Verifying expenses and income for 34 unit building

[Josh Sterling]

This would be our first large multifamily deal. (large to me at least). After viewing the property in person we are interested in proceeding with an offer.
I know that the building was purchased for cash by the current owner, and he is offering seller financing.
The occupancy is horrible. I have a rent roll stating 70% occupancy, but the on site manager (looked like Bevis) hinted that it was more like 50%.
All of our single family rentals are in this area, so I am well aware of market rents. I believe that the reason for the low occupancy is that rents are overpriced. (and the lack of a professional appearance for showings)

So my questions:
Income- how do I verify the actual occupancy. I don't want to question their rent roll, but I would have to have an accurate number of paying tenants the day I took over.
Ask for a copy of every lease? Ask for a copy of the most recent monthly bank deposit?

Expenses- this property has owner paid water and heat (baseboard). This is a huge portion of the expenses that I would need to be sure about. Shoud I ask for actual bills? I don't feel comfortable just "taking their word for it" on the expense spreadsheet I got.
What about other contracts/bills for lawn care, snow removal, etc? Should I ask that the owner provide everything?

Lastly, Due to the low occupancy, if I run my numbers with the current income this is a losing deal. How do I decide what occupancy to use for my calculations? I believe with market rents that I can get occupancy to 90% plus, but it will take time. However if I offer based on current occupancy my price would be half of asking.

Any advice would be much appreciated. Thank you

-SR

[Ned Carey]

Josh Sterling Do you have this property under contract? Final verifications are usually done after the property is under contract and during your Due Diligence period. You don't want to spend significant time and money doing the due diligence only to find someone else gets it under contract in the mean time.

If the numbers your due diligence comes up with do not match the offering numbers you are in a strong negotiating position.

To verify actual occupancy I would ask for the sellers tax return or at least the schedule for this property. No seller will overstate profits on a tax return. Also yes I would ask copies of all leases, bank statements and Inspect every apt. to verify occupancy.

Do not take their word for anything. Yes ask the owner to provide everything. If they won't give you the info - walk.

You want to know what the property will generate when fully stabilized. You know markets rents and you feel comfortable you can get to 90% occupancy. You should be able to come up with a good forecast of stabilized Net Operating Income.

Knowing the stabilized NOI you work backwards to get to today's value. How long will it take to get stabilized? What will the cost be? Will it will be worth $1,000,000 when done but will take a year to get there and $120K in expenses? Then work backwards to figure what it is worth to you today. You need to take into account risk, the time value of money and the opportunity cost of that money. The number you are looking for is known as Net Present Value.

Good Luck - Ned