Common Underwriting Mistakes

[Macen Williams]

Hey BP Community! I am currently learning to perfect the underwriting process, and as I was studying today a thought occurred-- What are some things you guys had to learn from pure experience?

Obviously there are always going to be situations you can't prepare for, but I'm interested to know if you guys had any tough experiences that now leads you to account for these situations before it becomes a problem again?  

[Charles Seaman]

@Macen Williams The single biggest underwriting mistake that people make is not properly accounting for a property tax reassessment after a property is sold.  Oftentimes, there really is no general formula for this because it varies widely from area to area.  It's often best to contact the county tax assessor to understand how their process works.

Another common mistake is the target rents.  Many people simply review rent comps.  This is a good starting point, but it's only a piece of the puzzle.  Checking the median household income in the 1-mile radius will often do a much better job of revealing how much rent people can afford to pay than any rent comp ever will.

Another big one is speed of execution for a value-add plan.  Many newer multifamily investors tend to be overly ambitious about how fast they can turn a struggling or underperforming property around.  Speak with property management companies and more experienced investors to get a better sense of timing for any project that you're looking to undertake so that you can more accurately reflect it in your underwriting. 

Lastly, keep in mind that underwriting evolves as you get new information.  It's never a "one and done" process.  Even experienced underwriters make mistakes, so do the best you can and always make sure to confirm your assumptions.