First time interested in a larger multi-family - how do I verify financials?
Member since 2021 · 107 posts · 82 votes
First time interested in a larger multi-family - how do I verify financials?
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Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
2y@Karolina Powell, and to sum it all up: seller's numbers are meaningless. Not only for the reasons you mention (easily manipulated, depending on format), but also have next to nothing to do with what your operations will look like.
While I do agree that you should try to verify income, both through lease review, P&L, and if they will share: bank statements and tax filings, at the end of the day, I don't put a ton of value in seller financials, for many reasons.
Let's assume they are getting $800/mo in rent. Market is $1,600/mo. If you price the deal based on the current rent roll, you will not be remotely competitive in your offer, since many other investors will price it on $1,600/mo, with a small discount to account for the remaining term of the existing leases.
On expenses, as noted, what seller pays is likely very different than what you will pay. Taxes is easiest: seller bought property in 2004 for $260,000 and modest increases in assessed value over 20 yrs. They sell it for 4x assessed value, and taxing authority uses your purchase price as new value. Your tax bill is 4x bigger than seller's accurate T12 numbers.
To summarize, the seller numbers are really only useful for a very back of the napkin analysis. Is the asking or whisper price remotely reasonable based on sellers financials? If so, spend more time in underwriting, if not, let it sit a while and/or call broker to figure out why they are pricing where they are when sellers financials don't support that value.
21 Replies
- Apartment Syndicator · Charleston, SC · Member since 2017 · 519 posts · 631 votes2y
@Karolina Powell Once you get into the commercial world, it's a bit different than residential real estate because it's very much a "buy at your own risk" situation. Aside from the items that you already suggested, the only other thing you can use to verify the stated income is the seller's bank statements (not all sellers will release their bank statements, but some will).
The expenses will vary a bit from owner to owner, so you're better off reaching out to a local property management company to get an understanding of how much things cost, unless you plan to self-manage the property. Taxes and insurance will be the biggest variables on the expense side. Reach out to the local tax assessor to understand how a sale might impact your future property tax bills and reach out to an insurance broker to get an insurance indication. These items are important so that you can budget accordingly and price the deal correctly.
What size properties are you focusing on? - 2yArn CenedellaPro MemberRental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
I second @Charles Seaman comments.
I would add since you own other rental property in the area, you probably have a good grasp of rental rates as well as expenses in the area. You should have a clear understanding of property tax rates, insurance costs, repair costs, utilities, landscaping etc.
Any buyer must develop their own proforma and that is what should be relied on. The seller data is useful but it must be evaluated within the context of your own investing knowledge and experience.
A local property manager who manages similar assets can also provide useful data.
Use your local market knowledge and experience to develop a proforma you feel confident in and proceed from there.
Arn
- Member since 2021 · 107 posts · 82 votes2y
Thank you to you both for the insights! I appreciate you confirming what I was seeing.
Charles, I'm looking for 10-30 units at this point in time.
- Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes2y
An eclectic answer.
=========
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I have been driving my Ford Escape on the city streets for quite some time.
What do I need to know to be able to drive 200 miles an hour tomorrow in the race?
Note: I want to win the race too.
Well Karolina-- These are big money deals, big money can be a double edged sword so be careful!
I am not going to answer your question directly because it would involve teaching and there are a lot of points to learn about this.
There are people on the Internet who teach this skill for price- I don't have a direct recommendation, but they're out there.
What I'm going to say is I see people who have experienced success in this arena, analyze many practice deals before they put their money down on the table for a real deal.
I also see people in your situation who as a newbie do okay, that's all I'm gonna say about it and you can take what you want from that because I don't have the Magic Pill to give you to make this work.
I'm just looking at it from a potential risk standpoint, and looking to give you some other experience you can learn from.
It's a skill you can learn, but learning it from forum posts seems like a longshot.
If I were doing it I would address the things I want in a letter of intent, non binding.
Then there is going over the accounting data for the property, and Making accurate projections, As well as having a good lender who can close and qualifying yourself for the lenders qualifications, which may be different said the loans on your other properties.
Good Luck!
- 2yGino BarbaroPro MemberRental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
You need to find the commercial brokers in your market and opt in to all their lists. When you get into larger multifamily, brokers typically do not share commission so you have to find the listing brokers and contact them directly. You typically do not bring your broker unless they bring you the deal, and if they do that sometimes you may have to comp them
When you put in your offer, you simply state the offer is based on financials provided. When you go into due diligence, request bank statements to verify actual income collected and expenses. If there is a discrepancy from what you were told then you ask for a concession on the price in accordance to what was missing in income
If they show you an actual rent roll that will give you an idea of income, delinquency and lease terms.
It's hard working with mom and pop sellers. But there is light at the end of the tunnel if you can make it through. Your bank is going to want to see the financial data for then to base off a DSCR. You have time during your due diligence if you want to back out or proceed
Gino
- New to Real Estate · Miami, FL · Member since 2024 · 1k+ posts · 459 votes2y
Hi Karolina,
To ensure the financials of the 13-unit property are accurate, request the seller’s Schedule E tax forms and bank statements to verify income and expenses. These documents are harder to manipulate than a P&L or QuickBooks summary. Also, review utility bills, insurance policies, maintenance invoices, and property tax records to cross-check reported expenses. Conduct tenant interviews or verify payment history to confirm rental income.
For larger multifamily deals, work with a commercial real estate broker who specializes in multifamily properties. Platforms like BP, LoopNet or Crexi can connect you to brokers with access to off-market opportunities.
Feel free to reach out if you need help navigating due diligence or financing!
Best regards,
Drago
- 2yAdam BartomeoBusiness MemberReal Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
@Gino Barbaro @Charles Seaman are both accurate. Never trust the number that they are being given to you. Some numbers are easily verifiable - taxes, insurance, utilities - just ask them for the documentation. Others are a bit trickier and often over/under inflated - income, maintenance, PM costs, legal, etc. Based on your portfolio you probably have some real-world data to bounce the numbers off of for accuracy.
Bartomeo Property Management4.7150 Reviews - Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes2y
Pro Forma is latin for "Total BS". You have to be able to run your own numbers. Get rent rolls, estoppels and any financials that you can from the seller but also realize that your expenses will be different than theirs and you always have to run your own numbers.
There isn't an MLS for this property type, the closest thing being co-star but commercial brokers joke that's where deals go just before they die. Smaller MF buildings can sometimes be found on the residential MLS's but mostly just 4 units and under. You want to be working with commercial brokers that deal in this type of property. Connect with those who specialize in it. In my area it's a mix of boutique local commercial shops and the big national players. Ask to get on their email distribution lists. If you're not familiar with the sales process for this property type, doing your own due diligence, the right lenders to use and what to look out for, how to negotiate and how to work with commercial brokers, I'd recommend having a good buyer's agent help you out on a few transactions before going straight to the listing agent!
- Rental Property Investor · Philadelphia, PA · Member since 2021 · 774 posts · 501 votes2y
@Karolina Powell - I am also targeting 10-30 unit properties and have underwritten 75-100 or so... It would be interesting to share some information and maybe we could underwrite it together and/or compare notes. Let me know!
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Karolina Powell, and to sum it all up: seller's numbers are meaningless. Not only for the reasons you mention (easily manipulated, depending on format), but also have next to nothing to do with what your operations will look like.
While I do agree that you should try to verify income, both through lease review, P&L, and if they will share: bank statements and tax filings, at the end of the day, I don't put a ton of value in seller financials, for many reasons.
Let's assume they are getting $800/mo in rent. Market is $1,600/mo. If you price the deal based on the current rent roll, you will not be remotely competitive in your offer, since many other investors will price it on $1,600/mo, with a small discount to account for the remaining term of the existing leases.
On expenses, as noted, what seller pays is likely very different than what you will pay. Taxes is easiest: seller bought property in 2004 for $260,000 and modest increases in assessed value over 20 yrs. They sell it for 4x assessed value, and taxing authority uses your purchase price as new value. Your tax bill is 4x bigger than seller's accurate T12 numbers.
To summarize, the seller numbers are really only useful for a very back of the napkin analysis. Is the asking or whisper price remotely reasonable based on sellers financials? If so, spend more time in underwriting, if not, let it sit a while and/or call broker to figure out why they are pricing where they are when sellers financials don't support that value.
- 2yJoshua ChristensenPro MemberReal Estate Broker · Albuquerque, NM · Member since 2015 · 285 posts · 232 votes
These are all great questions.
Financials> A 13 unit is not really a "larger" multifamily. It is still a small property relative to the MF world. It's just larger than your SFR, 2U, and Quads you described with different lending parameters.
That being said, it is not uncommon for a small, mom & pop, operator to have terrible books. In my market, many of the mom and pop operators don't keep good books. They collect rent, often in cash and put it in a bank account. If you can get the leases, build your proforma and expectations on how you will operate, not on historical evidence.
If the seller is willing to open the books once you're under contract, than build that into your offer and due diligence period. That is not uncommon on this size property. Remember that during your due diligence, you can back out if something is fishy. Don't overthink it.
You may not know if the books are complete or correct. Do everything you can in your due diligence to uncover what you can. The rest, set aside contingency funds to account for things you think may have been missed, unless its a terrible deal, move on.
If the owner doesn't keep Quick books or any other accounting, you won't see a P&L or cash flow statement, so you'll be working off the leases.
This is pretty common.
You may ask for a claims letter from their insurance provider for the last 3 years to show any claims they may have / or not made on the property.
I've seen people ask for bank statements verifying rent deposits (not always easy to get from sellers).
Remember, the person selling has a story and a reason for selling. Probably that they are not running it like a business as you will.
Best wishes.
- Member since 2019 · 59 posts · 30 votes2y
@Karolina Powell
A lot of people have mentioned different aspects of this in their posts. For rental income, you can tie it to leases, which are legal documents. Therefore, the leases should be accurate. You can also ask the tenant to sign an estoppel, which essentially has them verify the rent they are paying.
As for expenses, the main areas where they can go awry include property taxes, which you can determine on your own; the mortgage, which you can also calculate; insurance, for which you’ll have a quote beforehand; and utilities, for which you can obtain the bills from the landlord. Ultimately, the most variable expenses are discretionary ones, such as repairs and maintenance. During your inspections, you can assess these expenses yourself.
It's also important to step back and evaluate expense ratios to determine if they make sense.
For smaller multifamily properties that are usually listed on the MLS, I would find a MLS agent who owns investment properties themselves, as they'll better understand the process. Many agents claim they can handle multifamily, but working with one who owns similar properties provides better confidence that they know what they are working with.
However, if you are looking for larger multifamily properties—which are not listed on the MLS—it’s essential to build relationships with those brokers, as they often don’t list these properties on central services. I would also recommend checking websites like LoopNet. - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes2y
Your offer to purchase should include a requirement that the Seller provide all documentation and agree to sign an estoppel certificate (also called an estoppel form or agreement). The estoppel is a form filled out by the tenant, then confirmed by the Landlord, and then accepted by the Buyer. It's supposed to ensure there are no surprises after closing. For example, I often see Buyers purchase property thinking there is a $1,000 deposit but then the tenant claims it was $2,000 because they paid the last month's rent. How will you know? An estoppel certificate fixes this problem.
Some things it may include:
1. Tenant name, contact information, and address
2. Occupancy date
3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate
4. Are there any modifications to the written lease?
5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?
6. Current lease term (expiration date, month-to-month)
7. Current rent rate
8. Rent due date
9. Security deposit amount
You can find plenty of examples by searching for "tenant estoppel certificate doc" or exchanging "doc" with "pdf" for more options.
Here is an example and explanation: Sample Estoppel
Some have a lot of legal jargon but this document does not need to be so detailed. This is an essential tool for anyone buying a tenant-occupied property.
The DIY Landlord Book4.7247 Reviews - Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes2y
I ask for copies of all their vendor contracts, verify the taxes with the county and get a quote on insurance. I also ask for the schedule E's on their tax returns and some form of proof of deposit, at least for the last month or two (bank statements, deposit slips, etc.).
Furthermore, I compare their costs with the averages we have on such buildings and standard estimates to make sure they are in line. (After all, they could be completely honest with the costs but the costs be low because they are doing insufficient maintenance.)
But you should also build in a contingency and assume costs will be at least a little higher than they say. In the commercial world, caveat emptor is the rule.
- 2yAlex HilemanPro MemberReal Estate Agent · Pittsburgh, PA · Member since 2023 · 225 posts · 147 votes
All of the suggestions above are helpful. I would add to ask for the rental payment history. There may be a lease in place for $1,000 per month, but the tenant could be 3 months behind and the seller's haven't filed for eviction because they want to keep their occupancy rate high in order to sell, or just don't want to deal with the hassle of going to court. They could be allowing a tenant to pay rent late each month, and that tenant will be expecting you to make the same exceptions for them.
Obviously you will also want to walk all of the units physically during your due diligence period to see the condition of the apartments inside. This is also a great time to talk to the residents that are home. They usually like to share how long they've lived there and how they feel about their home. If they have been asking the landlord to fix something for weeks and it still hasn't been done, they will let you know.
As for finding a larger multifamily building, LoopNet and Costar are the largest listing platforms in our area. Multis are also sold off-market and your agent should be networking with other agents and investors and keep a pulse of who will be selling. I let other commercial agents know what my client is looking for to leverage their network of investors and help find a solution for my clients.
Best of luck!
- 1ySandra McEwanPro MemberRental Property Investor · Tampa FL and Augusta, GA · Member since 2021 · 68 posts · 14 votes
Quote from @Alex Hileman:
All of the suggestions above are helpful. I would add to ask for the rental payment history. There may be a lease in place for $1,000 per month, but the tenant could be 3 months behind and the seller's haven't filed for eviction because they want to keep their occupancy rate high in order to sell, or just don't want to deal with the hassle of going to court. They could be allowing a tenant to pay rent late each month, and that tenant will be expecting you to make the same exceptions for them.
Obviously you will also want to walk all of the units physically during your due diligence period to see the condition of the apartments inside. This is also a great time to talk to the residents that are home. They usually like to share how long they've lived there and how they feel about their home. If they have been asking the landlord to fix something for weeks and it still hasn't been done, they will let you know.
As for finding a larger multifamily building, LoopNet and Costar are the largest listing platforms in our area. Multis are also sold off-market and your agent should be networking with other agents and investors and keep a pulse of who will be selling. I let other commercial agents know what my client is looking for to leverage their network of investors and help find a solution for my clients.
Best of luck!
Hi Alex, thank you for the explanation. I am a little confused though as a newbie to 5+ units as I have only owned 4+. You said that you work with other commercial brokers. Above someone stated that you really only should target listing brokers because commission is not shared. What is typical in the small MF world 5-20 units? Do you only work with a local MF broker to help navigate multiple listings or reach out to listing brokers individually?
- 1ySandra McEwanPro MemberRental Property Investor · Tampa FL and Augusta, GA · Member since 2021 · 68 posts · 14 votes
Quote from @Sandra McEwan:
Quote from @Alex Hileman:
All of the suggestions above are helpful. I would add to ask for the rental payment history. There may be a lease in place for $1,000 per month, but the tenant could be 3 months behind and the seller's haven't filed for eviction because they want to keep their occupancy rate high in order to sell, or just don't want to deal with the hassle of going to court. They could be allowing a tenant to pay rent late each month, and that tenant will be expecting you to make the same exceptions for them.
Obviously you will also want to walk all of the units physically during your due diligence period to see the condition of the apartments inside. This is also a great time to talk to the residents that are home. They usually like to share how long they've lived there and how they feel about their home. If they have been asking the landlord to fix something for weeks and it still hasn't been done, they will let you know.
As for finding a larger multifamily building, LoopNet and Costar are the largest listing platforms in our area. Multis are also sold off-market and your agent should be networking with other agents and investors and keep a pulse of who will be selling. I let other commercial agents know what my client is looking for to leverage their network of investors and help find a solution for my clients.
Best of luck!
Hi Alex, thank you for the explanation. I am a little confused though as a newbie to 5+ units as I have only owned 4+. You said that you work with other commercial brokers. Above someone stated that you really only should target listing brokers because commission is not shared. What is typical in the small MF world 5-20 units? Do you only work with a local MF broker to help navigate multiple listings or reach out to listing brokers individually?
- Member since 2018 · 1k+ posts · 1k+ votes2y
Make sure any contract provides that seller personally guarantees that he has turned over all information, and that it is all accurate. Also provide that seller must give you tenant estoppel letters.
Seller balks, you walk. - Member since 2018 · 1k+ posts · 1k+ votes2y
Make sure any contract provides that seller personally guarantees that he has turned over all information, and that it is all accurate. Also provide that seller must give you tenant estoppel letters.
Seller balks, you walk.- 1ySandra McEwanPro MemberRental Property Investor · Tampa FL and Augusta, GA · Member since 2021 · 68 posts · 14 votes
Quote from @John Clark:
Make sure any contract provides that seller personally guarantees that he has turned over all information, and that it is all accurate. Also provide that seller must give you tenant estoppel letters.
Seller balks, you walk.Hi John, where is this clause typically located and on which contract and is it commonplace?
- 1ySandra McEwanPro MemberRental Property Investor · Tampa FL and Augusta, GA · Member since 2021 · 68 posts · 14 votes
This may be a silly question but when you request DD information from Crexi for example, you have to sign a confidentialty agreement. What restrictions does this typically place on the buyer? Can you review the financials with other investors/mentors? Aslo, can you review this information even if you are not close to submitting an LOI?
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