Deciphering the Multifamily Operating Memorandum: A Guide for Property Investors

Offering memorandums are marketing presentations of the deal made by the broker. Know that they're not legally liable for the information being accurate. This is why it is the most important to look at the financial statements of a deal and do your own research.

It's not that brokers are dishonest, they will just have their own opinion about what the pro-forma will be. They may have been given incorrect information, typos, their cost expectations could be based on other deals, not from a detailed bid, etc.

A side note is that almost all large multifamily deals are sold based off of pro-forma numbers, not day one numbers. This is where a lot of the "art of the deal" comes into play in how you can improve the property.

When you look at the OM, you can go through it quickly. Here are a few things to note when looking through an OM.

1. In the property description, what is the brokers selling point on the deal? Location, value add, loan, market, supply and demand, etc.

2. What the broker thinks can be done to the property for value add. They may give you a list of multiple ways to improve NOI based on what they think can be added.

3. Business plan that they are suggesting

4. Property specific details that may be important to know. Individually metered utilities or master metered, etc.

5. Pictures of the building. Look at the appliances, potential maintenance issues, landscaping and other ways you can improve the property.

6. Sometimes they provide potential loan options they've sourced to select as well.

More about OM's

Brokerages have different ways of presenting the deal through an OM. It has their own unique marketing style. The order of the details may be different.

OM's will only be on marketed deals. There won't be an OM made for an off market deal. You have to do your own research and look at the raw documents.

Always double check the numbers and create your own pro-forma based on the research you have done personally.

Overly optimistic OM's are very common. Shifting small details can make a huge difference in list price.

Check the proximity of the advertised household income on a property. Oftentimes you'll see the HH income advertised based on a 5 mile radius if that is the higher number. You need to be looking at the household income of the specific neighborhood. Go to city-data.com and use their interactive map. Type in the zip code, then find exactly where the property is located within that zip code.

Do your own research on comparable properties. It can be hard to get accurate comp rent data online alone. You may need to call them personally or pose as a prospective tenant.

Always do your own underwriting.