When you’re making an offer on a commercial property, you’re usually working off of net operating income and operating expenses provided by the seller and/or seller’s broker.
Doesn’t this seem a little strange? A party with the complete opposite interest of yours is providing you with ALL of the CRE data that you will base your potential purchase price and return on investment on.
I’m not saying that everybody out there is dishonest or unethical, but it is imperative that you double-check every single offering memorandum, setup, or P &L that is being furnished on and real estate property.
Sellers lie. It is what they do. Not all of them, but I’ll bet that the capitalization rate (cap rate) and the cash flow that real estate investors are advertised on an offering memorandum is incorrect 99 out of 100 times. And not for the better. Every deal needs to be underwritten correctly.
Sometimes you get omitted information. No property management fee, no maintenance, no reserve factor.
Then sometimes you get light expenses, $2,000 per year to do snow removal on a 400 space parking lot because the seller’s brother in law does it. The insurance policy that is 50% under what you were quoted. Vacancy rates that are skewed. All of this will affect your gross income.
I’ve seen incorrect square footage per unit,
Then you get what I call the camouflaged vacancy. This is when a broker adds the potential income from current vacancies but does it in a way that confuses the reader and makes it look like it is actual NOI. This heavily affects the price of the property. I don’t buy the future rental income of an investment property. I make sure the sales price is aligned with the true net income at that time.
Not all brokers and owners will provide you with incorrect information. In fact, a good broker/seller will actually try to be as honest as possible because they would rather correct any issues before getting a signed contract and going deep into due diligence.
Bottom line, you need to accurately underwrite every commercial real estate deal and really know what your true NOI and market value is before you can make an offer on an asset. You are better off scrutinizing the numbers of a real estate investment before you make an offer than once you are 30 days into due diligence and with a down payment that you might not be able to get back.
If you have any questions regarding investment in commercial real estate, please reach out to the team at First National Realty Partners. The asset types that we have available to our individual investors are a very attractive alternative to the stock market or real estate crowdfunding platforms. We have commercial property types in various vehicles that are strategically purchased to be stable and provide significant upside potential.
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