“There are three kinds of lies: lies, damned lies, and statistics”
– Benjamin Disraeli
The 50% rule is a great start for back of the envelope analysis for apartment investing, but what if you are seeking development capital for a project or private money? Will a wave of the hand and “oh the 50% rule says x” for your pro-forma suffice?
Pro-Forma’s Can Be a Dangerous Thing.
A recent horror story I heard is a prime example:
Allegedly, a group of doctors fresh from a famous apartment guru boot camp rushed right out to buy a property. As it turns out they relied on the pro-forma’s provided by the seller side. The actuals only supported a shocking 1% cap rate based on what was paid. OUCH! The end result is new buyer is ending up with a steal-of- a-deal based on their pain.
When dealing with the seller side in commercial and you need a friend: better to get a dog.
That being said, for a developer – I believe pro-forma’s are more dangerous. We are telling our own story. For me I am very concerned about “deal junky” syndrome. Are we lying to ourselves’ to justify our passion to build? Field of Dreams is a great movie but the SEC won’t let you off the hook based on that defense. Okay maybe if you did a séance and brought Johnny Cochrane…”the pro-forma didn’t fit so you must acquit”?
Are enforcement actions and civil litigation a pretty solid deterrent to the Field of Dream’s effect for you too?
To seek a reliable truth others have innovated a great data source. Two organizations that I have found infinite return from are Institute for Real Estate Management (IREM) and …read more