Proforma vs. P&L -- Which do I rely on for valuation? (Part 2 of 3)

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Services for Real Estate Pros with IaREIA | Iowa Landlord Association

Continuing, we are now in a position to focus on the property. 

Because you're astute, you'll know that Building, Location, and Demographics are three criteria about the prospective investment we'll use to evaluate the property but, you ask, where does the Proforma vs. P&L question come in?  And because I'm astute, I reply, as an element of the "Building".

We don't have time in a short Blog entry to undertake a study of all of the factors that an investor will consider that are personal, so let's assume we're just looking for something that makes good business sense to a wide group of investors.  Are there some investors who will only buy 10% CAP rate properties?  Sure.  Are there some investors who will only buy Class A properties, with a CAP rate of 7%, or even less?  Sure.   But let's assume we're just looking for an investment that will support our magical 80% LTV criteria, AND the owner will either be able to provide the most recent two years of a P&L Statement, or their Agent will furnish a Proforma.  

If you're the Buyer, and I'm representing your interests, which do you want me to find?  

Answer:  The P&L statements.  Many Proformas aren't worth the paper they are written on.  The Agent is blowing smoke, trying to trick us into believing that the current owner is an idiot for renting out his/her units too cheaply but because you're a genius owner, you're going to immediately raise the rents to where they "should be" for this building, and they'd like you to use this Proforma Income Statement as the means to establish value. 

Not only am I not going to buy that story, I'm definitely going to suggest that you not buy it, even if you are tempted, unless we can establish a good reason for so doing.

And that is the basis of the discussion for Part 3 or 3 -- Exercising Due Diligence as we establish our own Proforma, based on the P&L

  

 

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Charlie Ragonesi
AllMountainRealty.com - Big Canoe, GA
Homes - Big Canoe, Jasper, North Georgia Pros

excellent post and right on the money. The devil is in the details not the blue smoke and mirrors

August 15, 2008 06:52 AM #1
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Andrew Lietzow
IaREIA | Iowa Landlord Association - Des Moines, IA
MBA-Exec Dir Iowa Real Estate Investors Association -

Good morning, Charlie Ragonesi

Yes sirree.  I know of an agent who is looking for complexes for a buyer -- up to 5 Million.  And the primary criteria he's given the agent is he wants to find a property that is $35,000 per unit and built 1990, or later. 

That's a start, but it really rules out a lot of great properties.  That might mean that each unit is an efficiency, and the building is in a very challenging area with less than favorable demographics. 

These "rules of thumb", like cost/unit, are entirely too gross of a criterion for "shopping".  CAP rates tell so much more, and before you can have a reliable CAP rate, you need to have a dependable NOI. 

Would I work with someone who says, "I'll only buy properties where the price per unit is $35,000, or less".  Sure, but I'd much rather get them to enhance their filtering criteria, to allow me to find them a really sound investment.  

I know of a couple of 4-plexes, far from town, that are priced at $12,500 per unit.   Might be a great buy, but taking into consideration that only 3 units are currently rented, it doesn't look like near the bargain the list price implies.  

August 15, 2008 07:41 AM #2
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Andrew Lietzow

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