The 10-Minute Analysis
Step #1: Adjust the Income—4 minutes -If the marketing package contains actual financials, look for the gross scheduled income and 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 have a rent roll as well, compare the bottom-line income in the rent roll with the financials in the marketing package, and use the lower of the two.
If you only have the ProForma financials, then use those numbers.
Keep track of any adjustments you make to the income because you’re going to be communicating those to the broker later.
Step #2: Adjust the Expenses—3 minutes This is going to be easy.
If the reported or ProForma expenses are greater than 55%, then use that number; otherwise, use 55%. Often, when the reported expenses are less than 55%, they’re missing something. For example, the expenses may be missing a management fee (because the current owner is managing the property himself), or perhaps it’s missing insurance or some other expense.
Don’t spend a lot of time on this, but see if you can find SOME 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, determine your adjusted net operating income (NOI) by subtracting your adjusted expenses from your adjusted income.
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, as in, “Awesome deal at a 8.6% cap!”
If the cap rate is not that obvious, you can quickly deduce it by taking the NOI from the package and dividing it by the asking price.
Make a note of that cap rate because you’re going to use it to your advantage shortly.
Now, determine your adjusted NOI from Steps 1 and 2 and divide it by the advertised cap rate. This will give you the adjusted price for the property.
Typically, this number will be lower than the asking price. That’s because the income and expenses in the marketing package were overly optimistic to begin with!
Make note of the adjusted price. Your offer price should be below that to give you some negotiating room.
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.