The financial information the seller provides is the basis for your purchase price. If the numbers are wrong — accidentally or deliberately — you're paying for income that doesn't exist. Financial DD is the process of verifying every line of the seller's financials against source documents.

This lesson covers what to verify, how to verify it, and the specific financial games sellers play.

What you should request from the seller

The seller information request (SIR) for financial DD should include:

Income documents

Trailing 12 months (T-12) income statement — month-by-month
Trailing 3 months (T-3) — most recent 3 months in detail
Current rent roll — every unit, current tenant, in-place rent, lease start/end, security deposit
Lease abstracts — summary of every lease (covered in next lesson)
Bank deposit records — last 12 months of deposits showing actual rent payments received
Tenant ledgers — payment history per tenant (shows late payments, write-offs)
Concession schedule — any free rent, discounts, gift cards given to tenants
Other income detail — laundry, parking, late fees, application fees, pet fees, RUBS, utility billing
Tax returns for the property (Schedule E or business return) — if owned in entity name

Expense documents

T-12 expense detail by category
Property tax bill — most recent
Insurance policy declarations and most recent invoice
Utility bills — water, electric, gas, trash for past 12 months
Repairs and maintenance ledger — vendor invoices
Service contracts — landscape, pest, elevator, HVAC service
Property management agreement and fees
Payroll records if on-site staff
Capital improvements ledger — what was spent and when (helps separate capex from opex)

Other financial

Operating budget for current year
Forecast for next year (if available)
Capital plan for the next 5 years
Loan documents if any debt is being assumed
Tenant security deposits — amounts, where held

This is a lot. Sellers often resist providing some of it. Push back. The PSA should require the seller to provide "all financial books and records reasonably requested by buyer." If they refuse, that's a major red flag.

Verifying the rent roll

The rent roll is the seller's claim of who's paying what. Your job is to verify it.

Step 1: Compare rent roll to lease documents

For every tenant on the rent roll:

Pull the actual lease document
Verify the tenant name matches
Verify the unit/space matches
Verify the rent amount matches
Verify the lease start and end dates
Verify any concessions, free rent, or rent steps

It's surprisingly common for the rent roll to show one number and the lease to show another. The most common discrepancy: the rent roll shows the "asking rent" while the lease has tenant-specific concessions or step-ups not reflected.

Step 2: Compare rent roll to actual payments

For every tenant, verify they're actually paying:

Pull the bank deposit records
Match deposits to specific tenants
Confirm the payment amounts match the rent roll
Identify any tenants who are chronically late or partial-payers

Look for patterns:

Tenants paying less than their lease rent
Tenants paying late (more than 5 days past due regularly)
Tenants with frequent write-offs or credit memos
Tenants who've stopped paying entirely but are still on the rent roll

The best indicator: trailing 12 months of actual collected rent vs. trailing 12 months of contracted rent. If contracted rent is $300K and actual collected is $282K, that's a 6% loss-to-collection that needs to be in your underwriting.

Step 3: Note vacancies

Verify which units are actually vacant (not just "between tenants"):

Walk every unit listed as vacant
Check the manager's vacancy report
Look at the bank records — units with no payments are vacant
Be skeptical of "applied for, lease starting next week" — confirm with documentation

Common game: marking units as "occupied" or "leased" when they're actually vacant. The PSA may require the seller to deliver the property at a certain occupancy; sellers sometimes inflate the rent roll to meet this.

Step 4: Identify problem tenants

For multi-tenant properties:

Tenants nearing lease expiration without renewal
Tenants with payment problems
Tenants whose business is failing (visible on site visit, search news for the business)
Tenants on month-to-month leases
Tenants with unusual rent (much higher or lower than market — investigate why)

Each problem tenant is a potential vacancy in your hold period. Adjust your underwriting accordingly.

Verifying the T-12

The T-12 is the trailing 12 months of income and expenses. It should reconcile to the rent roll on income and to vendor invoices on expenses.

Income verification

Compare T-12 to rent roll:

Sum of monthly rent on rent roll × 12 = annual contracted rent
T-12 income should be within a few percent of this (difference is loss-to-collection, vacancy, concessions)

If T-12 income is higher than annual contracted rent, something's wrong. Possible explanations:

One-time items (security deposit forfeitures, early termination fees, key fees)
Income from prior tenants who have moved out
Errors in either document

Investigate and reconcile. Don't just accept the higher number.

Other income verification

Other income often has games:

Late fees, application fees — sometimes inflated by counting unusual one-time months
Pet fees, parking fees — verify these are actually being collected
Laundry income — if there are vending laundry machines, verify the actual collection
RUBS / utility billing — if tenants pay back utilities, verify the actual amounts
Cleaning fees, NSF fees — usually small but can be inflated

For each line of other income, ask: "Is this recurring or one-time? Is this revenue or just a pass-through?"

Expense verification

This is where most sellers play games. Common tricks:

1. Understated property management fees The seller might use a low (or zero) management fee because they self-manage. You'll need to budget the real market fee (typically 4-7% of EGI for multifamily, 2-5% for commercial).

2. Old insurance numbers The T-12 might show last year's insurance bill — but Florida insurance has doubled or tripled in some areas recently. Get a CURRENT quote for what you'll actually pay.

3. Unrealistic property tax Property taxes will reset to your purchase price after acquisition. The T-12 shows the seller's tax bill based on their purchase price (possibly years ago at a lower assessed value). Calculate what your tax will be:

New tax = New assessed value × millage rate
New assessed value ≈ Purchase price (varies by jurisdiction)

In Florida, commercial property tax often resets close to 100% of purchase price. Use the actual millage rate for your county.

4. Missing or understated repairs and maintenance The seller may have deferred maintenance to make the property look more profitable. Compare R&M to industry benchmarks:

Multifamily: $300-$700 per unit per year
Office: $1.50-$3.00 per SF per year
Retail: $0.50-$1.50 per SF per year
Industrial: $0.30-$1.00 per SF per year

If R&M is below benchmark, increase it in your underwriting. The deferred maintenance becomes your problem.

5. Capital expenditures booked as repairs Sometimes sellers categorize big capital expenses (HVAC replacement, roof patch) as "repairs" to keep them out of capex. Look for unusual repair line items above $5K.

6. Owner expenses included in property expenses Owner cell phone, owner travel, family member salaries, owner legal/accounting. These should be excluded from operating expenses for valuation purposes.

7. Missing utility expenses If the property pays utilities for common areas, verify the bills. Sometimes these are missing from the T-12.

8. Missing administrative expenses Bookkeeping, accounting, legal, software (property management software), advertising, leasing commissions. Often missing.

9. Missing replacement reserves Reserves should be in the underwriting whether the seller booked them or not. Industry standard:

Multifamily: $250-$450 per unit per year
Other: $0.10-$0.30 per SF per year

The "stabilized expense ratio" sanity check

Calculate:

Expense ratio = Total operating expenses ÷ Effective gross income

Compare to industry benchmarks:

Multifamily Class A: 40-45%
Multifamily Class B/C: 45-55%
Office (with utilities): 45-55%
Retail (with CAM recoveries): 25-35%
Industrial (NNN recovered): 10-20%
Self-storage: 35-45%

If the seller's expense ratio is way below these benchmarks, the expenses are understated. Use the benchmark ratio as a reality check, then go find the missing expenses.

Verifying actual collections — the bank statement audit

The most powerful financial DD tool: the bank statement.

Request 12 months of bank deposit records for the operating account. Then:

List every deposit by date and amount
Match each deposit to a specific tenant/source
Confirm the totals match the T-12 income
Identify any discrepancies

What you might find:

Income on the T-12 that's not in the bank (fictional)
Money in the bank that's not on the T-12 (unrecorded, possibly cash)
Tenants who pay less than the rent roll amount
Tenants who haven't paid in months but are still on the rent roll
Unusual one-time deposits inflating the T-12

The bank statement audit takes time (4-8 hours for a 24-unit property) but it's the gold standard. Most beginners skip it. Don't.

Property tax reset analysis

Critical for Florida and many other states: when a commercial property sells, the assessed value typically resets to (or near) the sale price. Your property tax in Year 1 will be significantly higher than the seller's last bill.

How to calculate

Get the current millage rate from the county tax collector
Multiply by your purchase price (or 90-100% of purchase price depending on the state)
That's your Year-1 tax

Example:

Purchase price: $4,000,000
Orange County FL millage rate: ~17 mills (1.7%)
Year-1 estimated tax: $4M × 1.7% = $68,000

Compare to the seller's T-12 tax of, say, $42,000. Your underwriting needs to add $26,000/year — over a 10-year hold, that's $260,000 of additional expense.

The "save our homes" trap

Florida residential properties have homestead exemptions and assessed value caps that don't apply to commercial. But the seller may be a long-time owner with assessed value much lower than current market. Their tax bill is artificially low.

Verify with the county tax collector or property appraiser website what the current assessed value is and what the millage rate is. Calculate forward.

Insurance reset analysis

Like taxes, insurance often jumps post-acquisition because:

The seller's old policy was grandfathered at lower rates
Florida insurance market has hardened dramatically
New ownership triggers re-underwriting

Get an actual binding quote during DD from your own insurance broker. Use that number, not the seller's old number.

In Central Florida specifically, expect insurance to be 30-100% higher than the seller's old bill for properties with hurricane exposure or older construction.

CAM reconciliation (commercial properties)

For commercial properties with CAM (common area maintenance) charges to tenants, the reconciliation matters:

Verify what's billed to tenants vs. what's actually spent
Check for over-billing (you owe tenants money) or under-billing (you're absorbing costs)
Verify the recoverable expenses match the lease terms
Identify any disputed charges

CAM mistakes from a prior owner become your problem post-closing. Year-end CAM reconciliations can result in tenants demanding refunds of $5K-$50K+.

Common financial DD discoveries

Things you'll commonly find that change the deal:

Property tax reset adds $20K-$80K/year to expenses
Insurance increase of $10K-$50K/year
Loss-to-collection of 3-5% that wasn't in the rent roll
Deferred maintenance of $50K-$300K that the seller capitalized away
One major tenant on month-to-month that the rent roll showed as having a lease
Concessions that reduce real rent below contracted rent
Owner expenses removed from the property
Replacement reserves that need to be added

Each of these affects your purchase price math. Total impact is usually $50K-$500K+ of value adjustment over a typical hold.

Re-underwriting after financial DD

Once you've verified everything, rebuild your pro forma with the verified numbers:

Use the verified T-12 income (not the rent roll claim)
Use the verified loss-to-collection (not 0%)
Reset property tax to your post-purchase number
Reset insurance to your binding quote
Use industry-benchmark expense ratios as a sanity check
Add reserves
Recalculate IRR, equity multiple, and DSCR

Then ask: does the deal still pencil at the original purchase price?

If yes → close If no → renegotiate or walk

The renegotiation conversation goes like this:

"We've completed our financial due diligence. Based on the verified numbers, our analysis shows the actual NOI is approximately $182K, not the $205K shown in the marketing materials. The differences are: (1) property tax reset adds $26K, (2) insurance binding quote is $14K higher than the T-12, (3) we found $14K of one-time income in the T-12 that won't recur, (4) management fee should be 5% market rate. At a 6.5% cap, that's a $354K reduction in supportable price. We can proceed at $3.65M instead of the $4M LOI price."

Sellers usually pushback on some items, agree on others. Final price ends up between the original LOI and your fully-discounted ask.

What to take away

Financial DD verifies every income and expense line against source documents
Always request: T-12, rent roll, leases, bank deposits, tax/insurance bills, vendor invoices
Verify rent roll against actual leases AND actual bank deposits
Watch for the eight common expense games — most sellers play at least one
Property tax will reset post-purchase; calculate it from current millage rates
Insurance often jumps significantly; get a real binding quote
Use expense ratio benchmarks as a sanity check on whether the seller's expenses are realistic
The bank statement audit is the gold standard — slow but irrefutable
Re-underwrite with verified numbers and renegotiate or walk based on results

Next lesson: lease and tenant due diligence — reading every lease, identifying problematic clauses, getting estoppel certificates, and understanding tenant credit risk.

Financial Due Diligence — Auditing the Numbers