25 unit Multifamily Chattanooga

[Jacob A Clark]

Currently in the process of underwriting and finding equity partners for a deal our team sourced in Chattanooga. It's 25 units, off-market (we are direct to seller on it) and is a value add opportunity. Class B-/C+ property, currently being self managed and has been difficult to obtain financials. Currently assuming an expense ratio of 40%. Owners are open to seller finance a small portion ($300k) of the equity. Anyone have any tips on how to assume / run expenses when there is no formal rent roll / P&L statements? Price point is under $2.5million. 

[Vessi Kapoulian]

This is not ideal but not unusual if you are dealing with a mom and pop operator. 

Re rent roll, obtain copies of the executed leases and validate collection via bank statements and tax returns. 

Re expenses, the tax return will have at least some info. Regardless, you will likely be adjusting the expense base to reflect the tax reassessment (which you can obtain from the local county), insurance (from your insurance broker quote), property management fee, and usual repair/maintenance expenses/admin/advertising/contract services/utilities. If you (vs tenant) is paying for utilities, you can request to see the last 12 months of utility bills. If they have maintenance contracts (landscape, pest, etc.), you can request a copy of those. The bank statements will also show these expenses, so you can validate. Validate the expenses by your PM too. 

If they decline to share, that is a red flag which would warrant walking away or at a minimum substantially reducing the price instead and basing the offer on your own numbers validated by third parties.