A trailing twelve-month statement handed over by a seller's broker is not neutral. It was built to present the property in the best light allowed by the actual numbers, which means the add-backs, the excluded line items, and the insurance quote all deserve a second look before anyone treats the bottom line as real net operating income.
Add-Backs That Are Actually Necessary Expenses
Sellers routinely add back owner-related expenses on the theory that a new buyer will not incur them, but some of those add-backs are really just costs the new owner will pay under a different name. A property management fee removed because the current owner self-manages still needs to be replaced with a market-rate management assumption, or the T12 is overstating income by exactly what it will cost the buyer to run the property professionally.
The same logic applies to payroll add-backs for an owner who handles leasing or maintenance personally without drawing a market salary. If the T12 shows no payroll expense for a function the property genuinely needs performed, a buyer stepping into that role either has to do the work themselves or pay someone else to do it, and either way the T12's zero-payroll assumption understates the property's true operating cost going forward.
Insurance Quotes Shopped Right Before The Sale
We have seen sellers shop for a cheaper insurance policy specifically for the marketing period, locking in a lower premium that shows up favorably on the T12 but does not reflect what a new owner will actually pay once their own carrier underwrites the property. We ask for the insurance renewal history, not only the current premium, and flag any recent policy change that lines up suspiciously close to the listing date.
One-Time Repairs Excluded As Non-Recurring
A roof repair, a parking lot resurfacing, or a major HVAC replacement gets labeled non-recurring and stripped from the T12, which can be fair if it truly was a one-time event. It is not fair if the property has a pattern of similar repairs every few years that the seller is treating each one as an isolated exception. We look at a longer expense history than just the trailing twelve months specifically to catch this pattern.
Property Tax Reset After A Memphis Or DeSoto County Sale
The trailing tax expense on the T12 reflects the current owner's assessed value, which almost never matches what the county will reassess the property at once the sale records at a new price. Shelby County and DeSoto County both reassess based on transaction data, and a T12 that does not flag this reset is quietly understating the buyer's actual future tax expense, sometimes significantly.
We also check whether either county has any pending reassessment cycle or millage rate change already scheduled that would affect the property independent of the sale itself, since a reassessment tied to a broader county-wide cycle can compound with the sale-triggered reset to produce a tax increase larger than either factor alone would suggest. Sellers rarely volunteer this information proactively, so we check directly with the relevant county assessor's office rather than relying on the T12's trailing figure as any guide to next year's actual bill.
What The Adjusted T12 Has To Show
Before we trust a net operating income figure for exchange purposes, the adjusted statement documents:
- Every add-back with a note on whether the buyer will actually avoid that cost or simply incur it differently
- Insurance premium history for at least three years, not only the current in-force policy
- Repair and capital expense history long enough to catch a recurring pattern mislabeled as one-time
- A reassessed property tax estimate based on the actual sale price, not the seller's current assessment
- Collections versus billings, since a T12 built on billed rent alone can overstate durable income
Common 1031 Exchange Questions
What is the most common trick in a seller's T12 statement?
Add-backs that remove real costs, like a management fee, on the assumption the buyer will not pay them, when in practice the new owner absorbs that same cost under a different label. We flag every add-back and check whether it is genuinely avoidable.
Why does insurance need three years of history instead of the current premium?
Because a seller can shop for a temporarily lower premium right before listing the property, which makes the current T12 look better than what a new owner's insurer will actually quote once underwriting the property fresh.
How do property taxes change after a Memphis or DeSoto County sale?
Shelby County and DeSoto County both reassess property based on recorded sale prices, so the trailing tax line on a T12 almost never reflects what the buyer will actually owe after the transaction records. We estimate the reset separately rather than relying on the seller's current assessment.
How can you tell if a repair expense is really non-recurring?
By looking at more than the trailing twelve months. A single roof repair might be a true one-time cost, but a pattern of similar repairs every few years suggests ongoing deferred maintenance rather than an isolated exception.
Does this review replace the lender's own financial underwriting?
No. Lenders will run their own analysis, but an adjusted T12 built before identification helps the investor avoid identifying a property whose real income looks materially different once a lender or the investor's own CPA digs in.
