This post is the third in the series “Buying Real Estate for Cash Flow.”
When purchasing a piece of real estate you’ll typically receive a pro forma statement from the seller or the listing broker. The pro forma statement lists the projected (on paper only) income and expenses for the subject property.
How useful is the pro forma statement? Will you get the returns shown?
The answer is NO, you won’t get the returns shown and the document is only sort of useful.
In the real estate industry the pro forma is informally known as the seller’s “liars statement“. This is because the sellers are NOT generating the returns they project. If they were, why would they be selling? You can verify this by reviewing the tax returns for the subject property.
The pro forma is used as marketing for the property and shows the unrealistic scenario where everything works out perfectly for the new buyer. This NEVER happens. Instead, there are plenty of real estate expenses not listed in the pro forma.
The rule of thumb is: when purchasing an investment property, the sellers never tell you about ALL their expenses, so assume whatever they do show you is only part of the story. I’ve even heard of seasoned real estate professionals doubling whatever expenses the sellers disclose to the buyer.
Make sure to review the prior post on the many real estate expenses commonly left out of the marketing pro forma for the property.
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