Reasons deals are too good to be true?

Orlando, FL · Member since 2018 · 27 posts · 10 votes

I've been practicing analyzing deals found on Loopnet, and curious why certain properties are listed for months and some close to a year. Especially when the numbers APPEAR to work? The areas of interest are very populated and active, like Orlando and Jacksonville, Florida.

My question is for the multifamily investors that have gone after these deals, and soon discovered why they are too good to be true.. what are some reasons you found? I understand this can be a very broad answer especially ones like major structural damage or total rehabs, but some of these listings with numbers and photos etc. just appear to work. Thanks!

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Brian BurkePro Member

Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes

If you are analyzing multiple stale listings on LoopNet in strong markets and finding the numbers are working, there is only one explanation.

You are running the numbers incorrectly. You are either missing something or the tool you are using is performing inaccurate calculations.

You are good to question this before you jump in and make mistakes. But don’t beat yourself up over it—this is very common when you are getting started. The next phase is you’ll see good deals in strong markets, analyze them, then watch someone pay a price a lot higher than you were willing to pay and then say “I’m analyzing deals and other buyers are out of their minds, paying way too much!” Which in some cases might be true but could also be a sign that you aren’t doing it right.

Analysis of commercial real estate is an art form. A skill that develops over time. You’ll catch on...just keep analyzing and follow the ones that trade and the ones that don’t. One day it will start to click.

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)

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Ronald Gladden
New to Real Estate · Hollywood, FL · Member since 2008 · 35 posts · 16 votes
7y
@Account Closed Read my mind Carrie. Looking forward to following this thread. Thanks for kicking it off!
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
7y
If you are analyzing multiple stale listings on LoopNet in strong markets and finding the numbers are working, there is only one explanation.
You are running the numbers incorrectly. You are either missing something or the tool you are using is performing inaccurate calculations.
You are good to question this before you jump in and make mistakes. But don’t beat yourself up over it—this is very common when you are getting started. The next phase is you’ll see good deals in strong markets, analyze them, then watch someone pay a price a lot higher than you were willing to pay and then say “I’m analyzing deals and other buyers are out of their minds, paying way too much!” Which in some cases might be true but could also be a sign that you aren’t doing it right.
Analysis of commercial real estate is an art form. A skill that develops over time. You’ll catch on...just keep analyzing and follow the ones that trade and the ones that don’t. One day it will start to click.
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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Kurt Jones
Investor · Longwood, FL · Member since 2017 · 108 posts · 78 votes
7y
Well, I invest here in CFL and the reasons are usually predictable when deals fall out- diligence process does what it is supposed to do - make the information symmetrical.
Put another way, the sellers listing is as polished as that property could ever be with flattering pics and a buffed pro-forma. Once you the buyer have a chance to uncover the rest of the story, only then do you have a peek at all the information. Usually if I walk from a deal during diligence it’s just a lack of value. That may be a large repair needed, inconsistent or missing rental history, or flat out misrepresentation of the opportunity.
That having been said, I frequently write up a revision onne I find significant issues and offer the seller a chance to negotiate a revised deal. If not, adios.
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Bjorn AhlbladPro Member
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
7y
@Account Closed nailed it. Also you will find that numbers in listings are often hopeful or just plain wrong! It is up to your due diligence process to get the correct numbers to run a proper analysis. In many areas, Jacksonville being a perfect example, neighborhoods can change within a few blocks going from reasonable to terrible.
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Kish Kanji
Jacksonville, FL · Member since 2018 · 4 posts · 1 vote
7y
@Account Closed I, like you, am also learning to analyze deals and on MF specifically, I have noticed that the selling price is more often based on a Performa rather than actual numbers. Seller essentially is benefiting, at closing, on your upside which simply does not make any sense.
I agree the more deals you analyze the better you get.
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Account Closed
OP
Orlando, FL · Member since 2018 · 27 posts · 10 votes
7y
@Brian Burke Thank you so much for your reply, you are absolutely right.. my numbers must be incorrect. My opportunity for improvement, I believe, lies in CapEx. I have yet to grasp how to calculate impending high ticket expenses and how it relates to current asking price when 1 item may be needed in a year and others in 3, 5 years etc.
Would 10% CapEx in reserves as well as 10% deducted each year be a good rule?

@Kurt Jones Thanks Kurt! I'm right down the street from you, in Casselberry. My budget and return desire seems to fit in line with Class C properties, at best.. I could see where inflated numbers, missing history etc. would be a common play for sellers.
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
7y
There is no "rule" for CapEx. Older properties will be higher than new ones, generally. Recently rehabbed properties will be lower than unrenovated properties of similar vintage. And so on. You have to look at all of the component parts and decide what needs to be addressed up front, and what will need to be addressed along the way and reserve for those expenditures. Which is why it's impossible to "desktop underwrite" everything you come across. Real estate is a tactile business and you have to get out there and see the asset to have a real sense of what the needs are.
After a while you'll get a "feel" for what this stuff will cost and you'll be able to get a rough idea of how much things will cost so you can do more desktop underwriting just as a first pass. But in the beginning there is no substitute for stepping foot on the assets you are analyzing.
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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Account Closed
OP
Orlando, FL · Member since 2018 · 27 posts · 10 votes
7y
@Brian Burke It's actually comforting to know there's an art to this and is gained with experience. Otherwise, it's easy to get discouraged and never take the risk. I really appreciate your input!
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Michael T.
Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
7y
@Account Closed mentioned once a buyer does their true due diligence they can see past the pro forma and know that the deal isn't too good to be true.
There are definitely deals out there that are good and as long as you due your due diligence you'll be okay.
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Account Closed
OP
Orlando, FL · Member since 2018 · 27 posts · 10 votes
7y
Thanks @Michael T.! I'll keep practicing and networking.
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Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
7y
Usually people overshoot potential value, undershoot construction or don't account for all of the management costs.
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Chase Louderback
Real Estate Agent · Luray, VA · Member since 2016 · 460 posts · 293 votes
7y
@Brian Burke nailed it. Your underwriting could be off to make the deal look good or there may be some material defect, poor location, etc that you can't see from the Loopnet listing that is causing it to sit on the market.
What are you using to underwrite your deals @Account Closed?
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Account Closed
OP
Orlando, FL · Member since 2018 · 27 posts · 10 votes
7y
@Chase Louderback Hi Chase, thanks for the reply. I'm using pen and paper to run numbers. I've used some apps and REI calculators but I really like seeing it on paper until I'm more experienced.
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Account Closed
Rental Property Investor · Central, FL · Member since 2016 · 950 posts · 821 votes
7y
Originally posted by @Account Closed:

I've been practicing analyzing deals found on Loopnet, and curious why certain properties are listed for months and some close to a year. Especially when the numbers APPEAR to work? The areas of interest are very populated and active, like Orlando and Jacksonville, Florida.
My question is for the multifamily investors that have gone after these deals, and soon discovered why they are too good to be true.. what are some reasons you found? I understand this can be a very broad answer especially ones like major structural damage or total rehabs, but some of these listings with numbers and photos etc. just appear to work. Thanks!
I run numbers on the same/similar LoopNet properties given I’m in your area. And just like everyone else said it comes down to representation of the actual numbers by the broker.
Just two weeks ago I had a NNN lease property I put an offer in on. The numbers worked based on what they provided. Once we started doing do diligence on it it was discovered that the "business owner" was on reliable at paying their rent or the other aspects of the triple net lease So we walked away. If the business owner had been reliable we would've ended up buying the property.
I also have see a lot of times what they provide for the expenses is a “fabrication“ of the truth. If they are listing it as a 10 cap It’s probably a 6 to 7 cap due to unlisted expenses.
I’ve noticed a lot of the multifamily 5 to 50 unit mom and Pop run places don’t take into account actual expenses such as lawn care pest control vacancies or even property management costs. Or worse yet they represent the market rate rents for the sale cost not the current rents which are massively discounted because they would rather have 100% occupancy then to deal with tenant turnover which means most likely in my opinion all the units would need a lot of deferred repairs once you took over.
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Account Closed
OP
Orlando, FL · Member since 2018 · 27 posts · 10 votes
7y
@Account Closed You’re right about that! I’ve noticed these places are private owners and the same for many years. Also the buildings appear unkempt and no real lawn care or maintenance to speak of... that’s a great point when I analyze my own numbers
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Chase Louderback
Real Estate Agent · Luray, VA · Member since 2016 · 460 posts · 293 votes
7y
@Account Closed Are you looking to invest using only your own money? And are you doing a very high level analysis on these properties? (I.e NOI/cap rate to determine the value and comparing it to your projected NOI/projected exit cap rate for future value)
Just curious since it can be pretty difficult to do the complete analysis on just pen and paper. A lot of people use excel spreadsheets or software if it passes that initial "this looks interesting" high level analysis to get a more precise estimate.
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Ray Johnson
Irvine, CA · Member since 2016 · 545 posts · 614 votes
7y
@Brian Burke What are some of the differences in your "Desktop" underwriting template, versus your complete IRR template? Do you have a desktop template you can share?
I come from the Institutional Grade Real Estate side of the business so my tools and skillset skew in that direction, there's no way I can get through these personal acquisition smaller multifamily packages quickly with what I'm using.
Because of my experience there are some deals I can look at on the surface and know it's a terrible deal or simply someone testing the market to see what buyers are willing to pay so I don't need to waste my time building out a complete IRR analysis on assets that fall into those categories.
@Account Closed Dealing with LoopNet and other publicly listed deals on the market for lengthy periods of time, you'll notice the asset may fit your criteria on paper then your team walks the property and you see all the issues before you even get to an inspection and immediately know the deal isn't going to work.
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
7y
@Ray Johnson I don’t have a quick and easy model. The few institutions that have seen my model have told me it’s the most thorough one they’ve ever seen, so it’s of no use for underwriting small assets, much like the tools you are using. If I ever had a desire to go back to acquiring small assets I’d probably build a model from scratch that would be a stripped-down version of what I’m using now.
The only quick tool I have is my investment box. By asking how many units, when it was built and where is it I can throw a deal away in less than five seconds. From there it’s an hours-long process to model up and analyze every deal and involves at least three people on my team. Everybody wants a way to sort a good deal from a bad one in a short amount of time. I don’t think that such a thing exists without the likelihood that some great deals fall through the cracks by failing the tests in an abbreviated process.
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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Ellie Perlman
Multifamily investor · Boston, MA · Member since 2017 · 281 posts · 521 votes
7y
@Carrie Mims - a deal that is too good to be true can be one of two:
1. Bad location - high risk high reward deal.
2. Aggressive underwriting - either the investor is inexperienced or s/he are aggressive in their approach. For example: low exit cap (compared to in place cap rate), unrealistic organic growth (market rent growth), etc.
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Jai Reddy
Edmond, OK · Member since 2012 · 456 posts · 270 votes
7y
I backed out from an advertised 9.6% Cap rate, after speaking to the 'anchor' tenant, of their plans after their remaining 2.5 years on the lease. Tenant was actually building out his own facility elsewhere and was going to relocate there. Apparently, the current owner knew of this tenant's plan to relocate.
This tenant currently leased out 70% of the current space, something that isn't easy to find a new tenant for.
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Gwyeth Smith
Rental Property Investor · Huntington, NY · Member since 2016 · 102 posts · 74 votes
7y
@Account Closed. Here are a few things I usually adjust for when underwriting off an OM, whether it be from LoopNet or not
- Closing Costs
  - I can't tell you how many times I see CoC calculated on an OM using just 25% of the purchase price without regard for closing costs, prepaid insurance, prepaid taxes, or anything that might be required to close
- Vacancy %
  - I bring this to the market average or if it’s a small to mid-sized building, I’ll look up and see how many units are being marketed online for rent.
- Property Management
  - I will bring this to what the company I will use charges
Stuff like that usually changes the numbers a bit. At the risk of being chastised, sometimes a deal that looks too good to be true actually IS a good deal. Loopnet has its reputation, and deservedly so. With that said, I know of two people who have found good deals there recently (unfortunately not me!). With the perception being what it is, some good deals may get overlooked and be waiting there for you to find!! Best of luck to you.
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Kelly Iannone
Rental Property Investor · Orlando, FL · Member since 2018 · 301 posts · 354 votes
7y
@Carrie Mims welcome Carrie! I’m interested to see the response on your question.
Be sure to check out the local BP meet up in the first Saturday morning of each month. The next starts at 9:30 this morning, check out the BP events page for details. Hope to meet you there!
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
7y
@Carrie Mims
Most investors, unless very experienced, concentrate almost exclusively on some method of measuring return on investment, i.e., cap rate, Internal rate of return, discounted cash flow. However, just as important is the other side of the equation - risk. Because risk doesn’t easily lend itself to quantitative measures, it’s easy to ignore.
The fact that an investment has historically returned an amount equal to 12% of the asking price by itself tells me little. First, I need to know what the likelihood of this cash stream continuing is. Are key tenant leases up? Are the build outs only suitable for the current tenants? What is the chance tenants don’t renew their leases? How much will it cost to attract new tenants?
Even in the residential field we need to account for risk. What is the risk that very expensive repairs will be mandated to local government? What is the risk that some form of rent control will be enacted reducing or eliminating rent increases as costs continue to rise. What is the risk the major employer leaves town resulting in a 50% vacancy.
So as evident, I want a higher return as risk increases. The problem with ‘market’ rates is the the property you’re considering does not represent the market. So we must take market rates as a very general guideline.
Contrary to what most inexperienced investors believe, most “great” deals are not deals found where a seller is selling way under perceived market value. Most are deals where the markets perception of value is based on an incorrect assessment of future events, property potential, or risk.
Private Mortgage Financing Partners, LLC
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Account Closed
OP
Orlando, FL · Member since 2018 · 27 posts · 10 votes
7y
It took me a few days to get back online, but thank you all so much for your invaluable input. As a newbie, I have been failing to think long-term and only analyzing immediate "return." I've also been over generalizing certain numbers like CapEx, closing costs and cash needed etc. Thank you all again!
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