We’ve all heard the saying, “Figures lie and liars figure’, but normally it is used in conversations about politicians and economists. However, I’ve found it equally true when dealing with the real estate industry. It is a tough pill for me to swallow as I make my living through real estate services but I must admit a lot of real estate professionals aren’t being completely honest. For the record, I want to make it clear that I’m not generalizing that all real estate professionals lie, certainly I don’t. What I’m saying is that there are a significant number who do.
My firm, Katchen Company, represents commercial buyer clients as a broker, consultant or joint venture partner. Through this representation we help our buyer clients with their due diligence necessary to make an educated buying decision. One of the main documents that are utilized is an Income and Expense recap or a Pro Forma of expected performance for the property. As you might expect, the listing agents prefer to us a Pro Forma rather than real numbers. Hum, I wonder why that is? Obviously, an Income and Expense recap indicates the real income and expense for the property where a Pro Forma indicates the expected performance once a property is purchased.
There are several areas where, “Figures lie and liars figure’, in a Pro Forma document with the most obvious being income. Properties that are currently receiving rents below market will magically start receiving market rents or even higher at the moment of purchase without loss of rent to vacancy or cost for repairs, tenant finish or commissions. Speaking of vacancy, regardless of how much vacancy the property currently has it will fare better than the current market the moment it is purchased. Obviously, the seller does a terrible job of managing the property expenses because the Pro Forma indicates how much the buyer will be able to reduce the cost of property management, utilities, repairs, property taxes and insurance. All without having to make any repairs to the differed maintenance on the property. Since they’ve already toyed with the number so far it is not unusual to see the CAP Rate mirror or be lower than the lowest rate being offered for the same type of property. Please notice that I didn’t say similar quality of property. I’ve seen Class C properties being offered at CAP Rates only considered for “Investment Grade” properties.
As you can see, “Figures do lie and Liars figure’. So what is a person going to do to protect them self when looking to purchase a commercial property. My best advice is to find an experienced professional for representation. How will you know if they are no better than the one representing the buyer? You won’t, but at least you’ll be assured they can play of good hand of “Liars Poker” when representing you in negotiations of the purchase price.
