Thursday, July 30, 2009

The "White Pad" Analysis

It pays to know your numbers. I've been plowing through lots of operating data sheets for apartment buildings lately. When I first started looking at them after so many years of not doing that... I was hilariously rusty.

I used to be able to rattle off percentages and do mind calcs like "Rainman." However, for a while, I looked blankly at data sheets trying to remember why agents continue to pawn off "Pro Formas" on me, and never offer the actual operating numbers.

I've had agents tell me that they don't provide the actual operating numbers without a written offer. In other words, the Seller is testing the water, and doesn't want to get organized unless he's got an actual sucker on the line that would actually fall for that approach.

Normally, I would pass on a situation like this, but let me tell you a story about a Seller who had no numbers, did not know his numbers, and as a result gave me several hundred thousand dollars in equity because of his ignorance.

The Seller had just foreclosed on the building that he had previously seller-financed. He didn't have any numbers, except the taxes and insurance invoices. He also didn't have a clear idea of who was in the building, or who was paying rent. He didn't know the market rents or vacancy factor in the area.
Otherwise, I had to make my own assumptions of what the potential was. This was my first apartment purchase.

After all was said and done, I bought this property for less than 25% of it's retail value because the Seller himself didn't know his numbers whatsoever. He offered a sale price I felt was too good to be true, and I recognized the sale price as being so grossly under market that I could literally barely hold the pen to write up the agreement. To make matters worse, I didn't have a pre-printed sale agreement with me, so I had to write a "shorthand" contract on a sheet of yellow lined note paper. All I listed was the price, the down, the closing date, the loan balance, and the interest rate. I closed three months later.

Now because I knew my numbers I was able to confidently and quickly, if not
not nervously and feverishly act! :D

The Seller, meantime, did not know what he'd done to himself until he went back home and found his answering machine full of inquiries about his building. I would love to have been a fly on the wall and saw his face after listening to 30 messages asking about his apartments! he he he

I did spend 90 days defending my contract after the Seller realized what happened and wanted to back out for obvious reasons. I wouldn't back out, and we finally closed after threatening to tie the property up six ways from Sunday, or until his great grand children were dead, whichever occurred last.

This story would have never happened had I not
analyzed over 100 operating data sheets in depth, and performed forecasts and what-ifs on every one of them to see what I could do under various scenarios. I knew my farm, and my numbers.

Since I knew exactly what I could do with 30 newer units in downtown Kansas City, and the Seller did not know, I achieved a 75% discount.


The moral of this story is, know your numbers, be able to make educated guesses, and then seize the opportunities when they present themselves.

Somebody might say, "But Jay, that was a gross steal. How could you not know that, regardless of whether you had analyzed 100 other data sheets, or not?" Well, the analysis gave me confidence to avoid second-guessing myself, and flinching at the last moment. Months before, without having done hardly any analysis, I had come across other "steals," but hadn't really appreciated what I was looking at...or the scarcity of deals like this. As a result, I blinked...and lost deals to investors that did know my farm better than I knew it.

Meanwhile, the fact remains that the Seller did not know I WAS BUYING A STEAL --- from him.


Someone recommended that we, "Know Thy Numbers". I never recommend this to Sellers! :D

1 comment:

MattJohnson said...

X-actly. It all comes down to knowing your area and your numbers, and following a checklist to be able to spot the BS in the financials. I followed the same route, analyzing WELL over 100 statements (probably closer to 300-400), and I think I found a grand total of 1 that had no shenanigans whatsoever in it.

Although I wound up postponing my apartment-buying venture until cap rates return to a more sane level, I'll be ready to pounce once the opportunities start to present themselves.

Great story!