I’m under contract to purchase a park and the seller will not supply the tax returns for the park. Assuming I could get comfortable establishing gross income via other means (copies of deposits, etc.), are there any lenders that would even look to lend on a park with no returns? The bank I had been working with will not. The price is 1M so loan size of around 700K.
Are they saying WHY they won’t release the tax returns? This would raise a red flag for me.
There are very few banks that would lend on this scenario.
I would move on.
Usually means that they have been under-reporting income for their cash business.
A local bank may underwrite based on leases for income.
Rare. But worth trying.
He is saying basically it is an intrusion into his financial life and unnecessary, that he owns 8 mhps and never once got any tax returns from the sellers.
As posted he is very likely understating income/over stating expenses on his park, this is very common with real estate investors, and is afraid that you will use his tax information to lower your offer.
The fact that he is a poor business person, having never requested tax returns, is not really relevant to you.
If he wants to sell I would make releasing his tax returns for the past 3 years mandatory to proceed with the deal or alternately suggest he is hiding something and lower your offer to protect your position.
Advice base on you being prepared to walk away from the deal.
I may be able to help but I would definitely need the rent roll and last two years P&Ls. If seller can’t provide them, then it’s a no go.
He’s probably not releasing his tax returns because:
-He’s cheated on his taxes (most likely)
-He hasn’t cheated on his taxes, and has lied to you, and the property doesn’t make nearly as much or have the occupancy that he claimed.
-Or, some combination of the above
If you’re using bank financing, explain that the bank will require tax returns, and the deal is dead if he won’t release them (and won’t do seller financing)
If you’re using seller financing, it’s up to you how comfortable you feel about the property’s actual income and expenses, and if you feel you’re getting a good enough deal on the purchase to hassle with this sort of stuff.
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Could be someone skeptical as well so where everyone might pass on it, you might try and work through the hurdles that everyone would have to.
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Question: does your contract state that he will provide tax returns in diligence? If not what, exactly, does it state WRT the seller providing diligence items? We were in a similar scenario once - the contract stated and the seller agreed he would provide a number of documents he later refused to (including tax returns). We used this as negotiating leverage to both a) refuse to release him from diligence and cancel the contract [the contract had an open ended diligence clause] and b) hardball negotiate down several hundred thousand dollars. In the end the deal was a slam dunk home run and worth every penny of paying cash and refinancing later after proving up the numbers.
I want a copy of your contract! Ours didn’t specify what items we were to receive before due diligence; that was laid out in a due diligence request letter we sent a few days later. Our contract simply said that due diligence would not begin until all requested documents had been received.
I have passed on two parks because of this. One was under contract in the early stages of due diligence. I think the owner is actually someone on these forums. Oh well, I see that his park is still for sale.
I’d say it’s a big red flag if they are not willing to release this info. Everyone knows that people understate income on their taxes, an intelligent seller knows this and the buyer should realize this isn’t necessarily a negotiating tool. Compare the tax returns to bank statements for better info in my opinion.
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I was in this exact situation a year ago, and I wasted a lot of time. After the bank spent a month and wouldn’t loan, then pop decided he wouldn’t owner finance. So the deal sat and sat until a cash buyer scooped it up at a good price.
My advice: renegotiate the contract to the point where a bank can lend on a very strong proforma, or move on.
I like to provide a list of the DD items I’ll need in the negotiation phase, before I write it up. That way, they have a heads up about how much is going to be required in the actual purchase agreement. IDEALLY, you get a lender to put that list on their letterhead, so Seller knows you’re not pulling it out of your…
If Seller won’t release tax returns, he’s hiding something. Banks won’t like it. Will he provide 3 years of bank statements? That might overcome the bank’s resistance on the tax returns. I want to see every dollar getting deposited. If the amount that is supposed to be deposited is not (cash taken and put in pocket), then you need to renegotiate the purchase price based on what the banks statements (and tax returns) show.
I’ve actually made an offer before based on the tax returns: “Purchase Price: $1,000,000, or 11 times the Net Operating Income shown on Sellers Form 8825 or Schedule E for the preceding tax year, whichever is lower. For the purposes of this paragraph, Net Operating Income is defined as the amount shown on Line 17 of Form 8825, less Line 4 (auto and travel), Line 9 (interest), and Line 14 (depreciation).”
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I like the strategy, in certain situations , to provide the DD list ahead of time. For some people its “sticker shock” but it takes out the surprises. As of late, thats what I have been doing with contract submission just to be straightforward. Hey we want to buy and we are serious but these are a few things we are going to need. I also say that many of the items will cross over to the lender if there is one involved but either way, you have to know if people are on year leases, what utilities to xfer, etc. Its all really legitimate .
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This could be an opportunity. If you can get enough"other information", you can still make it work. I would consider trying to extend it and find private financing if all numbers available look good. People hide a ton of cash. I once had 2 tax accountants on a commercial property that were selling their property to us. They privately showed us 2 sets of books!!! These were tax accountants who were skimming, not paying sales taxes to state, etc!!!
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Run, don’t walk. He’s hiding something or scamming you.
Tax returns don’t necessarily tell the story. They are for the IRS, not for a buyer but can be important to verify certain things or find omissions on the income statement as it was presented.
Under reporting income is a crime. Deducting everything you possibly can is not and can be exploited as a tax minimization strategy.
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I’m looking at a park with the similar issue from the owner… Though there reasoning for not giving the taxes is do to multi businesses under same name. The broker is claiming that no one can make heads or tails of them. Also 2 buyers before had banks walk away at the last minute. I’m assuming this is due to non tax release???
The park is a bit over priced in my limited experience, though it has ability to scale with minimum investment.
Suggestions of ways to look at the books or other info to get a better “big” picture of things?