Analyzing an apartment complex without past income/expense data

[Leonid Sapronov]

If you were doing analysis on a 30-unit apartment complex and, in response to your request to see the last 2-3 years of income/expense statements, the owner said "well, I didn't do a very good job of keeping track of them", what would you do?

I'm practicing doing due diligence on a multifamily and that's what the seller told me after we spoke on the phone. There were no other major red flags and preliminary research shows the property to be in good condition and cashflowing, but it's kind of hard to verify the seller's claims without some historical data.

Should I just do my analysis using known expenses, plugging in reasonable values for maintenance, capex, etc. and not worry about the actual income/expense history? If anything, this will work to my advantage, since I already know that the calculated NOI is lower than what the seller's pro forma claims.

Just now sure how big of a red flag this lack of recordkeeping is on its own and what else it could imply about how the place was managed.

Appreciate any advice!

[Gilbert Dominguez]

When you have a building that offers substantive data then you can apply standard formulas that you can plug that data into. If not such as in this case you can sort of reverse engineer your figures. I might start by reviewing the existing leases to determine the tenant history. If the leases show they are aged and still have more time before expiration and I can determine what the rental rates are I may be able to come up with gross income as a figure. Then if you know enough about evaluating a building for mechanicals, electrical, and structural issues you may be able then to determine what deferred maintenance figure to use.  

You may be able to get close to what an offer might be and then depending on what you desire or need for yourself as far as a cap rate you can determine if the building can offer that potentially or in actuality. You said the building is presently cash flowing but you will want to establish how reliable that cash flow is. 

Buying a building without strong accounting records increases your risk. You will have to determine what  is your risk tolerance and do you know how to monetize that risk.