Watch Out for Owners Using Fuzzy Math on Income and Expense Statements

To be successful in this business, you must be willing to delve beyond the numbers that are posted on monthly income and expense statements when estimating the current market value of rental properties. A word to the wise: When you read a property's income and expense statement, you should always go under the assumption that the owner is probably practicing fuzzy math by fudging on the numbers and telling little white lies to back them up. And I am not the least bit bashful about asking property owners to provide me with verifiable documentation to support the numbers they are claiming on their income and expense statements. Also, do not fall victim to pie-in-the-sky income projections, which overly optimistic property owners often try to foist upon gullible investors. As far as I am concerned, if owners cannot or will not provide verifiable documentation to support their income and expenses, I dismiss the whole kit and caboodle as being 100 percent unadulterated bullspit. In other words, when you come across property owners whom you suspect of practicing their own version of Creative Accounting 101, you should pretty much discount most of what they are claiming on their books as income and expenses. In addition, watch out for property owners using rent concessions, such as a free month's rent to help fill vacancies prior to putting their property up for sale. What generally happens is that the last month in the tenancy, usually after the property has been sold, the free month's rent kicks in. The best defense against being victimized by property owners who cook their books is to take a see-it-to-believe-it attitude and reconcile everything that is listed on a property's monthly income and expense statement against what is shown on:

1. Schedule E, Supplemental Income and Loss, of the owner's latest federal income tax return.

2. The property's latest annual tax assessment income and expense statement on file at the county property appraiser or assessor's office.

3. All of the rental agreements for the past year.

4. Water, sewage, solid waste, gas, and electric bills and receipts for the past year.

5. Repair and capital improvement bills and receipts for the past year.

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