How do you verify a rent roll from a mom and pop owner?
I’m used to underwriting institutional multifamily deals where there’s little skepticism on in place leases but when trying to underwrite a small mom and pop apartment building how do you verify their rent roll that is clearly just manually typed into a document. Thanks.
[{"id": "iynahps", "text": "The amount of fraud in the multi-family sector is astonishing.  Unless you're interviewing each tenant, looking at their bank records, measuring apartments yourself... \n\nIf you're buying, or representing a buyer, this is probably the time to do the extra leg work.", "replies": [{"id": "iyrml39", "text": "TY, Curious if you could provide some examples?  I have not seen outright fraud in mom and pop multi-unit deals, certainly incomplete and missing information always in sellers favor.", "replies": [{"id": "iyrnxh5", "text": "A 30-unit apartment building where the rent roll has all Hispanic names but when I look at a few units the residents are Chinese?  $2,000 per month rents in a POS 3-flat apartment building in Waterbury, Connecticut?  No lease, no proof of payment, nothing.\n\nI've delt with sellers who don't even think an accurate bedroom and bathroom count is necessary.  Rent rolls with a bunch of names and rent, nothing else.", "replies": [{"id": "iyroe5n", "text": "Thank you good sir. Personal due diligence is the key.  I\u2019ve always been amazed when people buy out of state properties site unseen - a foolish practice.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iynd4jz", "text": "I would ask for bank records. If the cash is being deposited it should line up in theory to an extent. And then just compare against margin notes like xxx apt was late and will pay next month etc. wishful thinking I know but it\u2019s worked for me in the past.", "replies": [], "depth": 1}, {"id": "iynfv5q", "text": "Are you a broker?\n\nTake it at face value until you get leases. Sounds like you're not in contract and don't have an offer on the table yet. Leases are step one.", "replies": [{"id": "iynmj7p", "text": "As stated here, it's nearly impossible to confirm/ verify the numbers until you have leases in hand. I've seen owners/ brokers circulate total bs information - it's actually comical sometimes.", "replies": [{"id": "iypoz89", "text": "And leases don't always mean rent is coming in, so bank statements showing deposits are important.", "replies": [], "depth": 3}, {"id": "iyqh1r4", "text": "This is very true, some of these brokers are complete idiots with the documents they submit. I come from an investment banking back ground, and the broker from the sell side submitted a bs RR pieced together on an excel sheet which was a joke.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iynh9fu", "text": "Bank statements.", "replies": [{"id": "iypgzw6", "text": "Yep this.", "replies": [], "depth": 2}, {"id": "iypt1xm", "text": "Bank statements reflect collections, not rent roll. Big difference during Covid lockdown when people stopped paying. If it is a small apartment OP probably could also look at all the leases, and do a spot check on vacant and occupied units from the appraisal or personal inspection to make sure vacant units line up with the rent role.\n\nI knew a company that would have the accountant do a spot check of vacant units to make sure property managers weren't letting their friend crash there for free for a couple months.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iynpmpk", "text": "Estoppels from the tenants could help. I see them mostly in commercial deals, but I don't think they're prohibited in residential cases.", "replies": [{"id": "iynutqf", "text": "Most residential leases have it as a term of the lease. You can't force a tenant to comply but it is in their lease", "replies": [], "depth": 2}, {"id": "iyqgdhr", "text": "What if an estoppel was submitted, tenant responded, but didn't disclose anything about not renewing, and then on the day of closing the tenant mentions that they are leaving in 30d. \n\n*this is on a commercial office lease, said tenant is 20% of the rent roll.", "replies": [{"id": "iyseib8", "text": "If the buyer is doing due diligence now, I'd expect the sale to be relatively soon. The esoppel should include details about renewal options and when they need to be exercised. If the notice period has lapsed without any notice to exercise and the seller hasnt offered a renewal, the seller can assume the tenant is not renewing. Getting financial details from the seller wouldn't prevent a non-renwal scenario and getting an estoppel would provide more details of the lease terms so the buyer can make reasonable assumptions.", "replies": [], "depth": 3}], "depth": 2}, {"id": "iysel10", "text": "I'd be interested to know why this comment is getting downvoted.", "replies": [{"id": "izamnvd", "text": "Which comment?\n\nEdit: oic ... Reddit ui/ux thing...", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iyns8rn", "text": "Is the RR certified? Can they certify prior to closing? Attach the RR to the loan agreement. I'm guessing if they were to provide false information in an attempt to obtain a loan it would be considered fraud. Will a property inspection be completed?", "replies": [], "depth": 1}, {"id": "iynunmt", "text": "Estoppel signed by tenant", "replies": [{"id": "iypt8yv", "text": "This is the way.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iyo00uv", "text": "Follow Freddie SBL guidelines. Randomly select the greater of 10 units or 25% of units from the rent roll for a lease audit. Collect the leases and see if they match. \n\nFor inspections randomly select 10 units +/- (at least one of every unit type) plus all vacant units. Post-inspection obtain leases for any inspected units that you didn\u2019t already collect leases for. \n\nIt\u2019s not an SBL requirement, but T-3 bank deposit statements (or full account statements if you can get them) are the best way to confirm collections.", "replies": [], "depth": 1}, {"id": "iyou93f", "text": "How did they collect rent? If its through a proper management system it should have a good clear record.\n\nIf it was cash or cheque, then via their bank records?", "replies": [], "depth": 1}, {"id": "iypfz0o", "text": "Brokers prepared spreadsheet\u2026 Ouchh \nIf you are under contract, leases, bank statements to confirm money is come in\u2026 tax returns\u2026 \nYou can send estoppel to validate the lease and the real number will confirm.", "replies": [], "depth": 1}, {"id": "iyph3rb", "text": "Estoppel", "replies": [], "depth": 1}, {"id": "iyphmuf", "text": "I mean, leases? Don't you have a copy of all the leases as part of the purchase? Or are they month to month verbal deals? Either way, the other responses of estoppel agreements are correct. \n\n1. Get the rent roll (done)\n2. Get the leases and compare\n3. Have lawyer draw up estoppels for all tenants and have them sign.", "replies": [], "depth": 1}, {"id": "iypiywa", "text": "Verify leases and deposits.", "replies": [], "depth": 1}, {"id": "iypjt7k", "text": "You don\u2019t, you project market rent for that situation", "replies": [], "depth": 1}, {"id": "iyptxyv", "text": "Schedule E.", "replies": [{"id": "iznr3i6", "text": "No one has every lied to the IRS!", "replies": [{"id": "izo753o", "text": "The good part about that is they would under report, so its the worst case scenerio.", "replies": [{"id": "izo8mhu", "text": "True. And If you have the leases and you or your agent gets signed tenant estoppel\u2019s, I\u2019ve never had an issue.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iyq3u7u", "text": "Estoppel certificates", "replies": [], "depth": 1}, {"id": "iyqzyuo", "text": "Take it at face value.\n\nDuring due diligence, acquire copies of leases to verify. If no lease available, have the tenants sign a confirmation of their rent. (Amount, term, deposits held, etc.)\n\nUse any discrepancies as a negotiation point to bring the price down.", "replies": [], "depth": 1}, {"id": "iyrlxrc", "text": "You need to get a hold of leases. Then bank statements. I assume there are no abstracts but the lease is to determine the rent roll.", "replies": [], "depth": 1}, {"id": "iz0w1t1", "text": "You underwrite what they give you and ask for supporting docs like the below. You will underwrite to a return basis and not make any commitments, outside of your underwriting time, until you get the supporting docs. If the rent is light adjust price to be at same return metric, you were hitting based on what the landlord gave you. If it is a value-add deal and or you can get the rents to where you need them to be you need to assess the risk/reward of a retrade. I.e. losing the deal that still works. \n\nPhilosophically it would be helpful to ask hey why the discrepancy because you want to know who you are dealing with in terms of honesty.", "replies": [], "depth": 1}]