Why are brokers selling based on projected cash flow?

[John McKee]

I was just looking at a deal that was a 7% cap, but it was based on projected NOI after I renovate it. Is this common that brokers and sellers advertise this way?

By the time I renovate it and sell it (assuming a similar 7% cap) I would have lost money.  

[Trevor Richardson]

It is very very common to do this. The problem is agents, buyers etc… focus on one cash flow scenario. In reality cap rates and cash flow should be calculated to 3 or more scenarios. Your 7% cap is focusing on the highest possible return, when you find out that it’s actually a 5% cap on actuals you are let down. This is an industry problem that honestly can be solved by organized analytics and communication. 

We have developed a way where we look at all multifamily properties with three different cash flow scenarios. Actual, market and proforma rents. We present all three on the brokerage listing side and buyer side so they can see each scenario clearly. 

Any owner with under market rents is going to want their agent to sell the property based on what the cash flow “could be” not what it is. We set correct expectations with everyone from the beginning.