Be Wary of Pro Forma's

If you've ever seen a pro forma that is worse than the actual 12 month operating history, please let me know, because I'm pretty sure such a thing does not exist. My dad had a saying I thought was pretty poetic. It goes like this,

"Buyer's are liars... and seller's are liars."

Perhaps it's a bit cynical, but you have to be a little paranoid when it comes to this business. It's simply to risky to take on someone else's pile of garbage. A lot of this comes down to good due diligence and a big part of that is not trusting their pro forma.

A pro forma is simply the seller's estimated performance for the next year or so. Somehow the rents can always be raised, the vacancy reduced and the expenses lowered. Indeed, one might wonder why this hasn't already happened, especially when the occupancy sits at 70% or whatever. Maybe there is a good reason, maybe not.

I've seen a lot of people get lured into buying vacant apartments in warzones because they were so cheap and the pro forma looked so good. However, if you are in the middle of such a bad area, you are not going to reach 10% vacancy and your rents will be so low that you will in all likelihood be over the 50% expense threshold. You can make money in rough areas, but out-of-state or passive or newbie investors should not give it a try.

Make your own pro forma and base it off of the operating statement and your conservative estimations of what can be done with whatever value play you are going to attempt. If they don't have an operating statement, or it's poorly put together, well then you need to be all the more conservative.

I call them pro fake'as for a reason. Always be wary of seller pro formas.

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