Is it likely to get tax returns from sellers of a 3/4plex?

Question

Hey all,

I'm preparing to purchase my first 3/4-plex and have read a few books so I have a good grip on the fundamentals, but not much "street knowledge". One of the keys that all the books push is confirming maintenance, vacancy, and expenses through the sellers tax returns. They stressed the importance of pro-forma information vs. actual data. In fact, the biggerpockets Introduction to Real Estate Investment Deal Analysis ([url]http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/[url]) page talks about this importance.

However, when I contacted a real estate agent to get me started he advised that in his experience it is highly unlikely to actually get tax returns on 3/4-plex properties and this usually only happens on larger multi-unit or commercial properties.

Is this true? In your experience is it rare to actually get tax returns or is this just a lazy real estate agent?

Thanks for any help you can provide!

David Beard · Answer

First of all, you're not asking for their entire tax return. I have gotten the Sch E's with blacked out SSN/EIN on numerous occasions when dealing with an actual owner/seller (as opposed to foreclosures). If it's a multi-member LLC, the schedule has a different name, as it gets attached to the partnership return (forgot the schedule number, 4797 or something like that). You should also ask for the depreciation schedules (4562), to give some clue as to any capital expenditures that they made the prior couple of years. But it's certainly true that if you don't get them directly from the IRS, or at least from a CPA or other professional preparer, they can easily be forged, as can any kind of reporting they provide. If they have a dedicated bank statement, that is obviously nice to see, but probably impossible to get. The best alternative is when they're using a PM that will provide you the information with their approval. But at the end of the day, your very detailed inspection of the property, and your market research on average tenancy (to determine how much spending on turns) will give you the best read on how much you'll face in maintenance. Heck, the seller may well have been deferring maintenance for years, and the tax returns might look great. Means little to nothing. In fact, low maintenance may mean they know there is all kinds of stuff needing attention, and they want to unload it rather than spend the money. This happens all the time. All things with a grain of salt, do your own due diligence. The thing I'm most interested in from the tax returns is their vacancy rates (ie. economic vacancy) over the past couple of years, to see if they've had trouble keeping the place consistently filled. Sure, they may be lousy landlords, with poor marketing and tenant retention programs, but it's still nice to see what they accomplished. Plus, if their results have been terrible for the past couple of years, then you know that they're poor managers and probably motivated to get rid of it.

Sandy Blanton · Answer

David Beard Joseph Sweeney Steven Hamilton II If the seller won't provide a Schedule E, base your price on the worst possible scenario. A seller will gladly provide them or they're flat out lying on the Schedule E and/or to you about the numbers. An agent that doesn't get them with their listing forms is incompetent and/or inexperienced in selling investment property. IMO:)

Sandy Blanton · Answer

Bow to the tax titan! Steven Hamilton II :)

Steven Hamilton II · Answer

David Beard, The form you are referring to is Form 8825. Form 4797 is for reporting sale of business property. -Steven

Steven Hamilton II · Answer

Steve L., You would not provide the Schedule E only with personal and other property information redacted? That is the most reliable source. He would be looking to find out what the actual expenses are. A quickbooks report can be doctored very easily. -Steven

Joseph S. · Answer

Thanks for replying Steve! I was thinking about getting rental income, maintenance totals, taxes, etc. Is there a better way to get this information? Am I trying to go too deep in this vein? Should I just assume that 50% of the income will go towards expenses/vacancy?

Steve L. · Answer

Joseph - The chances of you getting my tax returns on any real estate transaction are next to 0. I would give you the QuickBooks output for a particular property I was selling. Four or less units, you should just plan for 50% expenses or 40% if you self manage. You might see a little less. What are you planning to figure out from the taxes on a four unit? Utility bills will be the biggest variable.