Is There Even a Use For Optimistic Broker Proformas? A Second Look

Interpret the broker's proforma as the best possible case scenario. They're trying to sell the deal for the most favorable price.

Because of this, you'll almost always see the income go up and the expenses go down. What we'll mainly be discussing in this blog is the expense side.

1.) What you want to do is do your own first pass underwriting before looking at the broker's proforma numbers. You may use tax information provided in documents, market knowledge of other deals expenses in the area, basic insurance indications from sites like ratemap.com, adjusting for mis-accounting of which items should actually be capex expenses, etc.

2.) Once you've come up with your first pass expense assumptions, then look at the broker's proforma numbers. What you're looking for is if any of their expenses assumptions are higher than yours. With the assumption that the broker will make the expenses as low as reasonably possible, you would adjust the expenses to the higher number between your assumptions and the brokers.

3.) If the deal's return numbers seem to work, then what you would want to do is get a few opinions on your income and expense underwriting from local property managers. If the consensus between the property managers is that the income and expense estimations are attainable, then you could move forward and put an LOI in.