Deal analysis is the process of selecting a property and preparing for purchase negotiations. With careful deal analysis, you should increase your chances of finding a property that meets your investment goals, and enter negotiations with greater confidence. Poor deal analysis can cause you to pay more than necessary for a property, or become saddled with a property that does not perform to your expectations. Financial knowledge and careful planning are keys to averting costly mistakes and eliminating a lot of frustration.
Just Say No to Deal Analysis Mistakes
In multifamily deal analysis, knowing what to avoid as you assess a property will set you up for long-term success.
1. Don’t forget the basics. You need to establish firm goals in order to meet them. For example, are you seeking to diversify your portfolio, generate monthly income, or defer taxes through a 1031 exchange? Do you have a holding period in mind, and an idea of your appetite for risk? These are some of the same factors taken into consideration when creating a business plan, and your answers will help you choose the property that best aligns with your objectives.
Your resources and limitations should also be clearly understood so that you only seriously consider properties that you can afford and successfully operate. Know exactly how much financing you can expect to receive and what kind of down payment you will be able to produce. Prequalifying for a loan is helpful for understanding the amount of financing you might receive, the down payment you may need to produce, and other variables. It will also speed up the mortgage process.
2. Don’t get lost in the numbers. There are many ways to evaluate a property, and each one reveals something different. Be prepared to calculate and interpret net operating income, capitalization rate, cash flow and similar metrics. You’ll need to look at and compare two sets of data: the calculations based on pro forma data (assumed numbers based on idealized conditions) and the actual income and expense figures (the property’s current financial performance).
3. Don’t fail to read the signs. Multifamily property deal analysis should compare a property to your needs as well as to similar properties in its market and submarket. A deal that is tempting at first glance may look entirely different upon closer examination. If the property you’re considering is overpriced or underpriced for its neighborhood, or if its valuation figures differ widely from similar buildings nearby, it could be a sign of underlying problems that only someone more experienced can assess—before you enter into negotiations. So, if you lack the depth of knowledge to evaluate a property deal, consider consulting an expert at a trusted real estate investment management company.
4. Don’t be afraid to ask for what you need. A real estate acquisition is a complex transaction, and the more information you receive from the seller, the better. The seller will provide you with pro forma and current income and expense numbers. But calculation methods can vary. Requesting access to the property and to the documents associated with it will allow you to validate the calculations. If the seller is unwilling to accommodate your queries, consider it a red flag.
5. Don’t skimp on due diligence. Due diligence is conducted once you enter into talks with the seller and, ultimately, after the property is under contract. It is usually performed by professionals at your (or your agent’s) request. If there are particular areas where your calculations differ from the data provided by the seller, due diligence is an opportunity to get clarification from an authoritative third-party.
6. Don’t leave concerns unresolved. Put the data from your analysis to use. If you uncover deferred maintenance, determine the cost of upgrading and bring it up in negotiations. If pro forma numbers differ widely from the actual numbers, do more research. For example, pro forma calculations will be based on an assumed occupancy rate, which is likely to be the average rate in that submarket. If the property you are considering has a lower occupancy rate, it could be overpriced, poorly maintained, or a result of poor advertising. If the vacancy rate is lower than the pro forma, it may be underpriced.
Apply All You Learn
Thorough, well-formulated deal analysis is like detective work—nothing should be assumed. Check or seek out facts to gain insights that will keep your investment activity on track with your goals.
There is a lot at stake in a property acquisition, and deal analysis can present challenges. Increase your chances of success by seeking outside support. Seasoned professionals at an experienced real estate investment management firm can analyze properties and conduct negotiations with the greatest of skill.
At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and risk management to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country, and employ a team of experts who can help you hone your investment strategy.
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The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
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