Should i trust sellers rent roll and financial documents?

Multi-Family and Apartment Investing
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Should i trust sellers rent roll and financial documents?

Klaycon Santos
Rental Property Investor · Taunton, MA · Member since 2019 · 33 posts · 4 votes

Sellers agent is pricing the rental property as potential market value rents. The actual Rent currently at the property is below market value. Should that be a ground for me to offer below asking price? Thank you

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Jeffrey Donis
Investor · Durham, NC · Member since 2020 · 1k+ posts · 691 votes
5y

I agree with @Sam Yin. Never trust their documents. Instead, do your own due diligence and check the property. Also, ask the broker/seller for a Cash-Basis T12, and during due diligence, we always ask for bank statements to verify that everything is hitting the bank.

Hope that helps!

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  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    When you have an appraisal done you should get a market rent analysis. You could have some language put it the contract that gives you an opportunity to ask for a price reduction or to back out of the deal if the sellers numbers end up being way off. Also make sure you are looking at the cost of fixing the property up and how long it would take to recoup the rehab money via rent. Safe guards!

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  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    5y

    Easy answer, No. never trust the rent roll 100%.  Always check to see if the tenants are current, any missed payments, any special agreements for possible manager units... etc. Same goes for the estople.

    Now, as far as offers and such, from my experience, the value an any commercial residential depends heavily on the rent roll and so there fore the lender has to trust it.  If you feel the rents are below market and there is a tremendous upside, AND its lendable as is, I would not offer less in the current market.  I would actually offer at or over the asking price. 

    This may be counter intuitive to some investors, but here is how it would play out:  You know there is upside.  You have a lender that will lend on the current asset as is with the current rent roll and price.  If you maximize your leverage, acquire it and raise the rents in time, with or without improvements, your cash flow will just increase.  Remember, if the current performance does not support the appraisal for the lender, you should be looking elsewhere unless there is some hidden gem within.  But if it appraises, there will be other investors chomping at it if they knew the rents were substantially below market.


    That is just my .02 with my minimal apartment experience.  Perhaps others may have a different perspective. I am always eager to learn as well.

    Sam

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  • Cameron TopePro Member
    Property Manager · Katy, TX · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    Hey Klaycon,

    Why does it matter what the property is currently rented for? 

    What you need to find out is the current fair market rent for the property and how much you need to spend (repairs and rehab) to get the property to rent at that figure. 

    Then work backwards to come up with your offer. It shouldn't matter what the property is currently rented for or what it's listed at. 

    Hope that helps!

    [email protected]832-770-7090
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  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    5y

    I think I should have asked whether this was a commercial rental property or 4 units and below. The assessment would definitely be different.

    Sam

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  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    5y

    The offer does not matter a whole lot until you have estoppels, T12, rent rolls whatever you stipulate in your LOI.

    I offer cash (gets them excited) contingent upon inspection of premises and paperwork. Offer whatever so you can proceed to inspection of everything. Make sure you see all units-you or your point person.

    1Reply
  • Jeffrey Donis
    Investor · Durham, NC · Member since 2020 · 1k+ posts · 691 votes
    5y

    I agree with @Sam Yin. Never trust their documents. Instead, do your own due diligence and check the property. Also, ask the broker/seller for a Cash-Basis T12, and during due diligence, we always ask for bank statements to verify that everything is hitting the bank.

    Hope that helps!

    3Reply
  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    5y

    @Jeffrey Donis

    I agree with Jeffrey and Bjorn. Do your best to lock it down, then the due diligence comes into play.

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  • Kevin K.
    Specialist · NY · Member since 2016 · 82 posts · 60 votes
    5y
    Originally posted by @Cameron Tope:

    Hey Klaycon,

    Why does it matter what the property is currently rented for? 

    What you need to find out is the current fair market rent for the property and how much you need to spend (repairs and rehab) to get the property to rent at that figure. 

    Then work backwards to come up with your offer. It shouldn't matter what the property is currently rented for or what it's listed at. 

    Hope that helps!

    Depending on how/if he’s going to finance it. The lender is going to base the debt coverage ratio off the current contractual rental rates, unless they’re grossly overstated.


    You’re 100% correct though for his personal investment decision/offer. Assuming it’s a value add deal. 

    1Reply
  • Alex Ramirez
    Rental Property Investor · Houston, TX · Member since 2019 · 184 posts · 147 votes
    5y

    Is this residential or commercial? If it is residential then you are protected by an appraisal, which will be determined the price of the property. If you buy below market value (per appraisal) and considering rents are under market value then you have a deal. If this is commercial, put it under contract and during the due diligence period, this is when you spend the time to check actual leases, repairs, etc. If there are no leases, the owner fills out a form called 'estoppel certificate'. This is between the landlord and the tenant/s for each apartment. It outlines rent prices, deposits, when rent is due and many other things and it is signed by both parties. On the due diligence period is when you can come back and re-negotiate the contract if something is out of the ordinary. Hope this helps. Feel free to IM me. Will be happy to help you

    Alejandro / Managing Member / Real Estate Solutions Group 

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    5y

    Trust but verify.

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  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    5y

    Trust... but verify. When under contract and doing due diligence I would ask for copies of the leases, proof of deposit for at least a month (i.e. bank statements, tax returns, deposit receipts, etc.) and copies of utility bills and other vendor bills. Also verify the taxes and bid out the insurance.

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  • Anthony KingPro Member
    Investor · Charlotte, NC · Member since 2020 · 236 posts · 247 votes
    5y

    @Klaycon Santos Never trust the sellers numbers. Just like everything else in life, numbers can be stretched a significant length one way or another depending on your perspective. Are they lying or just stretching the truth? Odds are they're trying to sell you what the rents COULD BE...even if it takes 5 years for them to get there. They're trying to sell as high as possible, you're trying to buy as low as possible. Therefore, do your own due diligence and you'll find a fair deal is made somewhere in the middle. If you run the numbers you should see cash flow and a reasonable cash on cash in that middle range. If you're not at least breaking even when running your numbers, then it's easy to tell their "rent rolls" were some fantasy projection looking 5+ yrs into the future. Be honest with yourself as well. Don't stretch the numbers to make it work either. Then you're just being dishonest with yourself and doing the seller's job for them.

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  • Carolyn LlerenasPro Member
    Member since 2018 · 7 posts · 1 vote
    5y

    @Jeffrey Donis what do you mean by …”everything hitting the bank…”?

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  • Tariq B.
    Investor · Laurel, MD · Member since 2014 · 251 posts · 140 votes
    5y

    @Klaycon Santos I never trust anything a seller tells me. Always verify. If this is above 5 or more units do not base your offer off their inflated rents. Brokers love to get their price based off pro formas..it drives me nuts.

    You can’t give them an offer on work that hasn’t been done. Base it off actual numbers not what could be.

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  • Cameron TopePro Member
    Property Manager · Katy, TX · Member since 2015 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Kevin K.:
    Originally posted by @Cameron Tope:

    Hey Klaycon,

    Why does it matter what the property is currently rented for? 

    What you need to find out is the current fair market rent for the property and how much you need to spend (repairs and rehab) to get the property to rent at that figure. 

    Then work backwards to come up with your offer. It shouldn't matter what the property is currently rented for or what it's listed at. 

    Hope that helps!

    Depending on how/if he’s going to finance it. The lender is going to base the debt coverage ratio off the current contractual rental rates, unless they’re grossly overstated.


    You’re 100% correct though for his personal investment decision/offer. Assuming it’s a value add deal. 

    Agree, if this is commercial then my statement above isn't pertinent. 

    [email protected]832-770-7090
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  • Cody Neumann
    Rental Property Investor · Surprise, AZ · Member since 2020 · 405 posts · 179 votes
    5y

    @Klaycon Santos

    I would ask them for actual statements showing you what rents are and make sure the tenants are actually paying.

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  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    5y

    @Cody Neumann I agree. I'm in contracts with 2 apts, each has at least 2 non-paying tenants and found out that they were a few months behind. Due diligence is VERY IMPORTANT. Is it grounds for lower offer? Well that depends on the current price, current market, current financing options, and your personal vision. If the price is decent, the market is high, the financing is good, and you plan on a long term hold, I would offer full price or A PRICE that would weed out other investors. There are so many factors that it would be difficult to give the right answer because we all have different tolerances.

    Sam

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    5y

    Lol You can offer whatever price makes your heart sing, but you will have to pay the price that gets the deal done...assuming you want the deal :)

    1Reply
  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    5y
    Originally posted by @Ben Leybovich:

    Lol You can offer whatever price makes your heart sing, but you will have to pay the price that gets the deal done...assuming you want the deal :)

    Well put. 

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  • Justin Moy
    Investor · Kansas City, MO · Member since 2020 · 400 posts · 278 votes
    5y

    A pro forma means "what this property COULD do". Meaning what's the best case scenario (in the seller/brokers opinion) for rents and expenses; but you have to ask yourself how much time and money will it take to get the units there. If you want to spend $5,000 on 10 units on a 20 unit property, it'll take time to wait for those leases to expire, remove the tenant, implement the upgrades (which could also cause a higher vacancy as some tenants will be living next to construction areas), then release the unit. It could take 2 full years to get those 10 units where you want them to be. So you'd have to adjust your annual incomes to reflect those 2 years of work, then maybe you can have stabilized pro forma figures. 

    Pro formas usually don't take into account the time needed to get the units to those figures

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