What to look for on Sellers Operating Statements
We often get asked by clients what are some of the key things to look for when reviewing a seller’s operating statements.
First and foremost, all of the maintenance related items. These are listed in variety of ways depending on the seller and/or the property management company they employ. Over the years we have seen them be overly complicated with literally dozens of line items to the reverse of only one or two line items. Regardless, as a buyer, you need to be keenly aware of those figures. As a starting place for us here, we look for a figure in the $700-1000/unit per year range to cover all maintenance and unit turnover costs. When those figures are well over or under that range, we take a much deeper dive into the ‘why’. We have a separate article looking at the various elements of maintenance and turnover which you can review. However, paying attention to this category more than any of the others below can save time and headaches on purchases
Second, take a look at management and admin costs. These can be tricky to assess as management companies use so many formats for reporting those costs. For most, companies report their fees on one or two places depending on the size of the property. All will report a ‘management fee’. That cost should range from 4-6%. The higher end of that range will be seen on properties with less than 20 units typically as no onsite management is necessary. The lower end of the range is where they report a management fee as an ‘offsite’ cost and then will have a separate line item(s) for onsite payroll costs. As a general rule, we use 6% for under 20-unit properties, 8.5% for 20-50 unit properties and 10% for 50+ unit properties. These are only guidelines. However, if you see management fees well under 4% or well over 10%, you need to take some time and parse out why. We have seen many cases over the years of over-managed properties with management at 15%+. These are cases where as a buyer you can trim that expense dramatically which might in turn take a marginally good purchase and turn it into a great purchase!
Third, carefully look over the utility costs. This category is a bit of a sleeper since most buyers accept those for what they are. However, if you know the utilities in a particular area normally run $850/unit but this property shows them at $1,200 unit for a similar type property, you need to investigate the cause. Over the past several years we have seen countless times buyers turned good purchases into great buys simply by doing some homework and perhaps getting a water leak test only to find out there were leaks. Once the transaction closes, the leaks are repaired with an instant improvement in cash flow. Moreover, with many utilities, if you can show a leak had occurred and was repaired you can be reimbursed some amount against the leak costs. Another way to uncover possible issues is to look at the historical expenses and whether or not there was a sudden increase. If so, you’re likely culprit is a leak.
The bottom line with each of these categories is the requirement to do some homework on what normal expenses are in those categories in a specific area. As well, you need to take time carefully reviewing the operating data provided by a seller and make sure to ask questions and/or look for potential cost savings which go directly to the bottom line.
If you’re ever interested in having a fuller discussion about analyzing expenses, please don’t hesitate reaching out. We’re always happy to help.
