Tired of shopping for apartment complexes

Buying & Selling Real Estate
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Tired of shopping for apartment complexes

Jack B.
Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

Almost every person I deal with wants to only provide proforma numbers of their best case scenario with no capex or vacancy built in. I ask for schedule E and they claim the have only owned the property for 2 years. OK, then why don't you have 2 years of tax returns????? Out of all the times I've asked sellers or brokers, only once has anyone immediately sent the schedule E of their returns. And it was clear then their proforma numbers left out the 20K a year loss due to paying all the utilities. on an 8 unit building in Alaska...

I'm finding the task of finding and dealing with MF investments to be unreasonably time consuming not to mention frustrating and extremely risky. I've gotten used to the ease of finding a house and quickly crunching rent and mortgage numbers to decide yay or nay. A quick inspection buy my trusted and overqualified inspector and basic number crunching of area rents and the mortgage and maintenance expenses, and voila, I have a deal. With the MF, it seems to always be a game of what kind of problem is this clown dumping on me?

Really starting to reconsider investing in MF. If nothing else this summer I will sell several houses and uses the equity to 1031 into exchange maybe 3 for 6. Multi family just seems really risky. As long as you do due diligence I think it's reasonably safe, not as safe as a house, but the problem is the sellers are dumping problem properties and trying to pump up their numbers in the process of dumping them on unsuspecting investors.

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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y

Due diligence on a multi is no more difficult that a SFH from my experience. The fact is regardless of what I am buying the sellers numbers mean very little in either situation. Sellers numbers are only a guideline that can rarely be fully believed with out due diligence.

A sellers numbers are going to tell you the expenses are low and their tax returns are going to tell you the expenses are high. That is how successful businesses operate.

The up side of dealing with a seller that does not have good records is that I make them pay for their incompetence in my offer price. I love to hear them argue a higher price when they have zero proof to support it and my offer is 100% supported by fact.

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  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    9y

    Jack B,

    I always like looking at apartment building proformas that do not have a management expense in them.

    Mark

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Due diligence on a multi is no more difficult that a SFH from my experience. The fact is regardless of what I am buying the sellers numbers mean very little in either situation. Sellers numbers are only a guideline that can rarely be fully believed with out due diligence.

    A sellers numbers are going to tell you the expenses are low and their tax returns are going to tell you the expenses are high. That is how successful businesses operate.

    The up side of dealing with a seller that does not have good records is that I make them pay for their incompetence in my offer price. I love to hear them argue a higher price when they have zero proof to support it and my offer is 100% supported by fact.

    3Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    For MFUs, always use the Commercial Offer to Purchase and specify two years of Sch-E and PnLs, non-optional within 10 days.  Flakes will not accept the offer and above board sells will be happy to.  

    When I sold mine, I gave these outright to my broker AND insisted on PoF and Letter of Pre-Approvial as part of the offer package to shed flakie lookie-loos.  Had only bonafide offers as a result.

    2Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    9y
    Don't buy off proforma. It's all broker tricks to get you to buy. You need the trailing 12, 6, 3 profit and loss statements and rent rolls.
    1Reply
  • Anton Mattli
    Lender · Dallas, TX · Member since 2014 · 36 posts · 32 votes
    9y

    @Jack B. , I am not sure what size of properties you are looking at but providing a schedule E is not a common practice for multifamily properties with 5+ units. Disregard any pro forma and instead ask for a current T12 and rent roll. As part of your due diligence, you will have to dissect the T12 and rent roll for inconsistencies and come up with your own projections based on how you think you can run a property.

    2Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Anton Mattli:

    @Jack B. , I am not sure what size of properties you are looking at but providing a schedule E is not a common practice for multifamily properties with 5+ units. Disregard any pro forma and instead ask for a current T12 and rent roll. As part of your due diligence, you will have to dissect the T12 and rent roll for inconsistencies and come up with your own projections based on how you think you can run a property.

    My understanding is that it is very common for ask for schedule E in the due diligence period, at least from what I've read on here...Seems to me it's common place enough that people ask for it that some brokers have it ready and provide it. 

    Regardless, are you saying that it's irrelevant to ask what they officially report to the government? What is the advantage of T12 vs Schedule E? I would think asking what they actually report to the government at the risk of imprisonment or fines is more reliable than "best case scenario" proformas and questionable rent roll spreadsheets.

    0Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Jeff B.:

    For MFUs, always use the Commercial Offer to Purchase and specify two years of Sch-E and PnLs, non-optional within 10 days.  Flakes will not accept the offer and above board sells will be happy to.  

    When I sold mine, I gave these outright to my broker AND insisted on PoF and Letter of Pre-Approvial as part of the offer package to shed flakie lookie-loos.  Had only bonafide offers as a result.

     Thanks Jeff, that's what I thought. Everyone I've learned from has told me that I should get schedule E and it makes sense, as I myself report on schedule E. What kind of moron buys millions in real estate based on imaginary numbers? I actually told that to the dufus who was just trying to sell his overpriced complex in the ghetto based on his proforma, and every excuse in the book as to why he can't produce schedule E. OK, I'm offering 500K. Not even close he says. Great, so provide something that isn't useless in valuing the property as it is today moron....

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  • Anton Mattli
    Lender · Dallas, TX · Member since 2014 · 36 posts · 32 votes
    9y

    I am not saying that you should not attempt to get schedules E but they are really a look in the past while a current T12 and RR is giving you a picture of the current operations. On top of that, schedules E show annual numbers only which are fine for a high-level review of past years but not granular enough for a detailed analysis of current operations.

    Regarding the accuracy of T12s and RRs, reports prepared by a reputable third-party management company are generally accurate. The highest risk of fudged T12s and RRs is with self-management - I venture to say that someone who is purposely giving a prospective buyer an inaccurate T12 and RR will also cheat on tax returns so a Schedule E in these situations will likely underreport collections and overstate expenses. In any case, the more doubts you have about the accuracy of the numbers, the more you have to dig in and ask for bank statements, invoices, leases, etc. and verify that they are accurate. Even once you were able to reasonably verify the accuracy of both collections and expenses, you still have to determine how you would be able to run the property.

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    Schedule E is the best snapshot of reality there is because it creates the tax hit the owner will pay, it will always attempt to minimize the income and maximize the expenses.  This is ideal to evaluate any purchase as it becomes a defacto conservative view of the operations.  Nothing has miraculous changes overnight.

    @Jack B.

    @Anton Mattli,

    2Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Jeff B.:

    Schedule E is the best snapshot of reality there is because it creates the tax hit the owner will pay, it will always attempt to minimize the income and maximize the expenses.  This is ideal to evaluate any purchase as it becomes a defacto conservative view of the operations.  Nothing has miraculous changes overnight.

    @Jack B.

    @Anton Mattli,

     Exactly what I've read on here and some blogs. Absolutely makes sense, that's why I ask for it. I once found a great complex in Alaska. Looked like a dream on proforma. Asked for SE and all of a sudden they are posting huge losses from gas bills (winter in Alaska, units not indv. metered and market rent can't support bill back) to the tune of tens of thousands of year just on that alone. Yeah, schedule E or don't waste my time...

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  • Anton Mattli
    Lender · Dallas, TX · Member since 2014 · 36 posts · 32 votes
    9y

    I assume that you guys talk about single family and small, self-managed multifamily properties where you must focus on the Schedule E due to lack of other more current and detailed reports that you can trust. 

    Let's say you look at a property today and get Schedules E for the past 3 years for which tax returns have been filed for (2015, 2014, 2013). Everything checks out based on all three Schedules E but you have no idea how 2016 performed. Was it equal, better or worse than the previous three years? How did they perform vs. comps in 2016? What if they did well in the first half of 2016 but somehow had problems in the second half of 2016?

    Again, I am not in any way discounting the use of the Schedule E as part of the due diligence but one should recognize its limitations to evaluate a property in its current state. 

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