Posted by ray@lcorn on June 02, 2006 at 12:19:22:
Bob,
If you broke even at 75% you did better than the average. In my experience arrears are worth about 50%.
And it’s a trade-off… as I mentioned, I don’t like the seller chasing my tenants either. So you got rid of that problem and broke even on the accounts.
ray
Anybody take CCIM Institute Comm. RE courses? - Posted by rich
Posted by rich on May 27, 2006 at 23:31:41:
Has anyone in this forum taken CCIM Institute Commercial Real Estate courses? http://www.ccim.com/
I want to learn more about being a commercial real estate investor and would like to know the pros/cons of taking these courses.
I agree with John - Posted by ray@lcorn
Posted by ray@lcorn on May 30, 2006 at 21:03:05:
Rich,
The CCIM program is known as the “PhD of Commercial Real Estate”, and in my opinion the distinction is well-deserved. The quality of the information is second to none.
As John mentioned, the focus of the program is from the brokerage side of the business. However about a quarter of the CCIM candidates represent owners (mostly institutional).
Personally I prefer to deal with brokers who have the CCIM designation. Completion of the course work indicates a high level of commitment, and satisfying the experience criteria demands a high level of professionalism.
As an owner and investor I would suggest you pick and choose the specific courses that would fill in your knowledge base. The designation isn’t as important as understanding the fundamentals of investing in income properties.
ray
p.s. I do however, have one small beef with a CCIM practice. I took the 101 class a number of years ago, and strongly disagree with the use of “gross potential income minus a vacancy factor” in building an operating statement for valuation purposes. I could go on for pages on why this is incorrect, but it is a very good example of their bias toward brokerage. By depicting income this way it tends to overvalue the property. Since brokers are paid a percentage of sales price, higher is better, eh?
Absolutely excellent - Posted by John Behle
Posted by John Behle on May 28, 2006 at 02:05:03:
I’ve taken all but a couple and they are excellent. The amount and quality of information exceeds almost any course you will find and the instructors are top notch.
The focus tends to be towards an agent brokering property or a large developer. They’ve altered the courses some since I did it, but I’ll describe those I took.
CI101 covered financial analysis in great detail. There is nothing you won’t be able to do with a financial calculator when you are through.
CI102 covers market feasiblity analysis and demographics. With the tools provided there, you would have no question whether to build an apartment complex, shopping center or other commercial building in an area and what your occupancy would be. Then, with those details you have powerful data to help in getting loans or investment capital.
CI103 adds to the financial analysis and goes into greater details related to taxation.
CI104 goes into dealmaking, negotiating, role playing on how to talk with bankers, accountants, etc. It takes the details of the first three courses and puts them into practice.
I haven’t taken the other courses, but I believe they would be just as good. I recommend them all highly.
Re: I agree with John - Posted by Bob
Posted by Bob on May 31, 2006 at 07:51:52:
Ray, how do you figure the top line of the income statement if you don’t use gross potential-vacancy? Do you ask for the actuals over the last 12 months? Most sellers will tell you that that doesn’t include increases in the rent roll and shouldn’t be used.
Re: Absolutely excellent - Posted by rich
Posted by rich on May 28, 2006 at 15:02:36:
Thanks for your reply.
Im not looking to go the broker/agent route, but the investor route. I lack the knowledge of basic commercial fundamentals, so I feel like this course will allow me to learn the basics. Not to mention, being in this organization seems like it will provide some awesome networking opprotunites.
Re: I agree with John - Posted by ray@lcorn
Posted by ray@lcorn on May 31, 2006 at 11:00:07:
Bob,
Many investors make the mistake of using the projected income for valuation purposes. In essence that means the buyer pays the seller for the buyer’s risk and effort required to produce the income.
I value the property based on the trailing twelve months performance; i.e. actual cash collected minus accrued expenses, normalized for standard operating procedure. (e.g. delete any non-property expenses or increase for owner-performed management or maintenance).
That uses the most recent numbers available and offers the most accurate portrayal of the property’s status and income stream.
Then I project my return based on the current rent roll (including scheduled increases if signed by the tenant), historical expense plus anticipated increases, and the debt service based on terms quoted for the specific deal parameters.
ray
Re: I agree with John - Posted by Bob
Posted by Bob on May 31, 2006 at 11:24:04:
Ray, I’ve recently ordered your book and am looking forward to reading it.
Do you get resistance form seller regarding this? The last deal I did, the pro forma showed 30k in monthly rent roll. When I asked and then received the prior calendar’s year financial’s, the actual collections were approx 310,000. Far below 360,000 minus a vacancy factor. Of course the seller attributed this to extensive work on the building leading to additional vacancy that would not occur going forward. Bottom line, there was substantial vacancy due to lack of screening on new tenants. Took me over a year to stabilize the rent roll.
due diligence is the key - Posted by ray@lcorn
Posted by ray@lcorn on May 31, 2006 at 13:07:25:
Hi Bob,
I get resistance from sellers regarding a lot of what I do, especially in due diligence. But frankly, I couldn’t care less. I start from the assumption that everything they tell me is fiction until independently verified. More often than not the initial numbers don’t check out, in fact it’s rare when they do.
As you found with your deal, what the seller says and the reality can be two very different things. If you valued that property based on the $30T per month rent roll then you paid the seller for the effort it took to stabilize the property. Yours is not the first time I’ve heard of sellers filling a property with any warm body in order to get it sold. That’s the reason that we examine every tenant file during due diligence, looking not only for documentation but suspicious patterns such as a lot of recent move-ins with no references.
And sometimes the upside is good enough that it’s worth taking on some problems in order to get the deal done. I hope that was the case for you.
But if I’m going to take on problems I want to know about them up front. And the only way to go in with eyes wide open is to use the actual numbers, normalized for how I will operate the property.
If you’ve read my article about valuation (http://www.real-estate-online.com/articles/art-216.html) then you know how important the correct NOI is to determining the deal structure, the financing, and ultimately the overall return on investment. Mistakes in estimating total costs (e.g. deferred maintenance or expense increases) or unfounded income assumptions can have devastating effects on returns, especially in a competitive market when we’re looking for any edge we can find.
ray
p.s. Thanks for the order, and the book has a great deal of detail regarding this very issue because it is so critical to valuation. You’ll also appreciate the extensive detail in the chapter on due diligence about how to avoid the type of problem you described.
Re: due diligence is the key - Posted by Bob
Posted by Bob on May 31, 2006 at 13:21:51:
Thanks for the reply. Funny that I did go through every tenant file(the seller thought I was crazy). I was looking to verify security deposits and actual rents. I was thinking about asking for the entire payment history for each tenant on my next deal. Have you ever done that? Also, how have you handled arrears on the closing date?
Re: due diligence is the key - Posted by ray@lcorn
Posted by ray@lcorn on June 01, 2006 at 10:29:10:
Bob,
Sometimes even the most detailed due diligence comes up short if the seller is determined to misrepresent the property.
Yes, we’ve gone as far as getting payment histories, as well as tenant estoppels. We’ve also done random checks of previous landlord references, pulled new credit files, and verified occupancy through utility records. Now though it has to be a screamin good deal before I’ll go that far. Once I recognize any signs of deceit I usually drop the deal.
As a buyer I prefer to have any past due accounts transfer just to keep the seller away from the tenants after closing. It can cause problems if the seller is pursuing judgments against your tenants. Further, I consider the past dues as part of the property being sold.
However, typical contract language may provide that the seller is entitled to the rents up to and including the day of closing and retain the accounts. Like everything, it’s negotiable. The parties may agree to a cut off for remitting to the seller, or that the seller retains the accounts, or they pass to the buyer. I prefer to make a clean break at the closing table and get the seller completely out of the picture.
ray
Re: due diligence is the key - Posted by Bob
Posted by Bob on June 02, 2006 at 08:10:38:
This last deal that I refered to had 7K in arrears at the time of closing. We entered into an agreement to have me buy the arrears at a discount from the seller(75%). Looking back, I don’t think it was a great deal for me since much of that money was eventually evicted and uncollectable. I may have broken even. Have you done this before? It was the only time I ever did it.