I was emailed some information about a property that I inquired about. It is a 4-unit, FSBO, in a rural area. The asking price is $175K. The seller provided a very well laid out spreadsheet purporting to be of his income and expenses for 2005, 2006 and 2007. The gross annual rents are $24K and his figures show a net income of about $19K. I'm extremely skeptical about his numbers as it seems to good to be true. His figures suggest there is a potential positive cash flow of hundreds of dollars a month, yet according to my back of the envelope calculation based on the various formulas I've learned, at those rents there would be potentially a negative cash flow of a couple hundred dollars a month based on 100% financing.
According to his numbers, this seems like a great deal. I just don't feel like I should trust them. Am I missing something? What should I do?
If anyone wants to see the actual figures and property info, PM me and I will email them to you.
With an annual gross of 24k the actual expenses will be between 9-12k. A seller is always going to try to show the property in a favorable light. There is no way you will be positive on this with $0 down.
One suggestion I have heard is to ask to see a seller's Schedule E from their income tax return which would show the expenses they were actually reporting to the IRS. Has anyone ever tried doing this?
Who’s to say he will give you the actual Schedule E? He could easily make one up. It is also possible to have a year where your expenses are not that high, but they will average out over time.
I would say that it is quite possible that his numbers are accurate for a 3 year period. The problem is, if he did no repairs for 3 yrs or if he did little or no maintenance this is possible. The issue at hand is that property needs maintenance and repairs, sometimes big ones, and they don't always occur every year or ervery few years. I had a $1600 well repair bill one year and a $7000 well replacement bill the next on a duplex. Then my expenses for the next three years were nil, cuz I had just spent so much, i put off a few things too...Take it into perspective that you need to crunch your numbers well with your own numbers to get a good idea of reality. On the surface this sounds like a pretty good deal to me, but being in a rural area could be a problem if you have vacancy. Only so many tenants available...
Well saraheck, my opinion is that it's called DUE DILIGENCE, not DUE TRUSTING. Tell him to have HIS CPA fax you a "non-disclosure" and a copy of the last 3 or 4 year's Schedule E and any other docs you want.
Nothing from the CPA, I go no further. It's that easy.
Well just to update everyone: I did ask the seller about the maintenance figures. He basically just said it was a very low-maintenance building, but that he had made some capital improvements (like $3,000 for a new furnace) that he wasn't including in the figures. I didn't get the impression that he was being dishonest, just that he had had a good run and some longtime tenants who probably didn't give him much trouble. Although he was willing to be somewhat flexible on the terms, the price was really at the top of the market and there was no way it would cash flow without a huge discount, which obviously he wasn't willing to do. So I let it go.
Aside from all the very good points mentioned in responses here, he also could have made a large down payment to lower his debt service to the point of cash flow.