Pro Forma income vs Actual Income - Property Price

[David Hite]

Good morning!

Wanted to get your input on this.

Been screening multi-family and commercial real estate opportunities.  One thing I have noticed is the asking price with it's cap rate, is almost always priced out by the properties POTENTIAL income!  I.e.  If you increase rents, if you go MUGS and put the utilities, if if if if

Having owned and sold businesses and 1-2 properties, I have learned that I do not want to pay for POTENTIAL, but want to pay for what it ACTUALLY produces.

Of course the seller will want the max, and the real estate agent will also want the max, so will push for the Pro-forma or potential income.....and base asking price off of this.

I find that my numbers to evaluate properties almost never work with the asking price (based off potential), but almost always work with ACTUAL value.

-What are the experiences of the group in negotiating with the seller/agent to bring the price down because of this fact.....Do we hope to get all the way down to ACTUAL cash flow value?  Or should we aim for somewhere in between.

-How do you approach this?  Start by normal DD and circle back eventually?  Or in the early stages ask for more detailed financials for the last rolling 12 months, and come back with that data early in the process to weed out those who won't budge?

(Of course other factors can play into it, location, rates, how long its been listed etc).

I appreciate it!

David Hite

Commerce City, CO 80022