Buying multifamily property- how do you know tenants are paying?

Question

I'm interested in buying a few multifamily properties, potentially as big as 30 units.  I have looked at few different deals and every single one of them says the tenants are current and paying in full.  If I were to go under contract, how would I verify this?  I could look at bank statements but some tenants pay by money orders and I wouldn't be able to distinguish between an actual money order from the tenant vs one from an unscrupulous seller trying to make it look like the tenants are paying.

One a separate note, every seller and property manager I have spoken to, which is about 10, have said their tenants are paying in full.  How is this possible with 15% unemployment?  I understand that expanded unemployment benefits have made rent collections higher than expected but I find it hard to believe that no one I have spoken to has non-paying tenants.

Any ideas on how to verify rent collections would be appreciated!

Evan Polaski · Answer

@Suja Nathan, I think you will get a good sense of the seller in general when you ask for any due diligence materials, in general.  If they are hesitant, or not fully disclosing everything, I would give pause over more than just tenants paying.

Beyond that, I would say it is a bit of a leap to assume a landlord is going to buy a money order to deposit and apply to a non-paying tenant. A) a money order is signed by the purchaser, and B) If they do that, they also limit their ability to collect that rent if they needed to evict.

I agree that you trust and verify most everything. I would ask for financials first.  If things seem suspicious than you dig deeper, with more requests.

Bjorn Ahlblad · Answer

I always assume that while a seller may not be deliberately deceptive, but is at least leaving the door open for me to discover the real facts. LOL

I'm not expecting a landslide of evictions; we may get to file docs but one way or another politicians will get involved again and again. They are far too drunk with power at this point to back off anytime soon I'm afraid.

Bjorn Ahlblad · Answer

@Suja Nathan. Make your offers subject to inspection of financials and property, and have your accountant review the financials. The tenant delinquencies are very regional; many areas are enjoying a very high rate of incoming rents. We are still in the early days of the virus and what's true today may not reflect what will be going on in January etc. I think some/most inner cities will be very risky and suburbs will be a safer bet especially row housing and garden style apartments. I'd stay away from elevators and any cramped spaces. All the best!

Suja N. · Answer

I don’t necessarily assume a seller is being deceptive.  It’s more of a “trust but verify” approach.

Suja N. · Answer

@Bjorn Ahlblad @Jimmy Hodges. Thanks for the advice.  I totally agree that the economic uncertainty in the next 6-12 months matters as much as the historical financials.  I still don't know how to detect deception from a seller but given that evictions are going to start up soon maybe that is less likely to happen.

@Bjorn Ahlblad. Great idea to avoid elevator buildings.  Most of the buildings I am looking at have open-air staircases but I hadn't thought about incorporating COVID trends.

Greg Dickerson · Answer

In this current environment you want to get get T-12, T-3, and T-last week. You need to verify economic occupancy up to the week of closing. If you make your contract contingent upon the representations made in regards to collections you are covered if you discover any inconsistencies. In regards to the future of the tenants ability to pay you need to underwrite the tenant, where they work and the company or business they work for to determine your comfort level of future outlook of collections.

Jimmy Hodges · Answer

@Sujata Vaidyanathan You should ask for the trailing 12 months financial statement (T-12) and a copy of their Rent Roll. The RR will give you lease amount per unit per month and show any vacancy for the month that the RR was pulled. The T-12 will show you month by month how much rent was paid so you should be able to analyze the numbers pretty easily to see if tenants have been paying their rent or not.

I would agree that many tenants have been paying on time as of late but that may change over the remainder of this year. With unemployment trends and the stimulus checks possibly ending at the end of the month we could potentially see both a rise in evictions and a fall in rents.