I had not thought about this much before but I had a couple of ideas.
1) If I had reasonable doubts about fraud, I would probably not go forward with the deal (and that is not just related to tax forms but also other representations, documents, and disclosures). Like if the numbers on the form looked shady and there were red flags or gaps, I would probably walk.
2) Ask for more information and connect the dots. If you just want more assurance, maybe ask. For example, there should be actual bills or statements for all the Schedule E info (rental income, mortgage interest, insurance, utilities, repairs, maintenance). You can then match them up (or not) and make your own deductions. Or if the seller balks, that also gives you an answer.
That said, I would guess, if anything, less than honest actors may under report income and over-report expenses to the IRS. But it sounds like you may have doubts about the forms legitimacy (are they done by the owner? A CPA? Preparer? the latter two would give me more confidence for example).
I think it is Jay P. Decima that also wants actual bills and verification (like you call the vendor or renter). That may be another angle. The Schedule is not an ideal way to look at your cash flow. You might get thrown off by their auto expense (which may vary for you), depreciation (on their basis), or a black box like "other" (Line 19 last year I think).
Perhaps you could pick a few topics (like income, management, repairs, cleaning and maintenance) and ask for actual statements to see if they match (so you don't get a huge stack but a representative sample).
Others who do a lot of transactions may have ideas, too.
Best of luck.
Thanks for your thoughts and insights. I️ found it very helpful. Best of luck to you as well.
Having a schedule E is great but you should verify the numbers on it.
Does the rental income make sense?(divide the total rental income by 12). Ask your agent if that sounds like market rent.
Is there any repairs expense on the return? if there isn't it can be an indication that he did not properly care for the property.
There are also good ratio's that you can use
Property management fees normally range from 6% to 12%
insurance normally ranges from 2% to 7%
It would seem to me that if you are looking at a schedule E you got a complete tax return. If you do not have a complete tax return, I would not rely on a Schedule E to make a purchase. I would want to see copies of the leases, a rent roll for the past 3 years, and itemized list of repairs and maintenance done over the past 3 years, property tax documents, proof of insurance and bills and any appraisal done in the past several years. It is also a good idea for you to explore what comparable rents are in the area. And as has been said already, if you suspect any attempt to withhold information, just walk away.
Could just run the numbers on your own.
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