What is pro forma anyway, like an estimate?
From the REI Glossary:
Pro Forma - refers to the presentation of data, such as a balance of income statement, where certain amounts are hypothetical. For example, a pro forma balance sheet might show a debt issue that has been proposed but has not been consummated.
Hope this helps.
It can be different things depending on what type of property you’re working on, but generally speaking it’s an estimate of revenue and expenses or costs. It’s a snapshot of your project in some future state.
Can be a rehab to be comepleted in two months, or a construction job two years from now, or simply the estimates of revenue and expenses of an office building you’re purchasing.
Investors use simple proformas to gauge profit potential in a particular project, and then modify those proformas under different variables to test different outcomes and returns.
Lenders use them to compare your project against other similar projects, and in the case of a loan made off of a proforma, they use it to measure how well you’re living up to your planned numbers.
How detailed you get with your estimates is up to you. Do you need contractor bids and CPA tax analysis to analyze whether a duplex will make a good investment. Probably not.
Either way, if you do enough of them they’ll become second nature.
Are you saying that a proforma is a useful tool for evaluating a property? I have heard and read that these are just numbers that the seller/broker pulls out of the air (or other places) to make the deal look better than it really is. I am looking at a 10 unit mobile home park now. The broker says all they have is the proforma and that is how they came up with their asking price. Their numbers look good and would give me almost 2k per month cash flow, but how do I verify their numbers if all they have is thier proforma?
I don’t trust the numbers given to me by anyone.
I always confirm everything through property and owner documentation, county records, etc.
You should do your own proforma to determine if the investment makes sense for you.
What numbers you choose to plugin are at your discretion.
To be cynical: Pro Forma = Made Up
The numbers could be accurate or not. They represent someone’s guess about how an investment will perform in the future. Be careful with anything anyone provides to you. Do you think a salesperson will tend to inflate the positive and reduce the negative?
Your better bet is to do your own research and create your own pro forma statements. My offers are always based upon verifiable actuals, not pro forma numbers. Anything above the actuals will come from my hard work. That is, pro forma includes my profit and I won’t pay a seller a percentage of my profit.
As an example, in my area, the offering price for an apartment building will usually assume a fully leased property, even if it’s only 70% full. If the seller wants me to pay for a 100% leased building he should do the work of leasing it up himself. If not, my offer will be based on the building as-is (actuals), not what I will work to turn it into (pro forma).
<blockquote>but how do I verify their numbers if all they have is thier proforma?</blockquote> Your expenses are numbers that will be given to you as a good faith estimate of settlement charges, and a federal truth in lending statement. Your lender or mortgage broker should know what your expenses will be. The national association of realtors has a form called "tenant estoppel certificate" which is a form that is given to the tenant to sign a sworn statement that they are, in fact, Paying $X dollars per month for rent and the terms are indeed: blah blah whatever. You could also conduct comps for the proposed property and write your own pro forma with more realistic numbers.