What do I do if seller is clueless?

[Patricia J.]

Hi everyone,

I am a new investor currently finding and analyzing deals in Los Angeles. I came upon a 4 plex which is listed at 1 mil. I got the rent roll and past 6 months expense report by the property management company. However, 

1. my calculated annual expense is lower than the listing agent's estimation. I think the agent simply took market rent, applied them to all units, and used one of the R&M rules to come up with his number

2. property manager listed no rent income for 6 months straight and suddenly for the very last month on paper there was an income of about 2800 dollars. this made me doubt if the entire income and expense reporting was accurate

3. owner did not provide tax or insurance numbers - the listing agent estimated them...I also heard from the selling agent that one of the bigger units will be vacant from next month, due to eviction of tenants from rent delinquencies 

The owner is out of state and seems clueless on the operations of this building. I am more confident in analyzing properties with good records of income and expenses, but what do I do when the owner seems clueless and all the numbers are just flying everywhere? 

[Kelly O'Quinn]

Hi Patricia! You can do a pro-forma P&L analysis using market rents and estimate your expenses. A great tool for rent estimation is rentometer.com, but it's a good idea to check recent rental listings on padmapper.com, Craigslist, and the MLS if you have access to it to get a better idea.

For expenses, you could start off using the 50% rule (assume expenses will equal 50% of your rental income) for initial analysis, but once you're doing serious due diligence, you can do the following:

-Look up the property tax rate on the county assessor's website

-Contact insurance companies for estimates on insurance

-There are some rules of thumb for estimating regular maintenance and cap ex costs. The company I work for manages approx. 100 sfr and small multi-units in the Whittier area (mostly along the 605), and expenses for our units (including common area maintenance, regular maintenance, turnovers, and cap ex) have historically averaged around 40% of rental income. That's not to say yours won't be different, this is just to give you a jumping off point. I've seen other threads on BP discussing rules of thumb for estimating expenses, so search around for those to get some more opinions. Your expenses could be more or less depending on the condition and age of the property, and since this owner doesn't seem to have it together, I'd err on the side of caution and expect the worst. 

Also, plan for property management to be anywhere from 8%-12% of rental income after vacancy. 

Good luck! If you have questions or want to bounce numbers off someone, PM me, I'd be happy to help! :)