no income statements: multi-family properties for sale

[margaretcowan]

In my search for small multi-family properties, I`m running into more and more properties for sale where the owners don`t have income and expense statements. How they expect to sell a building grossing $84,000 a year or a fourplex listed at $800,000 with no income statement is beyond me.

The income statement is one of my first filters in deciding to look into the property further. This is becoming a challenge and is slowing me down in finding a property to buy in Alberta.

One realtor said he`d push the owners to come up with an income statement but after 7-10 days, I`ve heard nothing. Another realtor on an overpriced looking building shrugged, "They don`t treat it like a business."

What do you do in this situation? Advice appreciated!

 

[Berubeland]

Dear Margaret,

You are being fed a line of crap. The properties are usually not priced in a professionally accepted manner using any numbers or accounting practice but rather priced to lure in naive buyers who compare their "investment" properties to single family homes market value. I see this all the time here in Toronto as well.

Frankly I don`t get it either.... a four-plex is not that complicated to figure out, rent rolls and bills. Even starting from a shoebox accounting system you should be able to come up with something fairly accurate for expenses.

In the bigger properties you see a lot of estimated numbers too which usually means that they are trying to fudge the numbers. That fudging in fact is why CMHC inputs their own more realistic numbers when providing insurance.

Anyways if you see something good you can call the utility directly to get an idea of the actual expenses.

 

[ajaysritharan]

Hi there;

Ask the owner if they can provide a copy of their tax return where they have claimed income and expenses for this property (only ask to see the rental property portion).

This might give you a rough idea, but of course you are relying on the numbers stated by the owner.

If you are not able to get this from the owner you might consider putting the numbers together this way.

1. Ask the owner to request and send you a copy of (statement reprint)
a) property tax bill from City
b) water/sewage bill from City or Water company
c) heat and hydro - including equipment rentals (hot water tank etc)
e) any other utilitie
f) copy of insurance policy


2. Rent Roll
- ask them to provide say 3-6 month bank statement where you can see rental deposits being made into theier account

If the owner is not ready to provide any of these in a timely manner, simply walk away. They obviously have something to hinde or are not motivated enough to get this information/sell the property.

3. You can also ask your realtor for recent listing in the area which should include such things as property tax, water/sewage taxes (if applicable). If you look at a few you can come up with an average for these two items.

Hope this helps.

Ajay Sritharan

Hopefully this helps.

 

[Thomas Beyer]

QUOTE (margaretcowan @ May 14 2010, 05:11 PM) Advice appreciated!
A sale happens when buyer and seller come to an agreement on terms. One such term is documents that any prudent buyer needs for a mortgage or property value analysis.

A handwritten rent roll is minimum, as are evidence and accounting of utilities, insurance and taxes - ideally for 2-3 years. Often in smaller properties management fees and repairs are done by the owner and not accounted for. This is not unusual .. thus you have to use normalized figures like $800/unit/year for R&M and 12% for property management for a 4-plex.

Looking for another deal is always an option !

 

[RCrein]

I think you know what to do to get the info, but are really asking how to filter good deals out of the pool of deals without info. I don`t know of any way to get to the answer without the info. It would seem that they are screening themselves out. You can tell the realtor no info no deal but that`s not very satisfying. You have to ask yourself whether they are motivated to sell or are just testing the market. Some people won`t sell even if they get their asking price.

Foregoing the screening for the time being, one approach would be to make conservative estimates of your own and put in offers conditional on verification of the numbers including rent confirmation with tenant input. It protects you, and gives the seller a deal to lose to motivate them. When they complain that your numbers are too low, challenge them to provide the documentation. Once they provide some, they will be hard pressed to show why they can`t provide the rest.

Best of luck with your investments.

 

[margaretcowan]

Thanks everyone for your ideas!

I like the idea of telling the owner of my conservative numbers and challenging the owner to come up with the real numbers. I hadn`t thought of looking at bank statements either.

When I buy a small multiplex, one of my subject conditions is the owner provides 12 months of expense receipts and rental agreements. I borrow the files overnight and go through them all to match them up with an income statement, if there is one. For one of my properties, I did rely on an income tax return from a "shoe box accounting" type of owner and it was a great investment.

Recently on an old multiplex grossing $84,000 a year, I got property tax and insurance numbers for a year and copies of electric and city water & sewer bills for 6 months. But no numbers or bills for maintenance or repairs. I hesitated to take an expensive flight from Vancouver to Alberta only to find repairs and maintenance cost more than I thought and the numbers didn`t work. But next time I`ll use the "conservative numbers" approach and make an offer subject to seeing the real numbers and explain this in my cover letter with the offer.

I`m off traveling May 28 for a month in Italy so no offers for now.

Cheers
Margaret
I think you know what to do to get the info, but are really asking how to filter good deals out of the pool of deals without info. I don`t know of any way to get to the answer without the info. It would seem that they are screening themselves out. You can tell the realtor no info no deal but that`s not very satisfying. You have to ask yourself whether they are motivated to sell or are just testing the market. Some people won`t sell even if they get their asking price.

Foregoing the screening for the time being, one approach would be to make conservative estimates of your own and put in offers conditional on verification of the numbers including rent confirmation with tenant input. It protects you, and gives the seller a deal to lose to motivate them. When they complain that your numbers are too low, challenge them to provide the documentation. Once they provide some, they will be hard pressed to show why they can`t provide the rest.

Best of luck with your investments.

 

[housingrental]

Good info above, To add to the above posts:
Put yourself in a position where you can create your own pro-forma statements to any property your purchasing through your own estimations
The past numbers to me are of secondary importance.
Rent last year $800 for an apartment with 3 months vacant on 2/4 units? I don`t care. I do care if:
The revenue source is unsustainable and the vacancies are indicative of that. Big difference from a buyer perspective than:
Or maybe just poor management? or of upgrades during change over?
Or maybe potential rent is $1000 on change over.
Or maybe potential rent is $1000 on change over with $10,000 in upgrades.
Or maybe property has $X in deferred maintenance and past repairs well under future expected... or vice versa..
Etc.

 

[Thomas Beyer]

QUOTE (housingrental @ May 16 2010, 11:43 AM) Good info above, To add to the above posts:
Put yourself in a position where you can create your own pro-forma statements to any property your purchasing through your own estimations
The past numbers to me are of secondary importance.
Rent last year $800 for an apartment with 3 months vacant on 2/4 units? I don`t care. I do care if:
The revenue source is unsustainable and the vacancies are indicative of that. Big difference from a buyer perspective than:
Or maybe just poor management? or of upgrades during change over?
Or maybe potential rent is $1000 on change over.
Or maybe potential rent is $1000 on change over with $10,000 in upgrades.
Or maybe property has $X in deferred maintenance and past repairs well under future expected... or vice versa..
Etc.
indeed .. some properties with "shoe box accounting" make great investments as often the rents are way way low .. but as you stated the entire package has to be analyzed as a new roof, a new boiler and 4 new interiors costs north of $100,000 .. and as such the price has to reflect that !

 

[housingrental]

"and as such the price has to reflect that ! `
Yes absolutely Thomas... and sadly in most markets the price rarely does! Be very careful..