How to Analyze Deals and Make Offers in 10 Minutes
Real estate is a numbers game. The more offers you make, the more deals you do. The problem is, analyzing apartment building deals can be time-consuming, which can limit your ability to make a lot of offers.
When I first got started back in 2007, I was completely overwhelmed. I would get a marketing package from a broker and enter the financials into a spreadsheet I had created to crunch numbers. Then I would make a few phone calls and do some research online.
It took me four hours to analyze a deal and make an offer. Four hours!
As you can imagine, I wasn’t able to make a lot of offers; in fact, I nearly gave up because I was overwhelmed and couldn’t get it done fast enough.
Back then I didn’t have the tools or techniques I have now. Subsequently, I discovered a better way. I call it the “10-Minute Offer,” and it will allow you to make an offer on a deal you get from a broker within ten minutes of getting the marketing package. It’s that powerful, and it will accelerate the progress you’ll make toward your first deal.
Now, just a word of warning: The 10-Minute Offer involves some numbers and simple math, but if you find your eyes glazing over, just keep reading. Even if you don’t understand everything right now, just keep reading.
Okay, let’s dive right into the 10-Minute Offer 먹튀검증업체.
The 10-Minute Offer
Step #1: Adjust the Income?4 minutes
If the marketing package contains actual financials, look for the “Gross Scheduled Income.” This is the income that should be collected if all units were occupied and rents were at market rent. Just use that number for the 10-Minute Offer.
Then look for the adjustments for vacancies, concessions, and bad debt, etc. If these adjustments are greater than 10%, then use that number, otherwise use 10% as a vacancy factor. If you only have the pro-forma financials (i.e., what the financials should be if the property were run efficiently), then use those numbers.
Your Adjusted Income is now the Gross Scheduled Income minus 10%.
Step #2: Adjust the Expenses?3 minutes
This is going to be easy. If the reported or pro-forma expenses are greater than 55% then use that number, otherwise use 55%. That will be your Adjusted Expenses.
Often, when the reported expenses are less than 55%, something is missing. For example, maybe the management fees are not included in the expenses because the current owner is managing the property on their own. Don’t spend a lot of time analyzing this, but see if you can find some obvious expense that is missing from the broker’s marketing package. You’re going to use that as an argument that the expenses are unrealistically low.
Now you can calculate the Adjusted Net Operating Income:
Adjusted Net Operating Income (NOI) = Adjusted Income ? Adjusted Expenses
Step #3: Use the Advertised Cap Rate to Come Up with a Revised Fair Market Value?3 Minutes
Usually, the marketing package advertises a certain Cap Rate for the property, or your broker will tell you what Cap Rate he or she used to determine the asking price. If the Cap Rate is not that obvious, you can quickly calculate it by using this formula:
Cap Rate = Net Operating Income / Asking Price
Make a note of that Cap Rate because you’re going to use it to your advantage shortly.
If we have the Cap Rate and Net Operating Income, we can now calculate the Adjusted Value with this formula:
Adjusted Value = Adjusted Net Operating Income / Cap Rate
Here’s an example. Let’s assume the asking price is $653,000, the reported income is $95,000 and the expenses are $42,750. Once you apply the 10-Minute Offer technique, you get an Adjusted Value of $506,250 per the adjustments in the second column:
Typically, the Adjusted Value will be lower than the asking price because the income and expenses in the marketing package were overly optimistic to begin with! In this example, it’s no different: the asking price is $653,000, but your adjusted value is $506,000 because the reported income was high, and the reported expenses were lower than our rule of thumb.
Make note of the adjusted price, and let’s get back to the broker.
Step #4: Get Back to the Broker with Your Analysis and Informal Offer Price
Compose an email to the broker in which you explain your adjustments to the income and expenses. Explain that after applying the broker’s Cap Rate, the adjusted price is X, and that you’d be happy to make an offer at the price if the seller would be amenable to that.
Send your broker something like this:
Hey Rob, I looked over the package you sent me. Everything looks good?it’s what we talked about on the phone. I made a few adjustments to the underwriting, though.
Since I don’t have the actual financials, I had to rely on the pro forma numbers that were included. We both know those are going to be lower than actuals, right? Well, that’s all we have to work with at the moment. In your pro forma, you had vacancies at 5% of the Gross Potential Rent, which from my experience is typically closer to 10% when you include bad debt, etc.
Regarding expenses, I don’t have the actuals, but the pro forma totals only add up to about 45% of income. For example, it appears the insurance expenses are missing, and not much is allotted for repairs in the P&L. Based on experience and actual financials from similar listings in the area, I know those are significantly low. I normally use 55% of income for the expenses, and that’s what I’m using here.
You’re advertising an 8% Cap Rate for this deal. I’m not sure if that’s fair for this area, but let’s assume it is. If you apply an 8% Cap Rate to the Adjusted Net Operating Income, the valuation of the building is right around $500K, quite a bit away from the $650K asking price.
If you see something awry with my underwriting, let me know. I could make an offer at asking price, but I don’t want to waste your time if we both know the actual NOI will be lower than what you have in the pro forma once we get into due diligence. I’d rather be a bit more realistic upfront.
I’m not sure how flexible your seller is on the asking price, but I’d be pleased to put in an offer at $500K if he would consider it.
Let me know what you think. I look forward to hearing from you.