First time interested in a larger multi-family - how do I verify financials?

Question

I own several SFH, duplexes, triplexes, and a quad but I'm in discussion regarding a 13 unit mixed use property that is of interest to me mostly due to location (I own several properties in the area and it's near me and I have a good pulse on the town).  However the financials that have thus far been provided are just a typed out PDF of gross rents and expenses.  I am told that if we go under contract, I can review their books during the due diligence phase.

How do I know the books are complete and correct though?  It wouldn't take much to delete some expenses from quickbooks for example or add some rental income.  I know I can review the leases and that should give me gross rents but everything else seems easily manipulatable.  Besides a rent roll, copies of the leases, and P&L or cash flow statement for the property, what else do I want to look at?

Additionally, how do I find a realtor that deals with larger multifamilies?  My realtor isn't showing me anything that isn't on the regular residential MLS and she doesn't really add any value to these larger deals.  I'm sure there are more multifamily buildings changing hands in my county besides what I am seeing.

Thanks for the help!

Evan Polaski · Answer

@Karolina Powell, and to sum it all up: seller's numbers are meaningless.  Not only for the reasons you mention (easily manipulated, depending on format), but also have next to nothing to do with what your operations will look like.

While I do agree that you should try to verify income, both through lease review, P&L, and if they will share: bank statements and tax filings, at the end of the day, I don't put a ton of value in seller financials, for many reasons.

Let's assume they are getting $800/mo in rent.  Market is $1,600/mo. If you price the deal based on the current rent roll, you will not be remotely competitive in your offer, since many other investors will price it on $1,600/mo, with a small discount to account for the remaining term of the existing leases.

On expenses, as noted, what seller pays is likely very different than what you will pay.  Taxes is easiest: seller bought property in 2004 for $260,000 and modest increases in assessed value over 20 yrs.  They sell it for 4x assessed value, and taxing authority uses your purchase price as new value.  Your tax bill is 4x bigger than seller's accurate T12 numbers.

To summarize, the seller numbers are really only useful for a very back of the napkin analysis. Is the asking or whisper price remotely reasonable based on sellers financials? If so, spend more time in underwriting, if not, let it sit a while and/or call broker to figure out why they are pricing where they are when sellers financials don't support that value.

Steve K. · Answer

Pro Forma is latin for "Total BS". You have to be able to run your own numbers. Get rent rolls, estoppels and any financials that you can from the seller but also realize that your expenses will be different than theirs and you always have to run your own numbers.

There isn't an MLS for this property type, the closest thing being co-star but commercial brokers joke that's where deals go just before they die. Smaller MF buildings can sometimes be found on the residential MLS's but mostly just 4 units and under. You want to be working with commercial brokers that deal in this type of property. Connect with those who specialize in it. In my area it's a mix of boutique local commercial shops and the big national players. Ask to get on their email distribution lists. If you're not familiar with the sales process for this property type, doing your own due diligence, the right lenders to use  and what to look out for, how to negotiate and how to work with commercial brokers, I'd recommend having a good buyer's agent help you out on a few transactions before going straight to the listing agent!

Adam Bartomeo · Answer

@Gino Barbaro @Charles Seaman are both accurate. Never trust the number that they are being given to you. Some numbers are easily verifiable - taxes, insurance, utilities - just ask them for the documentation. Others are a bit trickier and often over/under inflated - income, maintenance, PM costs, legal, etc. Based on your portfolio you probably have some real-world data to bounce the numbers off of for accuracy.

Arn Cenedella · Answer

@Karolina Powell

I second @Charles Seaman comments.

I would add since you own other rental property in the area, you probably have a good grasp of rental rates as well as expenses in the area. You should have a clear understanding of property tax rates, insurance costs, repair costs, utilities, landscaping etc.

Any buyer must develop their own proforma and that is what should be relied on. The seller data is useful but it must be evaluated within the context of your own investing knowledge and experience.

A local property manager who manages similar assets can also provide useful data.

Use your local market knowledge and experience to develop a proforma you feel confident in and proceed from there.

Arn

Gino Barbaro · Answer

@Karolina Powell

You need to find the commercial brokers in your market and opt in to all their lists. When you get into larger multifamily, brokers typically do not share commission so you have to find the listing brokers and contact them directly. You typically do not bring your broker unless they bring you the deal, and if they do that sometimes you may have to comp them

When you put in your offer, you simply state the offer is based on financials provided. When you go into due diligence, request bank statements to verify actual income collected and expenses. If there is a discrepancy from what you were told then you ask for a concession on the price in accordance to what was missing in income

If they show you an actual rent roll that will give you an idea of income, delinquency and lease terms.

It's hard working with mom and pop sellers. But there is light at the end of the tunnel if you can make it through. Your bank is going to want to see the financial data for then to base off a DSCR. You have time during your due diligence if you want to back out or proceed

Gino

Greg Kasmer · Answer

@Karolina Powell - I am also targeting 10-30 unit properties and have underwritten 75-100 or so... It would be interesting to share some information and maybe we could underwrite it together and/or compare notes. Let me know!

Sam Applegate · Answer

@Karolina PowellA lot of people have mentioned different aspects of this in their posts. For rental income, you can tie it to leases, which are legal documents. Therefore, the leases should be accurate. You can also ask the tenant to sign an estoppel, which essentially has them verify the rent they are paying.As for expenses, the main areas where they can go awry include property taxes, which you can determine on your own; the mortgage, which you can also calculate; insurance, for which you’ll have a quote beforehand; and utilities, for which you can obtain the bills from the landlord. Ultimately, the most variable expenses are discretionary ones, such as repairs and maintenance. During your inspections, you can assess these expenses yourself.It's also important to step back and evaluate expense ratios to determine if they make sense.For smaller multifamily properties that are usually listed on the MLS, I would find a MLS agent who owns investment properties themselves, as they’ll better understand the process. Many agents claim they can handle multifamily, but working with one who owns similar properties provides better confidence that they know what they are working with.However, if you are looking for larger multifamily properties—which are not listed on the MLS—it’s essential to build relationships with those brokers, as they often don’t list these properties on central services. I would also recommend checking websites like LoopNet.

Drago Stanimirovic · Answer

Hi Karolina,

To ensure the financials of the 13-unit property are accurate, request the seller’s Schedule E tax forms and bank statements to verify income and expenses. These documents are harder to manipulate than a P&L or QuickBooks summary. Also, review utility bills, insurance policies, maintenance invoices, and property tax records to cross-check reported expenses. Conduct tenant interviews or verify payment history to confirm rental income.

For larger multifamily deals, work with a commercial real estate broker who specializes in multifamily properties. Platforms like BP, LoopNet or Crexi can connect you to brokers with access to off-market opportunities.

Feel free to reach out if you need help navigating due diligence or financing!

Best regards,

Drago

Charles Seaman · Answer

@Karolina Powell Once you get into the commercial world, it's a bit different than residential real estate because it's very much a "buy at your own risk" situation.  Aside from the items that you already suggested, the only other thing you can use to verify the stated income is the seller's bank statements (not all sellers will release their bank statements, but some will).

The expenses will vary a bit from owner to owner, so you're better off reaching out to a local property management company to get an understanding of how much things cost, unless you plan to self-manage the property.  Taxes and insurance will be the biggest variables on the expense side.  Reach out to the local tax assessor to understand how a sale might impact your future property tax bills and reach out to an insurance broker to get an insurance indication.  These items are important so that you can budget accordingly and price the deal correctly.What size properties are you focusing on?

Scott Mac · Answer

An eclectic answer.

=========

Hi, I want to Drive in a NASCAR race at 200 mph tomorrow.

I have been driving my Ford Escape on the city streets for quite some time.

What do I need to know to be able to drive 200 miles an hour tomorrow in the race?

Note: I want to win the race too.

Well Karolina-- These are big money deals, big money can be a double edged sword so be careful!

I am not going to answer your question directly because it would involve teaching and there are a lot of points to learn about this.

There are people on the Internet who teach this skill for price- I don't have a direct recommendation, but they're out there.

What I'm going to say is I see people who have experienced success in this arena, analyze many practice deals before they put their money down on the table for a real deal.

I also see people in your situation who as a newbie do okay, that's all I'm gonna say about it and you can take what you want from that because I don't have the Magic Pill to give you to make this work.

I'm just looking at it from a potential risk standpoint, and looking to give you some other experience you can learn from.

It's a skill you can learn, but learning it from forum posts seems like a longshot.

If I were doing it I would address the things I want in a letter of intent, non binding.

Then there is going over the accounting data for the property, and Making accurate projections, As well as having a good lender who can close and qualifying yourself for the lenders qualifications, which may be different said the loans on your other properties.

Good Luck!

First time interested in a larger multi-family - how do I verify financials?

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