Performing due diligence is the singular most important part of investing in real estate. Typically, a real estate purchase agreement permits the buyer to investigate financial data and the property itself prior to closing without commitment to the acquisition.
An investor must be certain that the property they are seeking to acquire is all that it was advertised to be. In order to accomplish that task an investor must be sure that the purchase agreement permits him or her to investigate everything pertaining to the property without committing. One of the best sources of information an investor can obtain from a seller is a Federal Tax Return 8825 Form. This form sets forth all of the income and expenses associated with a property. Most importantly, unlike requesting a income statement from the seller, an 8825 Form will not overstate income or understate expenses because the seller’s taxable income depends on the net figures derived off of that form.
A buyer can feel confident that the expense figures set forth on a Form 8825 from a seller are as high or higher than the expenses the buyer can expect post closing (with the exception of property taxes). Additionally, the buyer can expect the property to generate at least as much gross revenue as is stated on the Form 8825. As part of due diligence. I always recommend to a client seeking to purchase a investment property to request the previous two years 8825 forms off the seller’s federal tax returns.