Well if I haven't bored you to death yet, let's discuss that highly emotional, heart tugging, gut wrenching issue that is on everyone's mind daily - balance sheets.

First of all, what exactly is a balance sheet? Well, if you read my last post, we discussed income statements which is exactly what it sounds like, a statement of an organization's income and expenses, usually for a 12 month period. A balance sheet is another important statement in the trilogy of financial statements (note I said trilogy, there's one more), it is a statement of what an organization or a building is worth as of a specific date. So if a balance sheet for a building was dated December 31, 2009, it would be a statement of what that building was worth on December 31, 2009.

And here is how they work. ASSETS - LIABILITIES = OWNER'S EQUITY. Let's say a building has a market value of $1,000,000 but the owner has a mortgage of $550,000. The ASSET is worth $1,000,000 but has a LIABILITY of $550,000 so it is worth $450,000. If the owner sold the building for a million and paid the mortgage off, he would have $450,000 in EQUITY left over to keep.

Can you use the balance sheet as a quick and easy reference for the value of a building? Sorry, no. Like the income statement, the balance sheet has its share of challenges.

In general, the balance sheet is less useful than the income statement for the purposes of the real estate investor. Because most buildings are owned by companies, the balance sheet is usually for the company and not the building, and so, not really the business of the buyer. The balance sheet can provide some additional information to the investor who is familiar with them, but to discuss balance sheets in-depth would be rather complicated and would probably be like reading War and Peace backwards.

Okay I can't resist one tip. Suppose a seller only wants to provide one year's income statement but will provide a balance sheet. You may be able to determine what was paid for the building and you also may be able to determine what total income has been since the building was purchased. But from here on it, it gets complicated. That's probably enough on balance sheet. Next, we'll discuss the Statement of Cash Flows, and we will have come full circle.