The T-12 vs OM gap — how big is too big before you walk?

Question

I've been underwriting a 12-unit in Temescal (Oakland) and ran into something that's been nagging me.

Broker's OM shows:

• Asking price: $3,250,000
• Gross Scheduled Income: $228,000
• NOI: $138,600
• Cap rate: 4.26%

T-12 they sent over tells a different story:

• Actual collected rents trailing 12 months: $225,150 (vacancy hit in Sep, Jan, Jun)
• Actual operating expenses: $83,700
• Actual NOI: $141,450

So the T-12 NOI is actually higher than the OM — but dig into why and it gets uncomfortable. The OM uses a 5% vacancy assumption. The T-12 shows three vacancy events totaling $2,850 in lost rent. That's only 1.25% actual vacancy on a 12-unit — suspiciously clean for Oakland, where turnover costs alone can eat 2-3%.

The broker is projecting forward using the cleaner T-12 number. I'm stress-testing it at 6% vacancy and the NOI drops to $124,600 — that's an 11% haircut that moves the effective cap to 3.83% at asking price.

A few things I'm wrestling with:

• When the T-12 NOI beats the OM, do you treat that as a green flag or a reason to dig harder into why?
• What's your threshold for the T-12 vs OM gap before you re-trade or walk? I've heard 10% as a rule of thumb but curious what experienced operators actually use.
• On expense ratios — this property is running 36.7% OpEx/GSI. For a 1968-build in Oakland that feels light. CCIM rule of thumb puts it at 40-45% for assets this age. Are you normalizing expenses to market before you run your IRR?

Curious how CRE operators in here are handling the OM/T-12 reconciliation step before LOI.

Allan C. · Answer

I rarely see OMs that match reality, and often see T12s that are missing key costs as well.

The OM vs T12 gap should not be a concern to you, except to inform how you negotiate (I go harder at sellers who inflate OM).

you should have plenty of intel that gives you insight on market rents. How are you stress-testing insurance costs? That would be my biggest concern on cost variance for a 7-unit in CA.

$3.2 M for a 7-unit also feels like a less attractive neighborhood. What is unit mix, mostly 1BR?

Masoud Arouni · Answer

Good points — and just to clarify, it's a 12-unit not 7, so the per-unit price is $270833 which changes the calculus somewhat.

On insurance: I'm using the seller's current premium as a floor, then stress-testing at a 25% increase on renewal — California carriers have been repricing aggressively on Oakland assets specifically, and I've had two local brokers confirm that post-sale policy so rewrites are coming in 15-30% higher than in-force premiums on 1960s-vintage stock. That adds roughly $2400-$3000/yr to OpEx in my underwriting.

On the neighborhood and unit mix — Temescal is actually one of Oakland's stronger submarkets for rental demand, walkable to BART and Telegraph Ave retail corridor. The price reflects that. Unit mix is four 3/2s and eight smaller 1-2BD units, so not purely 1BR dependent. The thin cap is the reality of buying in an "infill" East Bay submarket right now, so you're underwriting for appreciation and rent growth, not day-one yield.

Masoud Arouni · Answer

Appreciate the pushback, Nyron, and the tax/insurance points are fair ones I'm already underwriting to. But the 5.5% cap target doesn't hold up against what's actually trading in this corridor. Temescal is one of the stronger East Bay rental nodes right now — walkable to BART, Telegraph Ave retail — and recent multifamily comps in the submarket are clustering closer to 4 to 4.5%, not 5.5%. Pricing this at $2M assumes a level of cap rate expansion that just isn't showing up in actual trades nearby, no matter how conservative the expense assumptions get. Normalizing OpEx and vacancy is the right instinct, but anchoring the exit multiple to a citywide or asset-class average instead of the submarket is where I'd push back.

On the DSCR point, I want to run the actual number rather than assert it. Normalized NOI lands around $133k. At 65-70% LTV on $3.25M, that's roughly $2.1-2.3M in debt, and at current rates the debt service comes in close enough to that NOI that it's tight but not the auto-fail you're describing. I'll firm up the exact coverage ratio once I have a quoted rate from my lender, but "fails bank underwriting" is a stronger claim than the math currently supports.

One thing I'd add that hasn't come up yet: the Prop 19 reassessment isn't a phase-in, it hits in full at the close of escrow. So whoever's underwriting first-year debt service needs the reassessed tax bill baked in from day one, not ramped over a year or two like some buyers assume. That's the part why my post-close NOI already reflects the higher basis rather than the seller's current trailing taxes.

Robert Ellis · Answer

One thing I've started paying more attention to is the difference between a bad number and a number I simply can't explain.

A T-12 that's better than the OM doesn't automatically make me optimistic or pessimistic. It just tells me there's a story I haven't uncovered yet. Sometimes it's excellent management. Sometimes it's deferred expenses. Sometimes it's just an unusually clean 12-month window.

Until I understand why the numbers look the way they do, I don't really trust either set of assumptions enough to anchor my valuation.

To me, the goal of due diligence isn't proving the seller wrong—it's figuring out which numbers are actually repeatable once I own the property. That's usually where my confidence in the deal either goes up or disappears.

Nyron Isaac · Answer

When a T-12 NOI beats the OM pro forma on an older Oakland asset, do not treat it as a green flag—treat it as an immediate red flag. A 1.25% actual vacancy rate across a 1968-build 12-unit in Temescal is a major data anomaly. Legacy owners routinely inflate the top line right before a sale by applying tenant security deposit forfeitures or legal cash settlements directly into the 'collected rent' column while completely freezing maintenance expenses to make the bottom line look artificially pristine.

Your stress-test is completely accurate, but you need to push it further. You must completely normalize this file to market standards before you run your IRR. You are underwriting a major Property Tax Reset (which will instantly recalculate at ~1.25% of your purchase price) and skyrocketing California property insurance premiums, which are currently running $800–$1,200 per door for older wood-frame buildings.

Once you normalize the expenses to a realistic 45% CCIM standard and model a safe 7.5% economic vacancy floor, your true pro forma NOI will likely compress down to the $110k to $115k range, dropping your effective cap rate to a dangerous 3.44% at asking.

This deal will completely fail traditional bank underwriting because a $112k true NOI cannot support a 1.20x Debt Service Coverage Ratio (DSCR) at a $3.25M valuation, and the lender will slash your leverage. Do not pay a premium today for a pro forma that doesn't exist. Submit your LOI based strictly on a market-standard 5.5% Cap Rate applied to your normalized NOI (pricing the asset closer to $2.0M), and insert a mandatory clause requiring the seller to hand over 12 months of certified business bank deposits during due diligence to verify that the cash clearing the bank matches their clean T-12 claims

Masoud Arouni · Answer

Good questions, Bradley. T-24 and estoppels are next on my list before LOI — agreed that's the only way to see what's actually being collected vs. what's on a rent roll.

On CapEx for rent growth: I'm underwriting a phased in-unit upgrade (W/D, AC where missing) at roughly $4,500/unit, staggered over turnover rather than all at once, since I don't want six months of stabilization vacancy stacked on top of the financing costs. Inspection is scheduled for next week — curious to see if it changes my view on deferred maintenance, especially roofing and electrical given the age.

The purchase price negotiation point is fair. Between the Prop 19 reassessment hit and the insurance repricing, I've got enough daylight to go back with a number below asking and a clear paper trail for why.

Bradley Buxton · Answer

@Masoud Arouni

Getting the T-24 and estoppel certificates will show you what tenants are actually paying. Looking at the lease agreements and how well the current operator is organized will increase or decrease the confidence in the numbers. Are you factoring in any capex to be able to raise rents such as adding a w/d or AC? Also have you had a property inspection? There will likely be room for more negotiation to lower thee purchase price for a 1960's build.

Masoud Arouni · Answer

The durability point is exactly what's been an issue.

On the turnover question specifically: two of the three vacancy events in the T-12 were under 30 days. That's fast for Oakland unless the owner has long-term tenants cycling out and replacing with friends/family, which can mask true market turn times. I'm requesting the rent roll going back 24 months to see if this 12-month window is an outlier.

The expense repricing question is the other one I keep coming back to. Property tax is pegged to the current owner's basis — post-sale reassessment in California under Prop 19 will reset that clock entirely. I'm underwriting taxes at the reassessed rate from day one, which alone adds about 8,200/year to OpEx and drops NOI to 133,250. That moves the effective cap to 4.10% at asking — still thin but a more honest number than what the broker's OM shows.

The T-12 vs OM gap — how big is too big before you walk?

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