown of gross rental income, annual expenses, even cap rate right in the listing info, which should be enough to give you a snapshot of the (supposed) past performance of the property and run your own preliminary financial analysis. Many also include proforma numbers (which I wouldn’t trust at all but that rule applies to all the info provided by a seller/listing agent). Typically you wouldn’t ask for actual financials until under contract, during due diligence period. I would ask for an OS/P&L’s for past several years not just trailing 12 (T12), as well as estoppels and schedule E. But sellers aren’t going to give these out to every tire kicker that comes along, and sometimes they don’t want to provide them even when under contract. Ideally you should be able to determine your target rent by knowing the rental market, looking at the condition of the units and estimating expenses. Sellers may only show numbers that will help them sell the property anyway, so it’s best to be skeptical of everything they show you and build in some extra expenses regardless of what the seller claims their operating costs to be.

Frank Chin · Answer

Several issues here. If there are current tenant, have estopple letters issued to these tenants. This includes info on how much rent they're paying, deposit held by the current landlord, whether they're current on the rents, and any disputes. Most of these are not answered in operating statements. See Estoppel letter

As to determining market rents and expenses, that's a total different exercise and you would have to know that area you'll be operating in. I was buying a foreclosure in an area that's new to me, a SFR, 3BR/1ba so I called rental agents in the area saying I'm interested to rent a 3BR/1ba, what is cheapest, most expensive. Ask how good are the schools, things that renters would and should ask about. These days, you can check Zillow and find out how long it's been on the market, so if it's on the market for over 90 days, they're asking too much.

As to real estate taxes, figures are available on online, and can go up on changeover of ownership. As to utilities, depends on whether tenants pay for it in the area, or owner. Depends on whether the furnaces are old and up to date. Water, for instance, I pay about $175/month to $225/month in NYC, and yet for a SFR in a neighboring town, in Nassau county, they charge $50 - $60 for a 3 month period, or $20/month. That's for well water, and my wife says "Yikes". So how could you generalize? So it's a matter of not knowing what you don't know, and you gain knowledge by doing deals, asking questions, as you're doing here.

Frank Chin · Answer

You can ask, but most folks won't have it. Back in the good old days, my dad would have his box and receipts, bring it to his CPA around tax time, and let the CPA work on it. So the closest thing is the schedule E which they may or may not furnish you. I do my books on QuickBooks and I'm usually behind.

The other thing is whether the owner charges market rent. One thing is, myself included, owners charge below market rent particularly if the property is paid off, tenants are there a long time and rents haven't been raised, or property taxes are lower than what they should be because of property tax caps and go up dramatically when it changes hands.

It behooves you to know what the market rents should be, the market value independently of the sellers records. This is besides for illegal units, very common here, folks collect rent in cash and it don't show up, so if I was a seller doing that, I wouldn't want to spill my guts and say "hey, I collect another $1,000/month that I don't report". You could well be an undercover guy from the IRS giving me a story you're buying the place needing operating statements.

So, this is the story on operating statements and why you might not get it. I never requested them myself as they're probably BS.

Steve K. · Answer

Yes only agents can access the MLS. Actually a lot of the info you'd get from an operating statement (gross rent, expenses, NOI, etc.) is available on many listing websites like Redfin and realtor.com, albeit not as up to date as the MLS and not always accurate but that goes for all data provided by listings.

Regarding MLS access: it is protected carefully with various methods such as keystroke tracking, IP address, simultaneous login etc. and agents can get in a lot of trouble for sharing their login info, which is good because within the massive database is a lot of private info that can be dangerous in the wrong hands like lockbox and security system codes. But as an investor there are a few ways to get access. You can get friendly with an agent and ask them to put you on an MLS "drip", where properties that meet your search criteria are delivered to your inbox. Most agents will expect you to use them on any deals you find this way, and rightly so. Alternatively you can become an agent's unlicensed assistant and get your own username and password along with limited access (some agents are okay with this, especially if you throw some deals their way or pay a monthly fee). There's also a public version of the MLS, realtracs.com, but it's not nearly as robust as the actual MLS.

In my personal experience it's worth just finding a great local agent that also invests- they will help you evaluate properties based on the info on the MLS but more importantly from real data in the field, as well as guide you through the buying process such as when to ask for what from the seller. I've found it's usually worth paying professionals (agent, inspector, attorney, CPA, etc.) to do their job. As long as you find the right one they will pay for themselves.

Morgan M. · Answer

My understanding is that only licensed agents get access to the MLS is that right?  That's really where my question was leading and thank you for pegging it down for me.  I wasn't sure when it's appropriate to ask for them because I wouldn't hand them out like trick or treat candy either.

Morgan M. · Answer

I really appreciate the input.  Certainly will incorporate this in due diligence.  I'll run a APOD on my property for practice.  Maybe see if I can't get a few other properties done for practice.  I'm loving these forums.

Morgan M. · Answer

@Frank Chin

Makes sense.  So doing market research on rents independent of seller details, and then I assume, add a clause in the offer about current tenant rate that survives the transaction.

Do you have any practical methodology for analyzing operating expenses if the owner doesn’t disclose?

Operating Statement: Just ask?

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