The Truth People Hide from You About a Real Estate Pro Forma
If you are just learning how to invest in real estate, you may be asking what the heck is real estate“pro forma”? In the real estate world, pro forma is essentially the process of establishing the value of a property based on its future potential earnings instead of the current earnings.
Real Estate Pro forma earnings can be useful as they do help to project financials into the future. However, these reports are sometimes an attempt by the selling party to cast a property’s earnings in a more positive light. Or they could be an attempt to excuse poor financial performance. The seller may showcase more appealing numbers and neglect other information such as certain maintenance expenses. They may also try to give the impression that it is more valuable than is actually is to prospective buyers.
Now, I am certainly not saying that every seller is looking to hide something when they provide real estate pro forma numbers. Your job as you learn how to invest in real estate is to perform your due diligence. Ensure you have the best information available for your financial analysis. If you want to properly establish the value of a property, you will want to base it on what it is worth today; not on what it could potentially be worth. As a result, you need to be leery of taking real estate pro forma financial statements at face-value. You should certainly not base your decision on whether or not to purchase a property solely on these numbers. Do your homework!!
Sellers often highlight the amount of income a property can generate if it was 100% occupied. It’s useful information. However, as a buyer, you need to be more concerned about what income it is currently generating based on actual occupancy levels. This allows you to assess its present value, and ensure you don’t make the critical mistake of overpaying for your investment.
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