After the purchase and sale agreement has been signed, it’s time to start reviewing the documents. If you are buying a single-family home that has not recently been used as a rental, the documents you receive may be minimal. However, if you are buying a rental house, a multifamily property, or a commercial building, you’ll likely have a lot to review.
As I mentioned at the beginning of this chapter, the purpose of the due diligence process is to make sure you are actually buying what you think you are buying. Inspecting the paperwork is a good way to do that. The seller may claim that the property’s tax bill is $1,500 per year, but how would you know for sure if you don’t investigate? They may say the property rents for $675 a month, but how would you know if you don’t check to confirm this?
The following is a list of documents you may receive from the seller. Keep in mind, not all of these will be used in every situation, because it largely depends on the type of property you are buying. However, I’ll list the most common possibilities here so you can know what to keep an eye out for.
10 Seller Documents You May Need to Review When Buying a Rental
1. Seller Disclosures
Most states, if not all, require that the seller disclose any known defects in a property before selling it. Therefore, in most deals you purchase with the help of a real estate agent, the seller will give you a pile of forms in which the seller lists anything that might be wrong with the property. You’ll want to read this document carefully, so you’ll know immediately about any issues with the property that the owner knew about. Of course, the large loophole here is that the owner must know about the problems, so this should not take the place of your doing your own investigation on the property’s condition.
2. Seller’s Tax Returns
One of the most powerful tools you can use to determine the truth about a property’s financials is the seller’s tax returns. A seller will not likely make a property look extra “cash flow-plush” for the IRS, so tax returns will likely be the most accurate representation of how the property really performs. To get these, simply ask for them! Look for any discrepancies between tax returns filed and the financial information provided by the seller, but also recognize the difference between aggressive tax write-offs and deception. If you find inconsistencies between the numbers they provided and the numbers on the tax returns, you’ll want to dig further into this.
3. Current Leases
If the property is an existing rental property, be sure to dig through the…