How to verify rent roll during due diligence period
Just closed on my first CRE (storage) and learned that half the rent roll has invalid information - either numbers or addresses don’t work or don’t exist. 

When we pushed during the DD period the previous owner said that’s all they had, yet they still collected rent so something is there. To be clear, we knew this was a turnaround and that’s the value add opportunity we wanted to take on despite the work upfront. We are still working with the previous owner so not all is lost. 

That said, how to best verify it in the future? Obviously I can’t call all tenants to see if they’re real.

Edit: I should add that we checked tax records, P&amp;L and compared to what was supplied with rent roll. No lease agreements are in place and most tenants paid through either Venmo/PayPal/Cash app or cash/check.
[{"id": "htr0eec", "text": "That\u2019s exactly what you do?\n\nYou call all the Tenant\u2019s during DD to introduce yourself, build a relationship, but most importantly ask how are sales, etc.", "replies": [{"id": "htr36he", "text": "To clarify, be sure you have the right to do so in the PSA. No seller will just let you contact his tenants without structure.", "replies": [], "depth": 2}, {"id": "htrn830", "text": "This is easy for a commercial property as the tenant-landlord relationship is critical, but is it really that simple for a large self storage or multifamily property where you had potentially hundreds of tenants who may be of lower quality and hate landlords? Obviously most will be happy to help but I imagine it gets hard to tick 100% of the boxes.\n\nHow do you get a hold of and get signed documents from someone who resents your entire profession?", "replies": [{"id": "htto6b5", "text": "I know someone who purchased a self storage facility recently from a mom and pop. He spent the entire week calling every single tenant (hundreds) and verifying information. So yeah get on the phone", "replies": [], "depth": 3}, {"id": "httxloq", "text": "It\u2019s very simple- you request access to all of the leases on file for the current rent roll and verify the every tenants income, credit, contract rent in the lease vs. what\u2019s on the rent roll, and what their background check revealed. That is a very normal part of the process whether it\u2019s 50 units or 500 units. Sure it\u2019s tedious, but your buying millions of dollars of real estate. Imagine if this original poster had investors in this deal and came back to them saying \u201cwe thought verifying the net rental income for this acquisition was tedious so we decided to trust a sketchy sellers word for it\u201d. That\u2019s a good way to get sued", "replies": [{"id": "httye3o", "text": "I\u2019m not saying you shouldn\u2019t check the available documents - my comment was in reference to getting signed estoppels from every single tenant.", "replies": [{"id": "htujocm", "text": "It\u2019s almost nonexistent to see a clause in an apartment lease for &gt;50 unit deals that requires a tenant to sign an estoppel certificate in the event of sale or refinance.", "replies": [{"id": "htx48pw", "text": "Ok so that was the whole point of my comment which was replying to a chain about how estoppels were the solution here. They aren\u2019t actually.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "htr2dxf", "text": "Verify through bank statements and match it with the gross rents in the rent roll", "replies": [], "depth": 1}, {"id": "htr3b3f", "text": "Perform better due diligence.  Never take the Seller's word on anything.  Each investment property I have under contract access to the Tenants is required during study period.  I also require large amounts of documentation.  If the documentation isn't available I walk away.  Too much of a risk.  The last two properties I had under contract I withdrew during the study period from uncovering crucial information the Seller was hiding (or lying about).\n\nAt this point, you could attempt to state the Seller presented fraudulent information.  However, you need to consider if it's worth it.  Documents for due diligence: Three years of tax returns, three years of profit/loss reports, three years operating expenses, three years of rent roll, ratified leases (with addendums), documents showing age of roof, all mechanical systems, etc.  \n\nIt's better to miss a good investment than purchase a bad one.", "replies": [{"id": "htrhgss", "text": "Also, make sure to double check the budgets on the expenses, how they handle CAPEX reserves, and anything else relative. I\u2019ve seen the family vacation rolled into the CAM fees before. \n\nThe kind of due diligence practice that Embers mentions should echo through all of your business - buyer, tenant, seller, or landlord rep. Financial documentation has killed deals, but saved clients from having to impose litigation; everyone\u2019s seen the dreamer tenant with no money in the bank try and sign a 7 year deal.", "replies": [], "depth": 2}, {"id": "htrsgje", "text": "Updated the original post since I didn\u2019t explicitly say it, but we did review three years of taxes, P&amp;L, maintenance and rent roll. Numbers all match which is what gave us the confidence, but contacting those individuals and learning if anything has changed since what was originally provided is the challenge. As someone else said, verifying dozens of individual units for storage prior to sale is impractical and requires special authorization. I guess my point is beyond these basics, what are better methods when the numbers are significant. \n\nTo your point about fraudulent information, I certainly could have my lawyer send a letter and maybe that\u2019s necessary, but I\u2019m saving that for a worst case scenario since they are responding - albeit slowly and in piecemeal.", "replies": [{"id": "httvtzb", "text": "Don\u2019t do self storage deals, but am confused why verifying dozens of storage leases is impractical. Work in multifamily and we conduct lease audits on 100% of the rent roll regardless of the unit count when screening acquisitions. \u201cSpecial authorization\u201d to do that is a very normal part of the DD process. Not sure what the deal size is here but there is a plethora of 3rd party companies that will do that for you for a $10-20k fee, which is pretty minimal and has no material effect on returns.", "replies": [], "depth": 3}], "depth": 2}, {"id": "httutrk", "text": "Im not sure this buyer could claim fraud if the seller never signed any reps &amp; warranties on the financials. In addition, it\u2019s pretty clear the buyer never attempted to request critical information. Just a bad buy all around.", "replies": [], "depth": 2}], "depth": 1}, {"id": "htr5irx", "text": "Tax records, bank statements, and always get estoppels signed.  I\u2019ve had so many scenarios where everything looked good until we asked for estoppels.", "replies": [], "depth": 1}, {"id": "htr5xzb", "text": "I once knew a man who bought a bed and breakfast in Vermont. It was failing. Maybe 80% vacancy. The ENTIRE guest book was forged. They found out really fast when absolutely nobody came to stay there over the first 6 months. \u201cBut the book said it was full!\u201d \u201cI don\u2019t know why all these phone numbers listed are just dial tones.\u201d\n\nBe careful out there.", "replies": [{"id": "htvv7q6", "text": "When buying that type of business, I would have thought that simply observing the typical customer flow would be a part of due diligence. Heck, just sit outside on a Sunday morning during busy season and watch the people checking out. Did he buy it sight unseen?", "replies": [{"id": "htvz277", "text": "No he visited 3-4 times.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "htr6ejz", "text": "Estoppels", "replies": [{"id": "htrariq", "text": "By definition, an estoppel certificate is \u201c\\[a\\] signed statement by a party (such as a tenant or mortgagee) certifying for another's benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date.", "replies": [{"id": "htrf527", "text": "On a commercial residential real estate transaction, lets say 100 unit property,  there is typically a signed lease with the tenant, is that the estoppel? Or, is the buyer expected during due diligence to personally go and get a signed document from each of 100 tenants that says they are in fact paying tenants? I know there is such thing as a unit walk during due diligence to go and inspect every single unit, is that when they would get an estoppel from the tenant so they can compare it to the leases in the lease audit phase?  I'm thinking of the times I have heard some people say they walk every single unit, and others say they only do spot check of some percentage of units.", "replies": [{"id": "htrowhs", "text": "Estoppels are new documents that basically have the tenant certify that all of the terms under the lease are true and whether there are any disputes - AT THAT POINT IN TIME. If the tenant signs it, then the new landlord (and lender) are protected from any claims from the tenants. Typically, you don\u2019t get 100%, usually 60-70% of tenants\u2026 definitely want major tenants that are a significant portion of property rent. This of course doesn\u2019t protect you from future disputes but as the new landlord you have control and as the new lender you have other mechanisms in your loan agreement to enforce proper operations / remedies for defaults etc with the new landlord. Estoppels are not a perfect silver bullet - they\u2019re just one piece of DD  that fits into the puzzle.\n\nYou don\u2019t get estoppels on residential tenants. Those you have to verify by conducting a physical inspection of every unit, checking paperwork, potentially getting an indemnity from the seller or an amount held in escrow or something like that.\n\nApartment rent rolls are super granular and you typically don\u2019t have tenants leasing more than 1 unit (ex corporate leases for multiple units), so unless there is wholesale fraud being committed, the chances of having a huge portion of your rent roll be in default and not knowing about it from basic A/R reports is low.", "replies": [{"id": "htrq9bt", "text": "Thank you, I assume storage might have commercial and non commercial uses, and the commercial uses might be more appropriate for estoppel, where typical residential if called that, might not.  My storage unit was purchased recently, I was never asked to sign an estoppel, I just got the notice that ownership was changed and a rent increase!  Gotta get that NOI up ASAP!  lol.", "replies": [], "depth": 5}, {"id": "htsa0qw", "text": "Just to tack on to this the tenant is typically required under the lease to sign an estoppel or document the issue.  So sometimes its less of an ask and more breaking the lease if they ignore it.", "replies": [], "depth": 5}, {"id": "htsjs5l", "text": "Some years ago I sold a largish property in Central Maui with 11 single family residences and a two story commercial property all on the same lot. We got estoppel signed from each and every tenant. (Side note - back in the day, more than ten years ago - it was considered a big ticket sale at $1.4 million, today, same property, even more deferred maintenance and much higher rents you'd be looking at a number closer to $7 to $9 million or more, with the buyer likely intending to tear down existing homes/commercial bldg and put market rate condos or high end Sr. living. Go figure)", "replies": [], "depth": 5}], "depth": 4}, {"id": "htvjtya", "text": "Usually the seller would either provide a copy of all active leases, or if a tenant is mi to to month an estoppel  document would be provided. Never buy a commercial property without either of these documents for each space.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "htrm6t7", "text": "Estoppels don\u2019t exist for storage.", "replies": [], "depth": 2}, {"id": "htvenl4", "text": "Good luck getting &gt;25 storage tenants to execute an estoppel during DD", "replies": [], "depth": 2}, {"id": "htvtba1", "text": "YES!!", "replies": [], "depth": 2}], "depth": 1}, {"id": "htr76gx", "text": "Ask tenants directly. Then ask the seller to provide bank statements showing tenants aren\u2019t in default.", "replies": [], "depth": 1}, {"id": "htr7oxk", "text": "You get signed estoppel certificates, that\u2019s your recourse and protection. Would never advise a client to buy a multi tenant property without them.", "replies": [{"id": "htrjeum", "text": "I've never dealt in storage but do you really reach out to each individual renter and get an estoppel?  That could be hundreds of estoppels and no  way to push renters to sign them.", "replies": [{"id": "htt5vk2", "text": "Ah I missed it being a storage facility. Honestly probably not worth the effort in that case.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "htretym", "text": "I have never worked on self storage asset before, but maybe as part of DD, you can match up payment receipts with spaces and copies of agreements due to transient nature of customers....and conduct a small pool of phone/email validations to get comforable.\n\nMy take on self storage business are (based on using it for 3 mos):\n\n\\- previous owner's poor management/data maintenance (making it a value add)\n\n\\- location/demographics/transient nature of self storage customers. While some people just don't have space in their home so they rent storage. Others are in the process of moving, temporarily out of the area, or have personal/financial problems requiring them to put their stuff in storage so their address may not be useful.  \n\n\\- given many/most self storage customers autopay (which is a draw for some investors), I'd think there's little incentive to maintain good data (i.e. customer address) except for timely payment.  So long as you can validate receipt of payment for a particular space, shouldn't that suffice?  I'd think the only critical data points are customer name, email/phone, alt name/email/phone, method of payment and whether paid on time or not, aging, agreement start/end.\n\n\\- environmental issues (i.e. RV/boat/etc storage) as well as such temp/variable usage that can/cannot be validated (i.e. cash)\n\nAgain, never worked on self storage...just rambling.", "replies": [], "depth": 1}, {"id": "htrm48q", "text": "Bank statements against management reports.", "replies": [{"id": "htrv284", "text": "Exactly with bank statement you can verify the rent roll", "replies": [], "depth": 2}], "depth": 1}, {"id": "htrua6f", "text": "For storage I would call a random sample of maybe 10% of the rent roll and verify their rates and how they pay, with seller permission of course.", "replies": [], "depth": 1}, {"id": "htryw44", "text": "There are many good and informative answers here. If there are no estoppels available for this product type, escrow still typically has the Seller and sometimes the seller and broker's sign a rent roll that breaks down monthly rents and deposits and the seller signs stating it is a true reflection of the current rent roll at the time of closing. Escrow uses this document to prorate any rents from seller to buyer and also uses this document to transfer any security deposits from the current owner to the new owner. Technically, by signing this document and if you are able to verify a large portion of it was incorrect or inaccurate, it would be for a court or mediator to decide if there was FRAUD an behalf of the seller. \n\nPersonally, if the tax returns matched the P&amp;L for a 3 year period, I would also have been comfortable moving forward in the transaction. I would also think that based on some of the information you had shared, the previous owner would be helpful in answering any questions you may have and in helping you sort out discrepancies because they are in a sense on the hook for FRAUD if they signed and certified a rent roll through the escrow prior to closing.", "replies": [], "depth": 1}, {"id": "hts7r0r", "text": "Ask for a schedule E on there tax return", "replies": [], "depth": 1}, {"id": "hts8r7z", "text": "Also bought a storage facility and I called every tenant. Buyer did not like it but I did it anyway.  Most of it turned up legit. Then of course upon taking ownership, asked all tenants to join online autopay system.", "replies": [], "depth": 1}, {"id": "htscyc5", "text": "Visit the tenants and ask them whatever questions you seem to be lacking info on.", "replies": [], "depth": 1}, {"id": "htsmcl5", "text": "Bank Statements", "replies": [], "depth": 1}, {"id": "htthok1", "text": "When I appraised a self storage facility, I counted the locks during the property inspection.", "replies": [], "depth": 1}, {"id": "htttst0", "text": "Yeah auditing bank statements to the rent rolls is a good start; however, that should be done pre-acquisition. If a seller isn\u2019t willing to provide those  l\u2019d walk away from that deal 10/10. Also was there no reps &amp; warranties on the financials? This sounds like you completely ignored very critical parts of DD. All of this should (and pretty easily) could have been discovered pre close and baked into your underwrite", "replies": [], "depth": 1}, {"id": "htx9ajy", "text": "Estoppel certificates are the typical mechanism, but you won't get those from storage or multifamily tenants.  The alternative is a rent roll certification in the PSA at signing and closing.  For there to be teeth to that, the PSA needs to permit post-closing claims for an inaccurate rent roll + guaranty from seller's parent company + fraud carveout for any floor limitation on claims.  While post-closing claims are rare, the teeth in the language is a stick to induce accuracy from seller's pre-closing.  With the exception of the parent guaranty, balking at that language is a red flag.  But no contractual carrot or stick is going to trump the quality of your diligence -- a lot of the insight on this thread on conducting a careful audit and making the most of your inspection period is quite good.", "replies": [], "depth": 1}]