Frustrations with Seller Inaccuracies

10 Replies

I’m currently evaluating my second multifamily property and have discovered major inaccuracies from the seller provided material. With the first property the seller provided rent rolls showing 100% current occupancy and stated 95% average for past year. When I did the walk through the actual occupancy was 85% and by examination of the leases and the condition of the property that’s what it clearly averages. To get the same cap rate the purchase price would have been about 400k lower so the deal was a no go. The second property the seller originally stated the flood insurance was 6k less that what it really is. This plus other under reporting of expenses would mandate about a 300 k drop in price to get the agreed upon cap rate at purchase. While I’m glad I caught this stuff during due diligence it’s beyond frustrating. It’s a waste of everyone’s time and initial lawyer fees (for purchase contract). Is anyone else encountering this? How do you avoid it? Are people able to obtain schedule Es ect prior to due diligence?

@Dee Malkerneker Hang in there. This is often the case with mom-and-pop sellers. They have faulty or non-existent records and are all over the place. It is a good thing you've maintained discipline and are working to a plan. Hang in there and don't lose your focus.

oh my goodness, people lying to make money!:-)

This is the new normal, and there is no end to the newbies who will pay too much for a property. We are having a bit of a multi bubble and the inexperienced who pay too much now are going to cause the distressed sales of tomorrow. Congrats on being thorough and avoiding extra risk. Please just figure on 50 percent expenses regardless of what the seller comes up with.

I read a great post, guy bought brand new house, rented it for 12 years to one single tenant, and at the end of term all the things needed fixed/ replaced totaled more than $20k! He did not make a dime on the rent but did benefit from the loan paydown only! His advice... always count on 50% for expenses.

Most sellers today are"fishin for idiots",  so dont be one.

@Dee Malkerneker Hey Dee, unfortunately, this is typical of some sellers and they will tell you anything to move the asset. Clearly, you know what you're doing so just keep at it. On the other hand, these inaccuracies shouldn't be perceived as frustrations, you should go into every deal expecting this going forward. Frankly (or sadly), its a game :)

Why would a Seller do this? Perhaps, they managed the property for 20 years and never kept their books up-to-date or they are just providing you bad data. Who knows? And does it really matter? My quick back of the envelope analysis is to allocate 50% of EGI as OpEx. I have received a T12 that has rents written on it by hand all over.

Here, you should use this as an opportunity to purchase an asset based on solid and provable figures derived from your due diligence.

The first step is making sure that you understand the game from this perspective and you will be fine. 

Hope this helps. Good luck. Thanks! - Ola 

Ola Dantis

Thanks for the replies. 

My surprise comes from the fact that this sort of behavior is short sighted on the sellers' parts. Yes you may get the property under contract but these assets only being sold to other investors. Things like true vacancy and flood insurance costs will almost certainly come out during due diligence. By this point it's costs both the buyer and the seller time and lawyer costs for the purchase agreement. 

I'm sticking to the advice above and using at least 50% for expenses to make my offer no matter what reported expenses are. 

@Dee Malkerneker

Hi Dee,

you are kind to call them inaccuracies.  Unfortunately, most sellers are so disorganized they can't give you the correct information.

As Ken McElroy says, trust but verify. Base your analysis on what they give you, and then re trade once they present you with the truth. Once you become proficient in underwriting, you will spot these inaccuracies. There's no way a seller can run a property for 2,500 per unit in expenses in our market, and we plug in what we run the property for.

Let a bank help with the underwriting. They have experience in looking at numbers to see if they are in the realm of possibility.  Try to get as much data upfront, last 12 month's P&L should tell the story.

12 month rent roll will also help immensely.

Gino

How about putting in your purchase contract a statement that the seller certifies that all information provided is accurate, and list the information provided? There might also be a penalty if info is inaccurate. 

You MUST "do your own due diligence".  The only thing you can count on from the sellers number, ESPECIALLY the ones in the listing, is that it can't possibly get any better than those numbers.

Jon Holdman

    I like John's response, that the sellers numbers are usually "end of the rainbow", best case senario, "possibilities"

    Not reality.

    Side note: made an offer on a 18 unit complex figuring 50% expenses. Got all records from management company and after careful audit, actual expenses: 52.4%!

    I feel your pain I just had a deal blow up because the NOI that was stated was not what it was in the financials and the changed the MAO from $39K a unit to $25K which the seller didn't accept. I don't understand why some sellers want to inflate numbers hoping to sell their properties. But I do agree it is frustrating no doubt,

    Just some follow up. I presented the seller with the actual numbers and what the price would have to be to achieve the 8% cap rate and the seller had no clue how what the property was actually bringing in (despite it being plainly visible on the schedule E). 

    The seller was not happy, the funniest part was the seller was upset even though the whole thing was a result of them misstating expenses.  I actually feel relieved the whole thing is done and I'm moving on.

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