I am new to real estate investing. I have done most of my research and I have a contract on a property. Everything looks good. However, I do not know how to actually verify the property's income. The seller's book keeping is horrible. He says the property is 100% occupied and has given me a rent roll. But i want receipts and other proof of income. What else can I use to verify the sellers story?Any input is welcome. Thanks in advance.
If the seller cannot prove the income and has horrible books then you CANNOT go on the sellers belief.
Some sellers will lie constantly until the property is sold and closed and run for the hills.
If you can't document what the seller is telling you then you have to assume it's not true and run numbers based on a worst case scenario. I tell sellers if you want a great price you need pristine records to justify it. With a low price there is more room for error but with a higher price it makes a much larger impact if numbers are not correct as the risk isn't built in.
So if sellers has bad records offer a real low price and if they balk walk away and give them your card and say if things change let me know.
How many units is this by the way??
No legal advice.
Thank you for responding. This complex about 22 units in a pretty good area. It seems like a good deal on location alone. The agent is saying most owners do not keep receipts. This sounds wrong. Besides rent receipts and direct deposit records, is there anything else that could be used?
What does the market rent tell you? Once you establish the market rent start digging into the expenses.
Is there alot of vacancy?
The rent is less than the market about 50 dollars. He states it is 100% occupied and seems to be. Everything seems okay except for the book keeping. I am having a hard time verifying what's coming in. I am unsure if I am being anal retentive or just suckered. Also, don't the appraisers need these documents to come up with an appraisal?
You aren't being anal retentive. What business person doesn't keep records? Crazy. It's either a game, a stalling tactic, or a very bad business person. Whichever scenario it is, you need to verify or lower your price.
Robenson anything under about 50 units or so it's a pot luck on what kind of records are kept.
Many try and self manage themselves. Even with a PM there is not enough income to employ a full time repair person. It comes with the territory in that deal size unfortunately. You get into the larger properties that are professionally managed by larger firms and there are way less things found and when they are they tend to be smaller items and not big ones.
Typically, during due diligence you are allowed to review/audit leases. This gives you a chance to verify everything before your earnest money goes hard.
Ok. Thanks everyone for your input. So if the leases are as they should be does that mean I am ok?
Frank, if the building is less than 50 units is it the norm for poor books? All these books that I read didn't mention poor books as a problem that I would encounter. Regardless, thanks for the input.
@Robenson Exume Hopefully since you mention you have seen the leases, you have compared the rent rates charged on those leases, all other fees listed, the expiration dates, and the deposits on hand to the rent roll the seller provided you. If not, build a rent roll with this info, then have the tenants complete and sign estoppel letters verifying the lease info is correct. If its not correct, the tenants will let you know.
The next step is to build a year pro forma by month for the income and see if it compares to the seller's numbers. Remember, 100% occupied does not mean 100% are paying rent. To verify this, make the seller provide bank statements to show the appropriate deposits each month and/or provide tax returns for the property showing income similar to the pro forma you created. If they don't have these items to verify, there is something shady happening here.
If none of this info ties out, you must do what others mention and assume the worst case on your income projections and renegotiate your purchase price accordingly or be willing to walk away. If the seller has treated this property as a piggy bank and not a business, you cannot be expected to pay top dollar for an income stream that cannot be verified.
Mike B. is exactly right on this one. Even if all the units are 100% occupied it doesn't mean a whole lot when it comes to rental income. I just purchased a small 8-unit complex a couple months ago, and I was in a similar situation with the seller. It was fully occupied, but just over a month went by and I already had to evict one tenant for non-payment and another one that should have never been allowed to rent there to begin with. In order to fill the only empty unit, the seller just accepted the first person to come along without do any background checks, etc. If your going to be investing in something that substantial make sure you know as much as possible about it first. Don't worry about irritating the seller with questions about the income, expenses, property condition or tenants. They should be happy to provide all that information to you if they truly think the property is worth the asking price.
You have plenty of good advice here. I can't believe that they don't have some type of ledger. My guess is that they are hiding something. Ask for the bank statements so you can check the deposits.
I use my own proforma in these situations. I know what is likely to be collected and what my expenses will be. There will always be some people that don't pay. You need to factor that in along with an anticipated vacancy to come up with your estimate of rent loss.
It sounds like you are in a strong location. How is the rental market in your city? If the average in your city is 5%, then you need to add in a couple more points for non-payers. This would give you a number around 7% to factor in as vacancy.
If the rental market is softer like around 10%, then the rent loss from non-payers will likely be higher as they will have more freedom to move around. Plus you may have to do some move-in specials to attract tenants. I would factor in 18-20% rent loss in this situation.
You could ask to see their income tax returns for the property. Of course, these could be fudged as well, but the expenses will likely be accurate.
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