We’ve all been there staring at an Offering Memorandum or Excel Spreadsheet wondering why the numbers aren’t matching exactly. Many underwriting mistakes happen not intentionally, but rather through a variety of distribution channels. Understanding the economics of the real estate transaction is an essential part of the deal for all parties involved including buyers, sellers, and agents and brokers. And when there are mistakes in the underwriting it can affect pricing as well as the smoothness of the transaction. Even with a well-trained eye, mistakes do happen.
There are 5 common mistakes than can be alleviated to help your next transaction process with ease.
1. Valuation Timing
When reviewing a Rent Roll, a common oversight that the information was valid at the time the property was first placed on the market or underwritten; however, as tenancies often have rental escalators the current rent maybe slightly higher. Or someone may have vacated.
2. Property Taxes
There are many states that reassess the property taxes upon the sale of the property, such as California. However, sometimes the operating expenses reflect the ownership's current property tax amount, which can be significantly older especially when a property has not traded for many years.
3. Leasing Updates
Tenants often have options to extend their leases, maybe in the process of renewing, or a vacant space has an offer to lease. Sometimes these timely updates can significantly impact the valuation of the property.
4. ARGUS
We would all like to think that technology is perfect; however, like most programs, the information exported is only as good as the information inputted. ARGUS is a fancy platform and one minor change can trigger an entire calculation result. For instance, having the rent show as $/Month (amount per month) instead of $/SF/Month (amount per square foot per month).
5. Specific Lease Clauses
One paragraph can change the entire economics of the deal. For instance, if a Big Box retailer has the right to terminate the lease early or is not responsible for paying certain expenses.
Paying close attention to these five underwriting mistakes will help you analyze the deal while minimizing some risk. With especially large transactions, it is helpful to have many eyes looking at the deal and determine appropriate procedures. As such, besides having an in-place analyst and acquisitions team, ask your real estate professional as well as third party vendors for a review. The more thorough the underwriting review process, the less likely to have avoidable errors.
