The seller does his own accounting and do not want to provide sch. E. how do I verify his financial if no sch. E provided and no accountant involved?
should i just ignore his expenses and use my own estimate? Thanks.
Even if he does provide numbers its probably best to assume they are BS. Assume 45-50% of gross rents as your expense numbers. Will the remaining 50% cover your estimated mortgage payment?
How about for a small office building? Should I assume the same 50% or so in operating expenses as well?
I have no idea as I don’t really know much about office space. I do know however that the expenses have a lot to do with who is obligated to pay what (maintainance, capital expenses, etc). I’ll let an office building pro answer the rest of your question.
But the actual expenses still need to be reviewed, correct? Say, if the actual expense is 60%, we would want to value that property based on that, not based on the 50%, correct?
Ideally, helpful sellers will provide you details of all their costs, not just their Schedule E line item summary. Even when disclosed though, you must verify all significant expenses and anticipate others.
Many items such as taxes and utilities can be verified by going to the controlling authority (tax assessor, gas company, etc.). A new insurance premium can be quoted through your agent. Maintenance charges are the wildcards though. Here the seller has the discretion to show or withhold anything. For obvious reasons, it’s in a seller’s interest to inflate maintenance charges on a Schedule E and withhold some (or all, in this case) when presenting them to you. Alternately, high expenses on a Schedule E can be real.
Absent any details, I would not use anything less than 50% for expenses. Especially if it appeares the seller is obstinate. You must use your judgment here. And yes, you value the building based on that – even 60%, if that is accurate. Unusually large expenses, say 60%, can indicate a profit opportunity if you are able to manage the building more effectively. One would hope that a good inspection will turn up any unusual maintenance issues. Be sure to ask for all maintenance contracts and to call these vendors.