Validating Rental Income

2 Replies

Hi everyone:

What is the best approach to validating the stated income from the Rent Roll?

What about tenants who have been paying cash to the seller?

Is there anything that ought to be in the PSA in connection with this?

Thank you for your kind advice and assistance.

Peter.

You can ask for validation just like a bank would in a loan process (in fact they probably will when you ask for a loan).  You can ask for a copy of their bank statements for the property.  Make sure everything matches up.  Get a bookkeeper to take a look too (in case your eyes glaze over with this stuff).  

It's not a bad idea to talk to a few of the renters and find out from them how much they pay.  You can also take it as an opportunity to find out what's working well with management and what they really want.  It can give you some ideas for forced appreciation once you buy it.  

You probably also want to get copies of all the leases just to make sure they didn't promise 3 free months of rent at the front-end of the lease just so they can get it filled up for a sale.  Also, you want to see if they have a bunch of sweetheart deals with friends and family who aren't paying enough rent.  

The best answer is to get an estopple letter for each tenant.  The letter would state the terms of the lease - monthly rent, lease end date, security deposit, and any special terms (e.g., last month is free.)  These would be signed by the tenant(s) and seller.  You definitely want copies of the leases.

A copy of the seller's tax return is useful, too.  Each property has its own set of pages, that's what you want to see.  Keep in mind some things that look good for the past may be warnings about the future.  If little is being spent on maintenance, for example, you're going to have work to do in the future.

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