QOTW: What is your biggest challenge when analyzing a deal?

Real Estate Broker · Denver, CO · Member since 2022 · 98 posts · 219 votes

4y

Alicia, I think you are totally right in saying that a lack of confidence in numbers is what holds people back in deals.

It took analyzing the deal many times before we took the leap on our first investment.

For long term rent projections I used a combination of zillow rental manager (not the zestimate), Bigger Pockets rental calculator, and rentalizer to come to a number I was confident about. I developed a pro forma using a combination of investor friends pro formas and Bigger Pockets rental calculator numbers. And then I had investor friends/peers review my numbers to make sure I wasn't crazy lol Utilizing people who had done it before was crucial.

For short term rentals, it's a little more involved because there are more expenses and you have to find a nightly rate rather than a monthly rate, which can be intimidating, but it's a very similar process. Seeing what data sites like AirDNA projections and then comparing and averaging comparable listings on Airbnb/VRBO 3 months out from present to come up with a nightly rate that you can be confident in. Comparing to other pro formas I developed an STR pro forma that includes expenses for my area and can be adjusted based on the bed/baths.

Taking the time to get comfortable with the numbers, doing analysis over and over again like Brandon Turner teaches, and then getting eyes on it from people smarter than me helped me finally take the leap rent out/purchase our next property!

And seeing it work out how I thought it would (actually better) bumped my confidence up 1000% and made me eager for my next deal!

12 Reply

Jeffrey Albaum

Investor · Austin TX · Member since 2018 · 151 posts · 165 votes

4y

Hi @Alicia Marks! I have found that I still struggle to nail down rehab costs. Although I get multiple quotes, I feel like I'm still constantly surprised by things that come up during the rehab. Biggest lesson I've learned is to always have way more cash than you think you need!

14 Reply

Christian EhlersBusiness Member

Real Estate Agent · NH & MA · Member since 2021 · 457 posts · 291 votes

4y

I'd agree with @Jeffrey Albaum on this one. I'm not a very handy person and never worked construction or anything related to that field so it's been difficult for me to nail down rehab costs, even with all the general real estate knowledge I've gained from helping clients. Knowing when certain things need to be done and when they don't was also tough. To add to that starting out it was hard to get a busy contractor to come look at houses to give estimates before even giving a potential seller an offer because I had no idea of the costs.

For how to overcome it though I would say focus on finding a General Contractor as part of your core 4 if you aren't experienced in the field. Once I found a friend of mine who was a designer/GC that could eyeball photos to give a broad estimate, I felt confident sending out offers more quickly.

Curious what others have to say!

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9 Reply

Account Closed

Realtor · Crossville, TN · Member since 2019 · 12 posts · 9 votes

4y

In my area, nothing is cookie cutter. My hold back is the offer price. There can be a 5 bedroom new home and 4 miles away a home with a trailer. It can drive on crazy. My comps have to be miles away at times and then I am nervous the appraisal (if any) comes back even less.

4 Reply

Richard Advani

Lender · Southern California · Member since 2022 · 25 posts · 15 votes

4y

Due Diligence and accuracy of data provided by others

2 Reply

Alicia MarksPro Member

OP

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

Quote from @Jeffrey Albaum:

Hi @Alicia Marks! I have found that I still struggle to nail down rehab costs. Although I get multiple quotes, I feel like I'm still constantly surprised by things that come up during the rehab. Biggest lesson I've learned is to always have way more cash than you think you need!

I struggle with that as well. I try to standardize most of my supplies, but the prices are up and down. I also do a lot of old houses, so you don't see the problems until you start peeling back the layers.

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2 Reply

Dave Van HornPro Member

Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes

4y

Right now it looks like estimating the rehab is trending as the number 1 answer in the poll, which would probably be my #2 choice for investors (especially for greener investors or ones without construction experience), but I think the real answer is Determining ARV.

Predicting the exit price when the cost of labor, supplies, and capital going up can be tough right now. In this environment the person buying the product will likely need financing and it's difficult to predict what they're going to really be willing to pay down the road.....and how many buyers there will actually be as rates go up (which would effect the hold time and concessions offered).

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5 Reply

Alicia MarksPro Member

OP

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

Quote from @Account Closed:

In my area, nothing is cookie cutter. My hold back is the offer price. There can be a 5 bedroom new home and 4 miles away a home with a trailer. It can drive on crazy. My comps have to be miles away at times and then I am nervous the appraisal (if any) comes back even less.

I struggle with that in my Detroit properties as well. A fully rehabbed duplex in one area can't be compared to the $5k priced land bank property 2 miles away just because they are similar age and square footage.

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2 Reply

Alicia MarksPro Member

OP

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

Quote from @Richard Advani:

Due Diligence and accuracy of data provided by others

Where are you pulling data that you con't feel can be trusted? Is there a way to independently verify to make you feel more confident?

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0 Reply

Alicia MarksPro Member

OP

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

Quote from @Dave Van Horn:

Right now it looks like estimating the rehab is trending as the number 1 answer in the poll, which would probably be my #2 choice for investors (especially for greener investors or ones without construction experience), but I think the real answer is Determining ARV.

Predicting the exit price when the cost of labor, supplies, and capital going up can be tough right now. In this environment the person buying the product will likely need financing and it's difficult to predict what they're going to really be willing to pay down the road.....and how many buyers there will actually be as rates go up (which would effect the hold time and concessions offered).

I would agree on ARV being a challenge. I'm running much more conservative numbers right now, which means I'm passing on more flips in my area. Where were were unsure on ARV 6 months ago and could be pleasantly surprised, the current climate has people feeling much more timid in their predictions.

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1 Reply

Travis Hill

Investor · Multiple · Member since 2019 · 175 posts · 150 votes

4y

I have purchased two SFR in the past six months. Both of them have gone over rehab budget. Fortunately, the ARV at 75% after paying private money off gave me positive cash flow with 20-30% CoC return. Being able to be in a property for less than 10% of ARV is an acceptable win.

2 Reply

Bryan Escudero

Investor · Miami · Member since 2022 · 48 posts · 48 votes

4y

Since we are in the Mid-size MF space, it is kind of difficult to get good numbers. Most don't have an OM and some don't have T-12. It becomes irresponsible to make too many assumptions when looking at some of these deals, so we have to walk. Due diligence is what allows us to go into a deal with open eyes. As we move into larger properties, these items are more the norm, but it makes me uneasy without these 2 important documents.

1 Reply

Alicia MarksPro Member

OP

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

Quote from @Bryan Escudero:

Since we are in the Mid-size MF space, it is kind of difficult to get good numbers. Most don't have an OM and some don't have T-12. It becomes irresponsible to make too many assumptions when looking at some of these deals, so we have to walk. Due diligence is what allows us to go into a deal with open eyes. As we move into larger properties, these items are more the norm, but it makes me uneasy without these 2 important documents.

Can you clarify OM and T-12?

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1 Reply

Bryan Escudero

Investor · Miami · Member since 2022 · 48 posts · 48 votes

4y

Quote from @Alicia Marks:

Quote from @Bryan Escudero:

Since we are in the Mid-size MF space, it is kind of difficult to get good numbers. Most don't have an OM and some don't have T-12. It becomes irresponsible to make too many assumptions when looking at some of these deals, so we have to walk. Due diligence is what allows us to go into a deal with open eyes. As we move into larger properties, these items are more the norm, but it makes me uneasy without these 2 important documents.

Can you clarify OM and T-12?

Sure...

The OM is the Offering Memorandum. This is basically a flyer that the selling agent or agency puts together with information about the subject property (the property that you are underwriting).

The OM has information such as:

Number of Units / Mix of Units / Utilities / Loss to Lease / Administrative Costs

Comparable Properties / Information about the surrounding market / Income information

The T-12 is the trailing 12 month expense report.

The T-12 has information such as:

Revenue / Administrative Costs / Capital Expenditures / Repairs and Maintenance

The difference hear is that you get to see a better picture of the property in a month by month basis. You might have a large repair in January, but nothing too crazy for the rest of the year...The OM would give you the number as a whole, but the T-12 lets you see that repair and maintenance numbers can be skewed by an event like that.

As I study more about conservative underwriting, I am keeping a closer eye on these and other forms of due diligence before bringing a deal to my investors.

2 Reply

Alicia MarksPro Member

OP

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

Thanks @Bryan Escudero! Abbreviations and terms can be confusing for new investors and some are even regional differences in terms. This was a great explanation!

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1 Reply

Bryan Escudero

Investor · Miami · Member since 2022 · 48 posts · 48 votes

4y

Thanks! I will keep it in mind as I get back into the forums. We were working on closing some deals and I do want to continue to add value to the BP Community. I appreciate it!

1 Reply

Jwana Player

Investor · Los Angeles, CA · Member since 2016 · 13 posts · 8 votes

4y

It's 1. Being Confident in the ARV (especially since I am a actively looking for a BRRRR deal) and 2. Estimating Rehab Costs..I'd rather just compare a few bids than try to estimate the costs on my own. I don't have a construction background at all so it will do me no good to try to just guesstimate. :S

3 Reply

Napoleon DeCiutiis

Real Estate Agent · The Short Term Shop / Florida Emerald and Forgotten Coasts · Member since 2022 · 217 posts · 126 votes

4y

I agree with refurb costs...I was a PM for a construction company for over a year, and prices have been higher than usual. Keeping a GC close/attached to your belt during your initial refurb investigation will help.

1 Reply

Nicholas Adams

New to Real Estate · Danville, PA · Member since 2022 · 23 posts · 13 votes

4y

More than anything, I struggle with certain long term projections to account for that are more specific to my area. The reason being is that the properties generally are 50-100 years old, making it harder for me to calculate the cost of certain repairs/replacements because of surprises that come up that I fear. One big factor to the numbers is the cost of oil heat, this has been a concern to me. Although I have calculated it into my numbers, I get extra conservative because of the fluctuation of cost. I definitely plan on avoiding some of the calculation headaches associated with these properties by getting more clear on my criteria when looking for my next rental.

1 Reply

Alicia MarksPro Member

OP

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

Quote from @Jwana Player:

It's 1. Being Confident in the ARV (especially since I am a actively looking for a BRRRR deal) and 2. Estimating Rehab Costs..I'd rather just compare a few bids than try to estimate the costs on my own. I don't have a construction background at all so it will do me no good to try to just guesstimate. :S

You definitely get comfortable with what you'd expect to pay for projects or realizing that two problems may be connected. It takes time and practice just like anything else. I would advise you start to learn basic construction concepts on your own. Some contractors will try to take advantage of a lack of understanding, which can cost you a lot.

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0 Reply

Alicia MarksPro Member

OP

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

Quote from @Nicholas Adams:

More than anything, I struggle with certain long term projections to account for that are more specific to my area. The reason being is that the properties generally are 50-100 years old, making it harder for me to calculate the cost of certain repairs/replacements because of surprises that come up that I fear. One big factor to the numbers is the cost of oil heat, this has been a concern to me. Although I have calculated it into my numbers, I get extra conservative because of the fluctuation of cost. I definitely plan on avoiding some of the calculation headaches associated with these properties by getting more clear on my criteria when looking for my next rental.

I do a lot of old houses, so those contingency surprises are always on the higher end of my budget. Most people say use a 10%, but older homes I do a 20% contingency. Nothing like thinking you can salvage plumbing and finding out you're wrong.

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1 Reply

Alex Talcott

Attorney · Durham, NH · Member since 2019 · 292 posts · 126 votes

4y

As I build a team with more underwriters, nationwide markets, and different buyer structures and business models, the biggest learning is the importance of overall context.

When operating off of imperfect information, as one always does, assumptions have to be reasonable.

Inexperience and ignorance (harsh word, but many in business ignore readily available news) are challenges.

If you don't find and train right, and you don't have other staff to check junior colleagues' work, there are likely to be #s not noticed as anomaly (beyond outlier; should be recognized as clearly incorrect, as a typo or something way off).

1 Reply

Lex Wilridge

New to Real Estate · Austin, TX · Member since 2022 · 3 posts · 1 vote

4y

We talked about analyzing deals recently. I would love to hear your thoughts @Dustin Thomas @Account Closed

1 Reply

Jose Cruz

Investor · Houston, TX · Member since 2022 · 10 posts · 7 votes

4y

Being that I'm pretty new to this finding the ARV seems to be the part I lose confidence in sometimes mainly due to lack of comps in certain areas. I have felt more confident in my numbers lately learned alot since I've joined the forums but numbers just seem to be everywhere from time to time.

1 Reply

Rodney Sums

Laveen, AZ · Member since 2016 · 584 posts · 528 votes

4y

Quote from @Alicia Marks:

Welcome to our Question of the week! If you haven't voted in the poll, please do. We are talking about deal analysis this week. It seems to be challenging to commit to a deal if you aren't confident in your numbers. That can hold a lot of people back from solid deals. What part of analyzing did you (or do you) struggle with when evaluating a property?

Have a deal you're currently running or ran but passed on because you weren't confident in your analysis? Link your calculator analysis here for helpful, constructive, and nonjudgmental feedback! We are here to help you learn!

Never analyzed a deal before? Go to Tools<Calculators in the top tab to calculate your first deal! You can analyze 8 different investment strategies. You get 5 free to start, and a badge on your profile.

Let's get talking!

I selected Financials due to interest rates, property tax changes, and seller attitudes.

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QOTW: What is your biggest challenge when analyzing a deal?

QOTW: What is your biggest challenge when analyzing a deal?

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