How to acquire and verify financial information from MHP seller?

Question

I'm new and this question may be too basic but I created an account so I could ask it:)

With a lot of information I have read and gathered from this site and others regarding MHP investing I have started contacting sellers about the parks they are selling.

My question:
How do you verify the information they send over? Most (at least the 9 I've contacted so far) don't have audited financial records. They just email spreadsheets that contradict themselves in certain cases.
How do I get a true set of financials so I can truly assess current value? not the future value they are trying to play up.
 
Thank you for your time and patience.

Dennis Tierney · Answer

Kimberly PrattAs part of the due diligence you can also ask the owner to supply supply signed estoppel letters from the tenants to conform that they are indeed paying the amount of rent the seller said they were paying.

Kimberly Pratt · Answer

Dennis and Bill I really appreciate your information and insight, now I have a better idea of how to proceed.
Thank you again

Bill Gulley · Answer

Welcome to BP Kimberly! Very good question!

Ask for the applicable tax return schedules, Schedule C. They may balk, tell them they have discrepencies in the financials they provided and that you're not asking for the complete tax return, just that applicable to the property they are offering to sell. Don't close without it, IMO. You can make an offer subject to the review and acceptance of detailed financial records including tax returns.

Changes in depreciation will indicate capial improvements made. Past three years is usual to ask for, but you can ask for more to show depreciation taken.

Accounting wise, you can dig and work some accounts backwards to obtain great insight to any business, this may require an auditor if you are not an accountant, depending on the operation, it might be a good idea to get professional assessments, prior to closing.

I say prior to closing as you can make your contract contingent on verified income, expenses, etc. with such being a final investigation after a price is agreed to. The price can be adjusted based on information discovered or you can avoid the entire deal. This should be covered in the due diligence period, which you should extend for a MHP, if the base contract is a standard RE contract (usually).

Verifications can often be found with utility records, if they calim a tenant was in the unit in July, the electrical usage should indicate someone living there.

You can also ask for bank statements of the business, many balk again, some open the books. Asking for the`statement for the Escrow Account can be a compliance issue as you will be assuming such as a liability, that will show rents, infer damages and termination expenses.

Before you meet an owner or an agent, drive through the place. Usually someone will be outside, rool down the window and ask them if they know of any vacancy, some residents will talk your leg off. I have done this from a financing point of view.

I pose as a potential renter or MH owner. I told them I was interested in a ______ (clean, quiet, party style, pick what appears to be applicable) place. If I want a tight knit friednly neighborhood, ask if everyone knows each other, if they do then you can ask about turn over, are they happy there, how is the management, any block parties? (LOL) You get the idea, tenants will tell you everything, take it with a grain of salt too, size up those you'll be working with.
This can be done before any contact concerning the sale.

You can also get an idea of maintenance issues by looking, deferred maintenance matches what is claimed?

Make sure in your audit you know how they post and allocate items, if it's a mom and pop park, they probably are not accountants and thier tax guy only knows what he is given most often, it may or may not be accurate.

Market norms, ask other owners about the business, what do they expect, if the info given by a seller fall outside these norms you may want to investigate.

Often, a Realtor will assist a seller in providing info, they shouldn't but some do. They also tend to know just enough to fluff the books in a good light. Discount proforma statements almost entirely, you need to do your own projections.

I have also found that it is best not to accept the package made for the sale, instead tell them what you want and tell them you don't need any estimates or proforma statements. If you accept materials made to market a property then, due to errors or ommissions, they agent or seller may be difficult to work with in obtaining substaniating documents, they won't want to give you an audit trail to show they fluffed the books or estimates. I suggest you specify what you want initially instead of asking for "financials".

You can ask them to sign a verification letter for financial information, cleverly drawn it has gotten me into bank accounts sitting in a bank reviewing a  screen, you may not be able to talk your with a verification of assets....but it can at the utility company, from the septic clean out folks or other major vendors. Such spot checks indicate the validity of information.

Don't put all of your decissions in the financials, assess the market, the assets, potential from management changes, improvements and tenant base, assessed overhead, what the last owner did may justify a lower offer, it won't usualy justify an asking price or future business. Your position will not likely be the same as the past owner.

Lastly, while you can make an offer, another aspect is your ability to buy, make that known early on. If you can show your ability to finance or buy to the agent, if they know you can swing a deal they will be more open to providing verifications and financials. A seller does not want thier personal or business issues out in the public. Suggest reviewing the books with the agent or sit down with the owner at the office, if they know you are a player they should be more open to your due diligence.

Good luck......

Dennis Tierney · Answer

By "spredsheets" do you mean a proforma? Never accept a proforma. I always ask for 3 yrs income and expense statements and you can also ask for a copy of the same yrs tax form filed for the property. They are less likely to lie to the IRS (although I've met some that do). They should also supply a current month's rent roll.