has anyone created a pro forma before?

how do you create this pro forma and what do you need to know in order to creat one?

is this pro forma necessary in selling a property?

thanks

Just a Latin way of referring to an estimated Operating Statement, a Profit & Loss, or a Balance Sheet for an Income Property. We used to produce an APOD (Annualized Property Operating Data) Form for every Apartment House or a Commercial Income Property or Business showing past income/losses or projecting those of the future. The increased Liability has greatly reduced this willingness.

Today, on simple properties, the Seller's IRS Schedule "C" or "E" usually suffices in satisfying this need to give a Buyer Summary Historical information about an Investment.

If you make up something else, other than actual results, have the Seller sign it to acknowledge it as an accurate representation of Profitability BEFORE handing it to anyone making a purchase decision.

NO not really.

Most pro-formas are used by developers to show FUTURE anticipated returns on new projects to joint venture partners and financial backers.

It is an ESTIMATE of future returns based on rosy numbers.

You will find with alot of sellers that they keep crappy records and in the listings show vague pro-formas that paint a rosy picture to the buyer.

Seasoned buyers dismiss pro-formas altogether and run there own analaysis based on much more conservative views.If the seller has actual hard data to look at gathered from great records the buyer will look at it.

My favorite with listing brokers is they tout the POTENTIAL of the property with a crap pro-forma. If a buyer is going to buy a place and turn it around they are not going to give the seller a higher price for that as the buyer is creating the new value later on down the line.

Whether you put a pro-forma in you listing agreement with the seller the buyer will have there own due diligence and system of doing things and will run there own.

The key is to get buyers and sellers in the commercial world to come together to do a deal right now. Most buyers are vulture buyers with cash ready to pounce. Most sellers are not in distress YET and say kiss off I am not selling for that.

However many sellers used short term debt financing that is coming do over the next 1 to 2 years. To refinance into a fixed rate loan lenders are wanting 30 percent or more down and the sellers don't have it.When there loan resets and balloons up they will go from a positive to a negative cash flow situation. This will eventually lead to defualt,selling for less,or foreclosure.

Right now many commercial sellers are trying to get financial aid from the bailout bill. Many commercial brokers do not want this as the resetting of loans would force the sellers and buyers to bridge the gap to do deals.

The credit market is so tight right now unless you are a cash buyer or can put alot down it's hard to buy a property or fund a project on your own.

Many landowners view to sell there property as a once in a lifetime deal and they don't care what the market is doing they will not sell at a discount to developers or investors. Instead they will let there land sit for a few years until the market turns around.

Its pretty easy to make one as you can find variety of pro formas. The standard one being the Operating Statement, a Profit & Loss, or a Balance Sheet for an Income Property.

hi, thomas.
I don't understand. do you need to get operatin statement, a profit & Loss, and balance sheet to create a pro forma?

I suppose you get those from the seller.

1st, If the actual documents are available, Use Them;

2nd, If the Tax Returns are available, Use Them; and only

3rd, Use the Seller's unverified information to make a projected (Pro Forma) P&L or an Operating Statement. As Super said above; do not fabricate some kind of "Pie in the Sky" projection about the Future to give to Buyers without having the Endorsement of the Seller on them, "With his Assumptions". They must not be your numbers . . . . they're his.

Some Prospective Purchasers need none of this information; others "say" they need everything.

If this is a New Listing, I tell the Seller that he'll be required to flesh out the business; but if he doesn't have documents already prepared "that he is willing to share", we can wait until a Buyer appears and see what questions arise, and let the Buyers give us guidance in determining exactly WHAT information is important to them and their Accountants or Attorneys for this particular Enterprise.

Usually, the Seller's Accountant can prepare a Simple P&L or Operating Statement using information that he already has . . . . for a Minimal Fee (or for free ?).

The Pro Forma that is typical of my market is based on 95% occupancy for commercial. Some markets may have higher or lower vacancy rates, so you need to find out what yours is. The market currently has low vacancy in multi-family (2-3%) and high vacancy (15-20%) in office. However, 5% is still the norm here for Pro Forma evaluations.

RULE OF THUMB: ProForma shows the potential for the property, not what the property is actually making!

Vermont is correct in that you need to find out what the net income is (after all expenses) from a reliable source. The ProForma for a property costing $500,000 with a projected net income (at current rent rates) of $50,000 would have to take off 5% of the $50,000 to make $47,500. The Pro Forma CAP Rate would then be 47,500/500,000 which equals 9.5%. If it is only 50% occupied ($25,000 net income), then the real CAP rate is 5% and it needs to be disclosed! You can emphasize the potential with the Pro Forma on marketing materials, but be sure to include the actual with this number.

Now the important thing to note is that you use actual market rents (preferably supplied based on current rents in the property by the owner's rent roll). If the asking price is $750 a month and you give away 3 months of free rent and a rate of $600 per month for a year in the unit, then you have to back out the free rent and the $150 difference to get your actual net income ($5400 for the year/12 months = $450/month). I have seen people in markets puff their Pro Forma Rates to rents that will never ever happen and this can get you in trouble as a buyer can sue for misrepresenting the numbers and then you have to back up where you got them in court!

Also, be careful and keep in mind that posting rent rolls on marketing information can work against your landlord as agents may start soliciting them when their lease is up. Be sure to have all agents that are requesting that info sign a non-disclosure with their client's info before giving it to them.