Pre-offer analysis/process

Hi Everyone,

First post here so I really appreciate any guidance or advice offered.

I’ve tried searching for what process people go through before making an offer and haven’t found much other than other’s deal reviews so I have a few questions:

  1. How much time do you spend doing a quick analysis before deciding to pass or make an offer? (I’m finding I calculate #'s within a couple of minutes based on the formula (Occupied lots x lot rent x expense ratio x 12)/Desired cap rate) but continue doing research into the area, expenses, etc and spending over 30 minutes when looking at a park initially)

  2. What does that process look like in terms of what you look at before making an offer?

  3. If you calculate park value several hundred thousand below list price, what’s your strategy in making the offer?

  4. How many parks are you analyzing before making an offer on average?

  5. How many offers are you making before getting one accepted on average?

I’m trying to drill down on a really good process with some KPIs to keep myself accountable. Looking forward to hearing what everybody has to say. Thanks!

  1. we go through the income statement spending several hours on it. Each line item is analyzed to determine if it would recur under our ownership. For example, if there is a $1,000 manager charge but we already have a manager in the area, we will make that expense go to $0. We then enter everything into a financial model. To see a good example of one search "Watch Me Build a Multifamily Real Estate Model by Spencer Burton (Watch Me Build a Multifamily Real Estate Model - YouTube).

Your formula is good for a quick guide, but it will not be accurate enough to get your deal sharp enough. It may be ok if your deal is not marketed by a broker. Brokered deals are competitive and require better accuracy. Also, by focusing on cap rates, you are omitting capital expenditures, which are not part of the numerator in calculating cap rate.

  1. We get the details from the offering, see if the major issues are ok for us (# of lots, location, demographics from which takes 10 minutes max. If it’s a go, we do the financial analysis in #1 and ask the broker/seller to clarify any issues. Then we write a LOI. Whole process can take a few days to get LOI out.

  2. You have to go back to #1 and sharpen the pencil. Deals are very competitive and you are unlikely to get the contract if the price is too low.

  3. Depends on the buyer. For a while, we made offers on every property that came to us.

  4. I’ll skip that one.

@mPark Thanks for taking the time to respond. I’ll take a look at that youtube video. I started building one on my own so this will probably be super helpful.

From Q1: With regards to capital expenditure, how are you accounting for them in your initial valuation of the park? (Where does that fit into the formula?) I have not been calculating them into the PP of the park.

From Q2: Whats the thought behind writing an LOI vs an actual offer? And if you write an LOI when do you put in an actual offer?

From Q4: My thought is that if the park meets your criteria, then its a matter of making an offer for what the park is worth so I should be making a lot of offers. If the park is valued at $2.2M and you think its worth $1.5M after a lot of analysis, would you still make the offer or pass because of too big of a gap?

Capex issues can be complicated. Basically you can think of it like this. If two parks are making 100k, at 10% cap rate they are both worth $1,000,000. However if one is decrepit and one is in great condition, you need to account for that. For the lower quality property you have to budget ongoing improvements to keep it sustainable which will cost more than the improvements for the higher quality property. Point is that 2 properties with identical income are not worth the same amount.

A LOI and an offer are the same thing. Unless you are communicating offers verbally, which we don’t do, you write an LOI. After negotiation, you draft a contract.

I can’t help you on that last one. Some sellers have unrealistic expectations and hold firm on price (and never sell). Some list high, the offering fails, and they reset their expectations. Best thing is to make your offer, see how it is received, and if it fails go back and see how your offer compared to the winning bidder.

Thank you for the clarification. It seems like capex is dealt with more on a park by park basis as to how its taken into account in the valuation of the park. Thank you for the help @mPark