How do YOU prepare your books for a sale?

Question

Hi folks,

TLDR: How would you (or would you?) accommodate a buyer's request for detailed rental and financial history, when selling only a small segment of your overall portfolio? Part II: what are some best practices when just getting started, to keep the whole transaction history for my first property separate so I can easily provide that information to a buyer years down the road?

This is a follow-up to my last post, wherein I was contemplating walking away from my first potential deal (I did), mainly because of the inability to see any sort of detailed financial history for the 8-unit property.

I tried doing some searching for my particular question in the forums, but I can't seem to figure out the right keywords. I just dig up all the threads about bookkeeping software.

The issue was, the seller did not separate his income & expenses, profit & loss, etc. for this property from all his others--I don't know how many, lets say he has 100 doors. Nor did he keep a rent roll in his self-management, to my knowledge. So he was either unable or unwilling to show me those detailed financials. I told my agent I need to see details like that to be comfortable moving on a deal of this size (8 units is big for me). My agent, also an investor with say around 100 doors, expressed skepticism that sellers will be willing or able to break out these kind of details when selling a small segment of their portfolio, and cited the expenses of a CPA keeping track of 100 LLC's as a deterrent to keeping properties separate.

I had assumed that it is a relatively easy matter to keep transactions for separate properties separate. Isn't this just what a good bookkeeper does? Does each property have to be in a separate LLC for this? Is, therefore, paying a CPA out the nose the only way to have a reasonably clear financial history for each property you own? Is it difficult/impossible if you use only one bank account?

Linda Weygant · Answer

Your seller and your agent are both lazy.  IRS requires you to track and report your properties separately so that gain/loss and locked/unlocked passive losses can be accurately captured.  Doesn't matter if you have 2 properties or 100.  If they have separate addresses, they should be tracked separately.

Given that you have what you have, here's what I would do during your Due Diligence Period.

1.  Ask for a rent roll from the owner and Estoppel letters *directly* through the tenants (not through the seller or their agent).  8 units shouldn't be tough for the owner or their property manager to come up with.

2.  Call the utility companies to get historical records for anything that is owner paid.

3.  Get property tax amounts from the County Treasurer.

4.  Call your own insurance agent to get a quote for the building.

5.  Get a VERY thorough inspection of the building done to estimate future repairs.  At this point, you kind of don't care about past repairs or their costs because the seller isn't going to be able to provide it.  Getting hung up on that can kill the deal.

6.  Get estimates for other services - lawn care, snow removal, etc.

Use these estimates to then run your analysis and figure a maintenance schedule and CapEx budget based on the inspection.

Jana Cain · Answer

@Joseph Taub I can't speak to how others present financials for a sale, but from a bookkeeping standpoint, yes, a good bookkeeper can work with you to track your income/expenses by property if that is what you want them to do. From reading on this forum, though, it seems pretty commonplace to not use a bookkeeper, with many investors using their own system(s) for tracking this information. You do not need to have each property in a separate LLC to track by property, either.

Some folks also just don't like to get too down into details. For example, say an investor/landlord has multiple multi-unit properties and does a bulk purchase of paint to touch up or update their units. It could be a giant pain to figure how much of that bulk purchase went to each property, especially if they did just 2 units out of 15 at one property, 1 unit out of 20 at another, and then 3 units and a wall of a 4th at a 10 unit property, etc, etc. It's just easier to book that the entity purchased $X of paint as one expense.

If you appreciate the details and like a high degree of organization, it's not at all difficult to keep impeccable records. You just need to have the desire to get it done, which means either doing it yourself, or hiring someone to do it for you (and it doesn't need to be a CPA charging CPA rates to do what is, by and large, pretty straightforward bookkeeping). There are plenty of bookkeepers out there that could handle this type of tracking.

Joseph Taub · Answer

Thanks @Jana Cain for your thoughts. It sounds like I'm not crazy at least. I can appreciate the complexity of distributing bulk expenses across many properties. It just seemed like this seller did not want to give me much of anything to work with for seeing income history. They did give me leases to look at, but there were some other issues that arose to the point where I was uncertain whether I could make the deal work.

Thanks @Ben Day. You know, the funny thing is, I'm told this seller has been a developer of houses and small multifamilies in the area for many years. So I'm surprised by the minimalist bookkeeping.

Thanks @Linda Weygant....I had the same thought about the IRS: I bet if they were audited they'd come up with some figures pretty quick! I ended up passing on this deal (they also gave me resistance on the Estoppels, which I did ask for), but I like all of your suggestions. It gives me a good picture of what to do when I encounter this sort of thing again, which unfortunately seems pretty likely :/

How do YOU prepare your books for a sale?

Most Popular Reply