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Commercial Real Estate Investing
Insights:
Proforma Pros and Cons
A WomenforWealth.com Interview with Kelly Fabros
by Kirsten Lee
Pro formas are a vital piece of the puzzle when analyzing a commercial real estate investment.
They are the document usually provided by the seller that explain what the
property would look like if the rent were "market" and the expenses were
they 'should be' (generally lower). LADP officer turned profitable
commercial real estate investor, Kelly Fabros, gave us the skinny on proformas.
Q: When you’re looking for properties
to potentially invest what are your most important investing criteria? Or
criteria to look into it further?
Kelly: First I run the numbers so if the numbers are in the ballpark of our purchasing criteria then I definitely look more at it. If it’s way off, and I read something else, you know, 40 percent vacancy
(because I can bring that up), motivated sellers, etc. Actually, the 1031 exchange are huge. A lot of people trying to get out of their properties
fast; I definitely take into account those things and when I see those kinds
of properties, I look closer at the numbers.
Q: How accurate is the picture painted by the proforma
given to the buyer by the sellers??
Kelly: The proforma is the seller’s chance to tell you that what the property might do at its optimal performance.
It is not what is happening right now. I ask, “If this were possible then why aren’t you doing it?”
The real numbers- the real financials are what property purchases should be
based on.
Q: Do sellers over-emphasize proformas?
Kelly: Often, they’re selling these properties off of proformas.
Meaning that the price is based on these fictional numbers. I say,
"send me the financials, send me the real numbers, send me the bank
statements, and send me your tax return, then I will decide what the value
of the property is." Profromas are usually just not the real thing and
take into account how the numbers would look after you did something like
replaced the furnaces- that would decrease heating expenses.
Don’t pay that seller for the work that you’re going to do!
For more
basics on the apartment investment process from our interview with Kelly
Fabros, check out her 1 hour interview plus 45 minutes of Questions and
Answers:
Profit from Apartments.
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