Income/Expense Analysis -Verification

[Phil Kurumunda]

Hi everyone and Happy Thanksgiving. I am working on a few deals and wanted to ask, if there was anyway to verify the income that the seller of the property is actually listing in their current income/expense financials?(to a high degree of confidence). I asked for current leases and they were provided, but would it be too much if we ask for Tax schedules? I asked for the latter and it was outright refused, but concerned that leases could be falsified (I have a friend that encountered this and was attracted to high Caps and COC returns, but after purchasing the property, found out the rents were not as claimed, and expenses were much higher). Some state that getting a "certified" income/expense statement is possible, but the certification came from the seller so back to square one - please advise?

[Kevin Siedlecki]

Not a lawyer here, but if they are refusing to give you tax schedules or copies of actual income/expense reports, that would be a red flag for me. In my experience, I have seen too many people pushing the edge of fraud.

My favorite one was a unit the owner claimed rented for $1200. The tenant mentioned he paid $1000. I asked the owner, who was walking me through the house, and he said, "Yeah, I meant the market rent is $1200. I lowered it for him because he's a good tenant." Of course, I knew the market rent, and he was right, it should have been in the $1200 range. 

I had my realtor to ask for a lease, assuming his $200 discount for a good tenant was a load of bull, and there would probably be no lease. It turned out the "tenant" was his son, and was actually not paying rent at all, just helping with the mortgage when he could. We obviously walked away from that deal, not ready to handle the other surprises the seller might have been hiding from us.

So, yes, definitely be skeptical and ask for as much documentation to verify the numbers as possible. Match up the leases with the actual tenants, and maybe even ask to go speak with one or two. 

So often, real estate deals can be drawn up so everybody involved wins. It's sad that so many people still feel the need to lie and cheat their way through.