Analyzing an apartment complex without past income/expense data

12 Replies

If you were doing analysis on a 30-unit apartment complex and, in response to your request to see the last 2-3 years of income/expense statements, the owner said "well, I didn't do a very good job of keeping track of them", what would you do?

I'm practicing doing due diligence on a multifamily and that's what the seller told me after we spoke on the phone. There were no other major red flags and preliminary research shows the property to be in good condition and cashflowing, but it's kind of hard to verify the seller's claims without some historical data.

Should I just do my analysis using known expenses, plugging in reasonable values for maintenance, capex, etc. and not worry about the actual income/expense history? If anything, this will work to my advantage, since I already know that the calculated NOI is lower than what the seller's pro forma claims.

Just now sure how big of a red flag this lack of recordkeeping is on its own and what else it could imply about how the place was managed.

Appreciate any advice!

P.S. Just to emphasize - I realize that even if I had the historical data, it's not a substitute for doing due diligence. Yes, I'm trying to do everything "by the book" (The Great Book of BP Wisdom). :-)

When you have a building that offers substantive data then you can apply standard formulas that you can plug that data into. If not such as in this case you can sort of reverse engineer your figures. I might start by reviewing the existing leases to determine the tenant history. If the leases show they are aged and still have more time before expiration and I can determine what the rental rates are I may be able to come up with gross income as a figure. Then if you know enough about evaluating a building for mechanicals, electrical, and structural issues you may be able then to determine what deferred maintenance figure to use.  

You may be able to get close to what an offer might be and then depending on what you desire or need for yourself as far as a cap rate you can determine if the building can offer that potentially or in actuality. You said the building is presently cash flowing but you will want to establish how reliable that cash flow is. 

Buying a building without strong accounting records increases your risk. You will have to determine what  is your risk tolerance and do you know how to monetize that risk. 


You can also call around and talk to some commercial agents or brokers in the area. They will give some ideas as well; some more than others. 

You can also get a commercial appraisal which is a lot more than a SFH. I got a quote for one a smaller building and it was $3500.

At the very least, you need a copy of the leases. You can then do a quick lease audit to find out if they are correct and who live in the property. After that, you can put together an expense budget and you should be ok. Utility bills are usually available from the utility companies. taxes and insurance can be easily determined. That leaves you with property condition. Have a professional walk the property to assess the roof, foundation, mechanicals, etc..

If you can not get a copy of the leases. run away. To much mystery and you will never know what you are getting into.

One last thing, make sure you review the title to make sure that you are not loaded up with mechanic liens and other unpaid bills.

@Gilbert Dominguez

Fortunately, I have the current rent roll and should have access to existing leases, although I haven't asked. Evaluation of mechanicals would have to be done by a professional.

@Nicolas Paez

Thanks for the great tips, will have to do a little more detective work.

@Philip Bashaw

Problem with talking to commercial brokers is that there aren't that many of them - it's a small town. Good to know about the appraisals - do you have any idea if they base it on more or less the same analysis (cap rates, NOI, etc.)?

@Leonid Sapronov ,

I do not know if the seller will let you do a walk through the property with contractors to evaluate the condition of the building and the mechanicals or if they will require you sign a contract first contingent on inspections but you will want to know if the building has any deferred repairs you may need to pay for and have done immediately or in the near future. You will want to estimate the lifetime of existing systems. It does sound to me as though you will be able to evaluate the building in its present condition and estimate a lifetime for the building as well as determine its current capacity for income generation and future income generation. That should give you all you need to determine what your offer should be and if this will be a good investment for you and to answer your question about an appraisal they will base it on the information we have talked about here. 

Remember a commercial building is like buying a cash flow machine so you want to determine what is its present and future cash generating capacity. Then the other factors you want to determine is the cost of insurance and what  the property taxes are. 

Hey @Leonid Sapronov great question. I haven't bought a large multi-family like this yet myself...but I was in the due diligence phase a few months ago with a property and came across the same problem. 

After doing some research I came across IREM (Institute of Real Estate Management). They sell a product that presents income/expense data for hundreds of apartment complexes and multi-families in all of the Metropolitan Statistical Areas across the country. If the seller is not able (or willing) to provide you with income/expense statements, at the very least this will help you get in the ballpark. I wrote a blog post about IREM that goes into a little bit more depth here if you want to check it out.

Best of luck in your endeavors!

He didn't keep track of them? They would be in his taxes, did he file taxes? If he didn't keep track of his income and expenses, then I would bet he also didn't take very good care of the property. Be sure to estimate high for you repairs and cap ex for the first 5 years while you fix his mistakes.

@Gilbert Dominguez Interesting, this puts a slightly different spin on doing the analysis. A LOT of blog posts and articles talk about allocating such and such % to capex, but few actually talk about estimating the lifetime of existing systems. Does that mean that if the building is close to the end of lifetimes of major capex items, I should subtract the prorated cost of replacing those items from my offer? I.e. if the roof is 30 years old and has an estimated lifetime of 40 years, do I subtract 3/4 of the cost of a new roof from my offer? More importantly, do I do that in addition to allocating whatever fixed percentage I decided to allocated for capex (e.g. 5%) when calculating my NOI?

@Tyler Flagg thanks! Will definitely check it out.

@Randy Landman Yep, estimating high is pretty much the only option the seller leaves me. All in all, this lack of records definitely raises my alert level a couple of notches, especially if it comes to doing an inspection.

@Leonid Sapronov how did this deal end up?  Have you figured out how to obtain actual data rather than pro forma?  That is my current hurdle right now.  Loop net is providing pro forma from the listing agents but I would like to verify. 

Originally posted by @Cody Barrett :

@Leonid Sapronov how did this deal end up?  Have you figured out how to obtain actual data rather than pro forma?  That is my current hurdle right now.  Loop net is providing pro forma from the listing agents but I would like to verify. 

 @Cody Barrett I tried to get what I could from the seller, who was pretty forthcoming about giving me various documents. He supplied a copy of the insurance policy (which showed a higher premium than the pro forma) and three years of tax returns. I also had a trustworthy property manager walk the property and give me her analysis. For the rest, I did my own analysis. One thing I would recommend is get an independent professional appraisal. I got one done, but it was late in the game and it was through the bank. If you are serious about the property, get an appraisal as early as you can to give you more time to negotiate with the seller. It'll cost you, but if you think you have a good chance at getting the property, it's definitely worth it. Just make sure you are working with a good appraiser.

Oh nice! Awesome advice and great heads up on the appraiser.  Thank you so much!!

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