ID-100120378If you’ve ever seen a pro forma that is worse than the actual 12 month operating history, please let me know, because I’m pretty sure such a thing does not exist. My dad had a saying I thought was pretty poetic. It goes like this,

“Buyer’s are liars… and seller’s are liars.”

Perhaps it’s a bit cynical, but you have to be a little paranoid when it comes to this business. It’s simply to risky to take on someone else’s pile of garbage. A lot of this comes down to good due diligence and a big part of that is not trusting their pro forma.

A pro forma is simply the seller’s estimated performance for the next year or so. Somehow the rents can always be raised, the vacancy reduced and the expenses lowered. Indeed, one might wonder why this hasn’t already happened, especially when the occupancy sits at 70 percent or whatever. Maybe there is a good reason, but probably not.

It’s almost so taken for granted that a seller will inflate their pro forma that it’s not even dishonest, it’s just par for the course. Thereby it is expected that a buyer will adjust downward. After all, if one seller put in completely realistic numbers and a buyer then adjusted them downward because that’s what he’s used to doing (after dealing with so many other sellers), the pro forma would actually be unfair to the seller. So seller’s, even if they are completely honest, have a huge incentive to make the pro forma overly optimistic.

Even with that being said, though, I’ve seen a lot of people get lured into buying vacant apartments in warzones because they were so cheap and the pro forma looked so good. However, if you are in the middle of such a bad area, you are not going to reach 10% vacancy and your rents will be so low that you will in all likelihood be over the 50% expense threshold. You can make money in rough areas, but out-of-state or passive or newbie investors should not give it a try.

Make your own pro forma and base it off of the operating statement and your conservative estimations of what can be done with whatever value play you are going to attempt. If they don’t have an operating statement, or it’s poorly put together, well then you need to be all the more conservative.

I call them pro fake’as for a reason. Always be wary of seller pro formas.

Your Comments: