Broker Om Vs The Reality Of Multifamily Ownership
We were recently reviewing some provided documents for an asset we have been looking at purchasing in one of our target markets in the Southeast. We received the typical T12, RR and Broker OM to review in order to start our underwriting process. As we typically do, we used the whisper pricing as a beginning purchase price place holder just to see where it pencils as we work through our underwriting and then adjust from there based on how the overall returns look for us and our investors.
As we were working our way through the underwriting we couldn’t help but notice some difference between the stated in-place numbers in the broker OM, the T12 actuals provided by the seller, and what we knew to be reality. Although most broker OMs are a little off, in this particular instance there was a HUGE, or should I say YUUUUUUGE, delta between the stated “going-in” numbers and our underwriting. The delta in the broker OM resulted in a 25% higher NOI that what’s actually possible.
The OM proceeded to use these fabricated income and expense numbers in order to support an inflated “whisper price” that was so far off that I initially pushed the deal away until recently. Out of curiosity I picked the files and the underwriting back up again just to see if I missed something and as I dug in a little deeper that’s when I discovered where the exact differences were. I immediately called the broker to walk through the numbers and I asked that whomever did the underwriting in their shop to have him or her on the call….there was no one available, and we are talking about a major national brokerage firm here.
As the broker and I talked through the deal I couldn’t help but notice that he repeatedly referenced the under-writing a lender provided as a justification for the numbers that I was suggesting were completely misleading. So I asked him to connect me with this lender and I would be happy to walk through the numbers with them and see where things actually stood.
The lender and I connected the same day and talked through his underwriting and my underwriting. As the
lender and I were comparing numbers I stopped and asked him a simple question. I asked him if he personally owned and operated any multifamily properties himself or if we was only using “book” knowledge of what he thought the numbers should be….(crickets)… and that’s when the lender said “Look, the broker reached out to me and asked me to provide a debt quote and supporting underwriting as aggressive as I could get it for him. I have never done a deal with this broker but I only did as I was asked to do”.
Enough said. I emailed the broker back and told him that based on my conversation with the lender he connected me with, in addition to another lender I have performed with in the recent past, that I was sticking to my underwriting numbers and that IF I submitted an offer it would be based on my numbers and not his whisper price. We are talking $900,000 lower than they are currently quoting in the market. That’s a big number on a smaller deal that just over 100 units. Wonder why the deal hasn’t sold yet?
The point is this: Know what the expected vacancy, expected rental losses and the bad debt factor is in the
sub-market where the property is located and compare that to the historical performance of the asset itself. For the expenses it’s imperative that you know what the per unit costs are for all expense categories and compare that to the actual historical category expenses per unit and see how it measures up.
Have the per unit numbers engrained in your head for the asset class that you specialize in. Class A, B, and C will typically have different per unit expense costs and ratios to know so whatever your specialty, you better know your numbers. Not only will it potentially keep you from overpaying for an asset, it will also help you underwrite deals much faster.
I hope this was helpful. Until we meet again!
Feel free to email me at Binman@InmanEquities.com to stay in touch or to learn more about what we have
going on. We would love to hear from you!
#GrantCardone I’m coming for you!!!!