So you’re going through the due diligence of purchasing some commercial real estate and you’re verifying all the leases. You have pieces of paper that are signed and dated with social security numbers, employment info, background checks… the whole nine yards. The seller is a nice guy and tells you that these leases show that the property he is selling is 95% occupied. You think to yourself, “Wow. This is really a great bargain!” Not so fast…..
This is the one area where sellers can trick you more than anything else. It’s pretty hard to hide the physical problems of a property once you have a professional inspector look at it. It’s VERY hard for the seller to explain away extremely low expenses while the management company is telling you a whole other story. Where the seller can and will cheat you is with the leases. This is the one area you have to be extremely careful with!
So, how do you know that a lease is really a lease and not just a piece of paper? The real answer? If it’s managed by the owners, you don’t. Of course, there are a lot of tricks that you can try to pull like knocking on all the doors and inspecting each and every unit, or you can look at all the electric meters to see which are on and which are not…. but that still doesn’t mean that the inhabitants are actually paying rent.
There is actually only one way to really know if a lease is a lease and that is to involve a third party management company. No property management company that is worth their salt and wants to stay in business and not get sued will lie about the rent rolls. This is a very surefire way to audit the leases. Granted, there may be exceptions to this rule in situations where perhaps a huge company is selling off some of their properties and they are managed by their own in-house management company, but even then extreme caution is advised. You may wish to negotiate the deal in such a way that a management company that is mutually selected must manage the property for a couple of months prior to closing to see how it effects the occupancy. You can then base your cash flow analysis off of sound, audited numbers.
There are still some good investment deals out there if you can find them. If you need help finding some, please visit our website at http://www.invesco.info and leave your contact information so we can respond to your request.
IVESCO/Virtual Banking Companies Unlimited, LLC is a Portfolio Selection Agent for an International Private Placement Trading Platform. For additional details on our investment opportunities, please visit our website at http://www.invesco.info and register your contact information so we may respond to you promptly.