Tag Archives: Real Estate Investment

High Expectations and Predictions: Why Most Broker Proformas Do Not Matter

I envision billions!


When demand heats up, so do asking prices:

Many sellers these days are waiting to trade their properties at–or above–the asking price. When demand is up, the asking price is typically influenced by an over-enthusiastic market environment. This is especially true in multifamily right now, because it’s in demand. When demand increases, so does the willingness to pay a higher price; it’s the law of supply and demand at play. In support of the highest possible sales price, a broker–with input from the seller–will put together a proforma income and expense statement to justify the asking price. A proforma is only as good as the assumptions used to create it.

The problem with most broker proformas:

The biggest problem with most broker proformas is that they typically do not take into consideration the total cost of acquiring, operating, maintaining, and selling the asset when the holding period ends; without this information, a true assessment of investment value will be difficult to achieve. The success of a real estate investment depends on 4 major things (1) it’s basis, (2) it’s financing, (3) it’s management, and (4) it’s cost at disposition. Because of these facts, the risk profile of real estate—as an asset class—is higher than a treasury bill, for example.

With a higher risk profile, a higher rate of return is justified for taking on the increased risk. Therefore, an internal rate of return of 14 or 15% before taxes is a reasonable expectation for properties like multifamily; unless you are reducing your returns in order to accommodate an equity partners’ required rate of return. An investment that offers a low return for higher risk is an investment not worth undertaking because of its inadequate compensation.

Games people play

Brokers will give you proformas without taking into account the true cost of ownership including acquisition and disposition costs. It is a half-ass approach, and half-baked idea, and yet brokers–along with some sellers–do this all of the time. In my own deals, I make it a point to explain why my offers are not where they want it to be. Typically, when I do this, they can see the logic. The reactions I get will vary depending on the character and personality of the person I am dealing with; for example, one broker’s voice suddenly went up an octave as he started talking really fast to get off the phone with me, and then never returned my phone calls or emails.

In another instance, a broker blatantly lied to me arguing that she had already received an LOI from an interested buyer at the “minimum price” the seller was supposedly willing to accept. When I withdrew my company’s interest, the truth came out. For this reason, we have had to incorporate a policy to only deal  with decision-makers directly in order to avoid the greedy and costly games that some people will play in the middle of a deal to milk the most fees and commissions they can from it.

Good Advice from Colorado Springs Apartment Investor: Deeper Analysis of a Potential Apartment Purchase


Deeper Analysis of a Potential Apartment Purchase

By Les Goss

After using a property’s annual income and expense data, combined with the local cap rate to determine value, most offerings will be set aside as the unrealistic dreams of a deluded seller. Occasionally, however, a property will pass our first scan and deserve a second look. So what are the next steps to determine if we’ve really found a keeper?

The first step is to dig more deeply into the financial reports released by the seller. The critical thing to watch for here is to separate the actual figures from the pro forma numbers. Every seller, with the help of their broker, will attempt to paint the rosiest picture possible. You’ll do the same when it’s time for you to sell.

As an example, I’ll use information pulled from the most recent offer to cross my desk via Loopnet, a 28-unit C class apartment in Colorado Springs, offered at $1.3 million.

The Annual Property Operating Data (APOD) is a one-page summary of income and expenses. It calculates the Net Operating Income (NOI) as well as the cash flow before taxes. This particular APOD shows a cap rate of 8.79%, certainly within the current range of 8-9% expected for this class of apartment in this town in this year. It also lists the cash flow as $114,280 per year, or just over $9,500 per month. Assuming you paid the asking price of $1.3 million and put down 25%, or $325,000, the cash-on-cash return would be 114,280/325,000 or 35.2% So far, the numbers look promising.

But let’s look a little deeper. One of the easiest tricks to play is to merely leave some lines of the APOD blank. It’s easy to overlook something that is not even there. On this APOD there is a line for Management Services, but there is no number next to it. Even if you choose to manage it yourself, you should put a value on your time and effort. As it turns out, last year $8,300 went to this line item, which represents a 7.2% charge, reasonable in this market for this size property. Of course, underestimating your expenses, in this case by leaving one out, has the effect of increasing the NOI, which drives up the property value.

The other sin of omission occurs here by neglecting to include the annual debt service. Using the broker’s assumptions of 25% down and a 4.5% interest rate, the total mortgage payment is $60,800 per year. This is subtracted from the NOI to get the actual before-tax cash flow, which now drops to $53,480. This makes the actual cash-on-cash return 16.5%, definitely decent but less than half of what was shown on the APOD. Leaving out the management fee and the debt service has the effect of making this deal look much better than it actually is.

Now let’s look more closely at the income assumptions. The APOD has a note indicating that the current market rent for one-bedroom apartments is $495 per month. Since all the units in this apartment are one-beds, it’s easy to calculate the Potential Rental Income as $166,320 per year (495x28x12). However, in another part of the sales package labeled Income Summary, we find that less than $110,000 was actually collected in rent last year. Why the huge difference? Well, the current rent roll shows that 17 of the 28 units are paying $425 or less per month and only 2 are paying the full $495. What gives? Is the current owner asleep at the wheel, or is there something lacking in this property that prevents him from getting market rent? This is definitely something a potential buyer needs to explore in some depth. In fact, using actual numbers from last year, the cap rate at the asking price is only 4.7%!

Moving on from the financial analysis, we need to envision all the ways we can add value to the property. One of the easiest and most obvious ways is to improve the curb appeal. Potential renters won’t even slow down if the place looks like the owner fell asleep in the 70s and never woke up. A new top coat on the parking lot, well-trimmed and manicured landscaping and perhaps a new exterior paint job can make an apartment look like new almost overnight. Of course if the property has been a low-vacancy eyesore for a few years, changing the name and putting up new signage lets people know a new owner who actually cares for the property is now in charge.

Once you get a prospect inside, they will compare the perceived value to that of other apartments they’ve looked at. This is where your personal market research comes in. What amenities do other properties in your rental range have? Will you need new kitchen cabinets or will a paint job and new hardware be sufficient? Will you opt for new carpet or will you try the linoleum that looks like a hardwood floor? New lights in the kitchen and bathroom can add pizazz for very little cost.

Windows are a controversial topic among owners. If the residents are paying for utilities, it doesn’t directly help the owner to put in new ones, which is why you see so many older buildings with original windows in place. On the other hand, new double pane energy-efficient windows, along with uniform new blinds, can instantly improve the curb appeal. You can also tell prospects that their utility bills will be lower and their apartment quieter and more comfortable. It’s also one more thing the person who buys from you won’t have to pay to replace. In addition, there may be utility rebates available that lower your net cost if you choose to install them. Needless to say, all these expenses must be accurately estimated and still have all the numbers work. If a property has a lot of deferred maintenance, you must factor that into your offer or it’s not worth buying.

The bottom line for all this is how much can you raise the rents? Can you raise them enough to justify these expenditures? Can you buy it cheaply enough to allow these upgrades? You’ll definitely want an experienced member of your team to help you make these decisions when you’re first getting into this.

Finally, you need to look at the operating expenses to see if there are ways to reduce them. Running a more efficient, smarter operation can lower expenses. Do you need a full-time employee or can you outsource many of the operations? Can you charge back your residents for common area water, gas and electricity? Are they being charged for their share of trash pickup? Your market may put limits on how much of this you can do. You might also experiment with a lower rent plus these utility chargebacks versus a higher, all-inclusive rental figure to see which is more enticing to your prospects.

Once you’ve done your quick 5-minute evaluation of the numbers, most properties will be revealed as the duds they are. The ones that pass that first screening are ready for this more in-depth analysis. Once they pass this, it’s time to submit a Letter of Intent and let the negotiations begin. Have fun and good luck!

Les Goss is a real estate investor and syndicator in Colorado Springs, Colorado. You can learn more about investing in apartments and the Colorado Springs apartment market specifically by visiting his blog at http://www.ColoradoSpringsApartmentInvestor.com

Article Source: http://EzineArticles.com/?expert=Les_Goss



Sustainable Power and Influence: When are You Powerful?

Power Comes from Within...

Here is a powerful quote from The Power Principle by Blaine Lee  (1997), “Power is not a new phenomenon. It can be intriguing, because power can be surprisingly complex. It can be enticing, because power can be seductive. But it can also inspire and uplift and exalt, because power can be used to help people accomplish marvelous things” (p. 7). Blaine Lee, The Power Principle.”

Bait and Switch Tactics in Real Estate: Four Things Every Buyer Should Know.


I have seen many listing agents start out listing properties at below market value and then use the resulting flurry of buyer interest to spark bidding wars.

While this practice benefits the seller, and the listing agent would not be doing their job if they did not try to get the highest price possible for their sellers, buyers need to remember that this strategy only works when more than one buyer takes the bait.

Here are 4 things buyers should bear in mind about bait-and-switch tactics in real estate:

1. Remember, demand creates value, which increases prices. The opposite is also true. When demand goes down, so do prices.
By engaging in bidding wars, you are driving prices up.

2. If you want to find a truly great deal, then you most certainly do not want to render yourself a tool for sparking a bidding war.

Instead, find out the motivation of the seller. If seller or their agent appears evasive, take note, give them the benefit of the doubt once, and then move on if it appears that you cannot get straight answers. This is a red flag.

3. If you engage in the game of bait-and-switch, then be prepared to waste some time.

It is no wonder many investors prefer to look at unlisted properties, and save listed properties as a last resort.

4. Wise investors avoid bait-and-switch pricing games. They realize that there are too many good deals out there to allow themselves to be used as leverage in the ploy to get the highest price possible.

Smart investors do not get emotionally attached to properties. Emotions are the hooks that make pricing games work so well. Eliminate emotions from the equation and pricing games are no longer as effective.

Real Estate Investing and Improving Cash Flow: Be Careful not to Over-Improve

Smart Repairs = Profitable Business

Since real estate investors are in the business of real estate, it makes sense that investors would desire to have a profitable business instead of an expensive hobby. However, an important component to accomplishing this successfully is to avoid overspending and over improving investment properties.

An article on Invesdoor.com gives some helpful tips on what to do to maximize profit on real estate investments. Breaking even or losing money defeats the purpose of investing in real estate. Therefore, it is well worth the investment of time to gain insight into the strategies that are designed to curb over-spending and maximize profit potential from each and every real estate investment project.

The article points out three practical tips to prevent the over-improvement of real estate investments:

1. Consider the street that the property is on, and what kind of repairs should be made in order for the property to be in a comparable condition to neighboring houses on the same street.

2. Consider cost-effective improvements that attract the most attention; for example, kitchens and bathrooms.

3. Repair what is broken, but think twice before replacing anything unless cost of repairs exceeds the cost replacement.

REO’s vs. Bank Auctions: 3 Things to Consider Before Buying with Cash

Bank Auction or REO? You decide which is better!

I recently read an article at Invesdoor.com that discusses a few important things that cash buyers may want to consider when deciding whether to pick up properties at a bank auction or purchase REO’s. The information was insightful and compelling. Here are three points that stood out most for me:

1. Outstanding debts attached to property:

a. Bank Auction – the debt typically follows the property, which means that a new owner would inherit the debt attached to the property including unexpected liens and judgements (not good).

b. REO – Bank owned properties typically come with the assurance of clear title–meaning, no surprises after closing; or at least a complete awareness of liens or judgements due.

2. Inheriting Tenants:

a. Bank Auction – Properties sold at auction typically have existing tenants or owners still in place, which means new owners may have to bear the legal expense of eviction if current occupants refuse to vacate the property.

b. REO – Banks typically go through the eviction process prior to selling; therefore, a new owner may not need to bear the legal expense of evicting occupants.

3. Deal Financing:

a. Bank Auction – Buyers need all cash upfront usually.

b. REO – Financing and terms are often available; therefore, using leverage to increase purchasing power is possible depending on the specifics of the deal.

Read full article here !

Real Estate Market is Coming Up Roses but Buyers Should Beware of Thorns

NAEBA just released its latest press release regarding buyer agency and the confusion that occurs when traditional real estate agents call themselves exclusive buyer agents when, in fact, they are not because their companies also represent sellers:

Here’s an excerpt from the release:

“We believe it is important that home buyers understand their options so they will make the best choice when selecting an agent,” commented Benjamin Clark, 2010 President of NAEBA. “It is our mission to educate buyers on the advantages of using Exclusive Buyer Agencies and we want buyers to have that information before they sign a binding agreement with a real estate brokerage.”

A “buyer‘s agent” is not always an Exclusive Buyer Agent (EBA). Agencies may have singular relationships, representing buyers or sellers only or they can be a dual agent that represents both sellers and buyers at the same time. Within a dual agency brokerage, there may be “buyer agents” but this differs from NAEBA (http://www.naeba.org) member companies where both company and agents exclusively represent buyers and never take listings. In fact dual agents and dual agency companies may represent buyer and seller in the same transaction, with written consent.

Read full release: Real Estate Market is Coming Up Roses but Buyers Should Beware of Thorns