Financial Disclosure and Seller Preparation

The 'books and records review' contingency of purchase and sale contracts requires sellers of investment property to disclose income and expense data.  Sellers should prepare this information in preparation to market their property.

It is important to truthfully disclose financial information on the property and provide supporting documentation.  Many properties are marketed in a less than truthful manner.  While painting a rosy picture can create initial interest, underreported expenses, undisclosed deferred maintenance etc. will be discovered in the offer process.  Purchase and sale agreements for multi-unit properties include a “ books and records” review contingency.  Misleading information will be discovered and potential buyers will walk away.

Sellers should carefully prepare documentation and provide a complete package to the listing agent for presentation to potential buyers and/or their agents.  Having this information readily available helps keep the interest of potential buyers so that they do not move on to the next property.

The seller package should include:

• Current rental/lease agreements.  One set of copies with personal tenant information concealed for the books and records review and a second set with full information to be turned over to buyer upon closing of the transaction.  Security and damage deposit information that is being held is a critical component for determining fund distribution at closing.

• A rental history including dates of tenancy and rental rates

• Documented expenses including utilities for the most recent calendar year

• Extraordinary repair items, include descriptions of work performed, dates performed and receipts

• Income tax information.  If extraordinary repairs/upgrades are included as expenses, this should be noted. If major repairs were performed, additional years may be desirable.  Always show at least the most recent 2 years.

Making this information readily available in a nice presentable package rules out the guess work for buyers.  It also helps to prevent tying up the property in contingent offers while books and records are prepared for review.  Ideally, the books and records can be presented up front so that the review period can be minimized and fall within the time period of the structural inspection.  Sellers should always seek to minimize the off-market time that is the result of contingency periods.

The formats of this information can vary.  A spreadsheet showing property upgrades and dates and another one with rental history are a good start.  A printout from a financial package can also be used. It is usually understood that reported tax information may not be an accurate reflection of income and operating expenses as often items reported for tax purposes are not an ongoing part of the building operation.

When I market a property I can make this information readily available to prospective purchasers or their agents via my web site.  Few agents do this.  I have worked with buyers of such properties in the past and found that typically one needs to play phone tag with the listing agent and often wait several days to get the required information.   By making this information readily available and in a nice presentable format, I facilitate the sale of the property and often can bring in multiple offers.

Occasionally,  income and expenses on a given property or units within a given property are very much out of line with market conditions.  Often this is a result of long term tenants with few rent increases.  Under these situations, a set of  ‘Pro-Forma’ numbers can be used to market the property.   The Pro-Forma numbers are a educated representation of what the numbers should look like.  I have successfully marketed properties using pro-forma numbers and proper legal disclosure to get top dollar for listings.   For legal reasons, sellers should not attempt this themselves.  Only a Realtor should make representations using pro-forma numbers to market your property