Hi everyone and Happy Thanksgiving. I am working on a few deals and wanted to ask, if there was anyway to verify the income that the seller of the property is actually listing in their current income/expense financials?(to a high degree of confidence). I asked for current leases and they were provided, but would it be too much if we ask for Tax schedules? I asked for the latter and it was outright refused, but concerned that leases could be falsified (I have a friend that encountered this and was attracted to high Caps and COC returns, but after purchasing the property, found out the rents were not as claimed, and expenses were much higher). Some state that getting a "certified" income/expense statement is possible, but the certification came from the seller so back to square one - please advise?
Not a lawyer here, but if they are refusing to give you tax schedules or copies of actual income/expense reports, that would be a red flag for me. In my experience, I have seen too many people pushing the edge of fraud.
My favorite one was a unit the owner claimed rented for $1200. The tenant mentioned he paid $1000. I asked the owner, who was walking me through the house, and he said, "Yeah, I meant the market rent is $1200. I lowered it for him because he's a good tenant." Of course, I knew the market rent, and he was right, it should have been in the $1200 range.
I had my realtor to ask for a lease, assuming his $200 discount for a good tenant was a load of bull, and there would probably be no lease. It turned out the "tenant" was his son, and was actually not paying rent at all, just helping with the mortgage when he could. We obviously walked away from that deal, not ready to handle the other surprises the seller might have been hiding from us.
So, yes, definitely be skeptical and ask for as much documentation to verify the numbers as possible. Match up the leases with the actual tenants, and maybe even ask to go speak with one or two.
So often, real estate deals can be drawn up so everybody involved wins. It's sad that so many people still feel the need to lie and cheat their way through.
Thanks Kevin - yes I have the current leases and I met a few tenants during my walk through. I also have a "certified" income/expense breakout. But asking for tax schedules seemed like it was beyond customary in the area I was looking into (per the broker). I didn't want to push it, if it was considered an encroachment of privacy for the seller and I had no right to demand that. I find asking for tax schedules is met with hesitation no matter what. Just wondering if other investors had the same issue and if we are with right to ask for that, or is the lease information the best we can do? Falsification happens at times, but I guess that is the risk of investing?
Getting a tax schedule would never fly. Your thinking about how to do your DD all wrong.
- Get a copy of the leases to confirm rents, then confirm rents to market price with something like rentometer.com.
- Get a expense report from the seller for vendors and or utilities, then call each one and confirm the averages, exclude handymen, but not pest companies. Most wont talk about a client's account, but most will give you averages for a given month, or a free quote.
- Likewise have your vendors give you quotes for insurance and other services, plus call the country or check online to see how much the tax bill is.
- Toss in margins for vacancy/non-payment, and well as margins for repairs, never use the sellers data for this.
Time you do all that, you will have a very solid idea of how the property will perform.
I agree with the above posters, if you are buying in the area where the rental is located you should have a laser focus on what the rents are and be able to have a very good idea of what rents should be for that building. If you run your numbers conservatively, I wouldn't worry too much about what the building is currently renting for unless it is a 5+ unit building. However, I have had sellers send me their tax schedules to show me all of their income and expenses for the building. It is definitely comforting and helpful to validate your expense assumptions you are using. I wouldn't make it a deal breaker if they can't send them, but would try to question/think why they are not. Good luck!
thanks Levi - that makes sense. I did all that you listed above, thanks for the confirm on the Tax verification as not standard. I feel I now have done all I can in terms of DD
great advice, Zach much appreciated.
I ALWAYS DEMAND via the contingencies the Scheule-E for TWO years - - and I get them. It is not too much to ask.
Also as for the Estopple for each tenant.
Any Commercial RE Agent would have know this and gone to bat for you.
thanks Jeff. I thought I heard this as well from he forums and other contacts. So far when I have asked in various deals, it was met with a firm no... Let me keep pressing and demanding that going forward
@Phil Kurumunda Ask for bank statements showing the deposits. I’d get at least a year but try for 2.
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