How to verify NOI when buying? When a seller gives a breakdown of the NOI, what are some effective ways of verifying the numbers are real?
Obviously you don’t want to trust the numbers at face value. Do you request tax returns and balance sheets? Thanks in advance.
[{"id": "hwf6l1o", "text": "Verify revenue through original leases and financial statements (audited is best, NTR is okay). Verify expenses through invoices, utility bills, tax records, and check against your own estimates.\n\nMost purchase agreements have a provision whereas vendors must attest to the accuracy of their deliveries.", "replies": [], "depth": 1}, {"id": "hwf6v6u", "text": "This was posted just a few weeks ago. Many good responses in that thread. \n\nBasically you take what you\u2019re given pre PSA, make offer, under contract you can verify more accurately. Make adjustments to purchase price if warranted. \n\nTax returns can help but not every seller will provide them.", "replies": [{"id": "hwfi7wr", "text": "THIS!\n\nAlso, keep in mind situations where the owner was putting their own labor into the property.  For example, if apartments and no leasing commissions shown, did Landlord provide that service and how much would it cost otherwise?", "replies": [], "depth": 2}], "depth": 1}, {"id": "hwffbc3", "text": "A key part of your contract should be reps and warranties as to validity of Seller provided numbers and your remedies should be significant in the case of a breach of those reps and warranties. (aka have a good lawyer with a good contract)", "replies": [{"id": "hwgl8ry", "text": "This is really the answer. Your due diligence is only as good as the hours or $ you put into it, but a seller rep and warranty gives you some ammo in the event they are not being transparent. Seller says they are providing everything? Then have them put their money where their mouth is.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hwffyqn", "text": "Bank statements", "replies": [], "depth": 1}, {"id": "hwfhxoz", "text": "Request rent rolls prior to making an offer verifying everything you would do in your sue diligence period", "replies": [], "depth": 1}, {"id": "hwfpyyj", "text": "Request the following:\n\n1. Three years of tax returns.\n2. Three years of rent roll (start date, term, options, defaults, etc).\n3. Three years Profit/Loss reports.\n4. Copies of all ratified leases.\n5. Age of roof, dates of repairs.\n6. Age of all mechanical systems, dates of repairs.\n7. Any reports of termites, pests, etc.\n8. Any easements.\n\nPerform your own due diligence: review property tax records, cost of insurance, etc.  If they claim to only offer this information after a ratified LOI, advise them you cannot value the property without the above information.  Anyone serious about selling (or their broker) will already have this information on hand.\n\nAlso, if there are existing Tenants on the property require you have access to them during your due diligence period.  You will be amazed how much you learn about a property and the owner through Tenants.  Offer them a NDA at the beginning of your meeting.  I have withdrawn from two properties under contract in the last three years after speaking with existing commercial Tenants.", "replies": [{"id": "hwi3xzl", "text": "What were the reasons the tenants gave to make you withdraw offer?", "replies": [{"id": "hwpc53t", "text": "One Tenant explained they had leaks from the metal roof.  First, this building had a flat roof yet the owner installed a metal roof (wrong material for flat roof).  I found ponding in three areas.  The owner stated there were never leaks (lie).  Also, ponding on metal roofs is a red flag.  Likely slow long term leaks and the supporting plywood below is rotted already.  Another Tenant stated there were leaks during heavy rain from the front of the building.  This was caused due to weak grouting along the storefront.  I deal with many older buildings and have performed grout and brick pointing projects.  The owner had a handyman come to plaster and repaint the damaged interior walls after each major rain to avoid potential buyers from seeing it.  In this particular buildings two other suites were leased, I learned both were leased to relatives of the owner (likely not paying rent).\n\nAnother property the ground floor Tenant owed the existing Landlord four months back rent.  The owner claimed the Tenant only owed one month of back rent.  If the Tenant can't pay the current Landlord how is the Tenant going to pay me once I acquire the building?  Tenant also mentioned a few details regarding the FF&amp;E which I did not feel comfortable with.\n\nAlways speak with the existing Tenants.  Not only do they offer information on the building, it's an excellent way to garner a relationship if you acquire the property and become their Landlord.  Can also take the meeting to discuss their lease.", "replies": [{"id": "hwqkzbb", "text": "Wow! Good info! Thanks for the info about the roof. I use to be a corporate commercial property manager and now self investing so nice to see it from a diff perspective. I take my time with all my deal analysis. Honestly it\u2019s so easy to get caught up in the \u201churry up and buy before it goes hype\u201d but I stay in control and do an Analysis until I\u2019m super comfortable with my offer and the risks I have seen. Good practice as I will be an owner of commercial property one day!", "replies": [{"id": "hwsdx1k", "text": "It's better to miss a good investment than acquire a bad investment.", "replies": [{"id": "hwsvow7", "text": "Agreed!", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hwi5mdt", "text": "Additionally, for retail tenants, we usually require SNDAs and Estoppels from east tenant.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hwg2t1x", "text": "If you are into smaller deals,sign an nda with the owner.Get the rent roll,CAM Agreements,Utility expenses,Outstanding recoveries statement (for any bad debts or defaults),Lender Financing agreements ,Repair and Maintenance records,Capital Expenditure statement,property tax records and finally do a detailed physical check of the property (for any unplanned surprises).Underwrite your model based on above inputs and voila you have an estimated NOI.\nIf you are into big deals,hire a big 4 firm for the financial due diligence and an IPC for the valuation and physical due diligence.", "replies": [], "depth": 1}, {"id": "hwgaej4", "text": "The problem is that by the time you get all the information from the seller the property os sold!", "replies": [], "depth": 1}]