All Forum Posts by: Denise Evans

@MARK MONTANO, a pro forma is often used to pitch a project to investors. Especially for investors, you should always present a "best case," "worst case," and "most likely case" scenario, so they can properly assess risk.  Worst case will usually include lease up rates about 75% less than the market.  If I think I can fill up 10 units a month until I reach stabilized occupancy, then my worst case might project only 7 units a month. 

For brand new construction on unknown dirt, a worst case scenario might include earth moving expenses 50% more than anticipated. That is because you might run into a really deep patch of top soil that has to be removed and replaced with clay. That can be very expensive. Those are usually the only two surprises that will affect a worst case scenario, assuming you've gotten good numbers for other construction expenses and have a realistic schedule for completion of construction and issuance of a certificate of occupancy. 

Before doing a pro forma for new apartment construction, make sure you have good engineering ahead of time. Engineering expenses can be surprisingly expensive, especially if local authorities will require some type of water retention system to compensate for the fact that large amounts of soil with vegetation, that used to absorb rainfall, will now be covered with concrete and asphalt.  Installing utilities is also a very expensive, and surprising, item.  It's not just the cost of putting in the lines, but the tap fee imposed by the water works for simply tapping into their lines, and other such expenses.

Also, you will need architectural drawings before doing your pro forma, because things like firewalls can  make a huge difference in construction costs.  An architect can help you make decisions like increasing the set back line so you need firewalls only between units, and not along the rear walls that are too close to the property boundary.

FYI, hHere are a few of the upcoming tax sale dates for Alabama counties.

Shelby, March 23

Jefferson, sometime in May. Date not yet determined.  (You must register approx. a week in advance. Those people almost never answer their phones. Good luck.)

Jefferson--Bessemer Cutoff, same date and rules as Jefferson, different location.

Madison, May 1

St. Clair, May 4 and 5 (they have sales in two locations)

Cullman, May 5

Lee (Auburn area), May 6

Autauga, May 12

Lauderdale, May 12

Houston (Dothan area, in case you are unfamiliar with Alabama geography), May 18

Morgan, May 19

Baldwin, May 20 (runs several days until completed. The big national investors come to town with tens of millions of dollars to spend and bid up almost everything, driving effective redemption interest rates down to the 4.5% range)

Tuscaloosa, May 26  (You must pay a $100 bid fee, which is refunded immediately if you don't buy anything, and credited against purchase price if you do buy something.)

Mobile, May 28

Montgomery, June 3

A pro forma is just a spreadsheet showing anticipated revenues and expenses over a projected time period, usually one to five years.  Basically, it is just a budget. For a new project, the best practice is to prepare three different pro formas for any project, with numbers for a "best case" scenario (most rapid lease-up, for example), a "worst case" scenario, and a "most likely case" scenario. 

If preparing a pro forma for a banker, they will want to see certain expenses that you might not actually incur. For example, if you self-manage rental properties, the banker will still want to see an 8% to 10% management fee expense in the pro forma. That is because the banker has to look at the property as if the BANK owned it, not as if you owned it. They will also want a vacancy and collection losses expense, that could be another 5% to 10% of gross projected rentals.  The banker will also want to see maintenance and repair expenses as if a 3rd party did that work, even if you typically do it yourself.  A banker might also want to see a reserve of money put aside each month for future capital expenditures, such as a new roof or replacing appliances.

The pro forma for the bank (and your own internal use) will include debt service as an expense.  A pro forma prepared to aid in selling a property would not include debt service as an expense--it should assume the buyer will pay cash. BTW, a pro forma should always be used to sell income-producing property, because the buyer is not buying yesterday's revenue stream, it is buying tomorrow's revenue stream. The price should be based on tomorrow's revenue stream, as long as it is realistic and not pie in the sky.

I offer classes and resources for tax sales investing, and foreclosure investing, in Alabama.  I also provide free advice on my blog, which you can access at my website, and am willing to provide short answers to common questions posted here, if you'd like. Please check out my website, www. ButlerEvansEducation.com. REAL advice from an investor, broker, and attorney, all rolled into one person!

I think you should classify the deferred maintenance repairs as an acquisition cost on your books, but then do book-to-tax adjustments for your tax returns, in order  to expense those items.  On your business books, repairs necessary immediately upon acquisition are truly part of the acquisition expense, and unnecessarily skew historic repair expenses if you account for them as repairs and maintenance.

In Alabama, the three year right of redemption does not start "ticking down" until you take possession. If the property is occupied, and they don't leave voluntarily, you have to send written notice and then wait 6 months before you can file the eviction suit.

Regarding condos, the personal property in the condo does not pass with the tax sale. If it was furnished, you are not entitled to use the furnishings. This means that if the owner redeems, and wants a credit for the reasonable rental value of the furniture, you have to give that. Or, if the owner demands their furniture but without redeeming. Nobody ever asks for that, but you need to know when you are on weak ground in an argument, just in case it happens.  Never antagonize the redeeming owner into the arms of a lawyer if you are on weak ground.