Kicking the tires on a real estate deal involves more than just reading a financial statement: everything from management agreements to delinquency rates to insurance premiums all factor in to the due diligence process, though not every seller will necessarily want to reveal this information, said a speaker at the FAE's Real Estate Conference today.

Sandra Adam, a director at RSM who specializes in real estate transactions, said the due diligence process begins shortly after the signing of a purchase or sale agreement, and generally lasts about two to four weeks , though she said her own work product needs to get done typically within seven to ten days. 

"We come in and we basically get the seller income statements and scrub that and look for things that may not be apparently if you're just looking at a set of financials. It also gives the buyer some insight, which may lead to some negotiations with the seller, typically a decrease in price, based on things we find," she said. 

So for example, she will spend time going over every single lease agreement attached to the property, as well as all related amendments, noting that for older tenants there may be a substantial number of them. She will also break down income into components like rents and fees, as well as expenses, both operating, like maintenance and repairs, and non-operating, like mortgage payments and amortization. 

Getting this information, though, sometimes requires getting documents the seller would rather not hand over, like the general ledger, which she said is particularly important. Some buyers don't realize this, she said, and therefore don't ask about it, but not being able to compare what's in the ledger with what's in the financial statement information, as well as other documentation, can allow the seller to manipulate information. If the seller won't give the entire ledger up she said she will sometimes compromise and try to get at least the revenue or expense portion.  

She said there also tends to be pushback with regard to cash receipt reports. But this information is important because the buyer needs to see how much money the property actually makes, not what the paperwork says it should be making. 

"We can see what the seller is really charging the tenant, are they collecting, are tenants delinquent, are they charging the correct amounts for the lease, so this is extremely important to talk about," she said. 

If the seller won't give this information up, then she said she can work around it by suggesting perhaps just tenant ledgers or collection reports. 

Beyond what someone's expenses are, she also said that the due diligence process must also include how someone is accounting for those expenses to check for things like if the seller is accruing expenses that they may not have made yet. 

"A lot of times we get cash basis statements, but what if they didn't pay the landscaping for the last four months and now you're understating your expense, so this is key," she said.