How Heavy Is Financial Modeling Is Typical When You Are Evaluating Commercial Real Estate Assets?

The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.

It’s important to note that if financial modeling is too complex for a particular deal, it might not be the right deal. Something may be wrong with deal, you might not know enough, or the deal could have hidden fraudulent elements you don’t quite see on the surface. This is why it’s important to hyper focus on your specialized area in real estate, as this makes your financial modeling a more confident and simple experience. 

Richard Wilson: And how heavy is financial modeling or how heavy of financial modeling is typical when you’re evaluating commercial real estate assets with your team? 

Ben Marks: I would say it’s fairly moderate. I don’t get too impressed by a lot of fancy schmancy excel programs or, you know. At the end of the day, and I don’t think I’m particularly exceptional, when I look at a deal I can tell you within five minutes with the back of a napkin and a calculator whether this thing is going to make sense. Not all deals are like that and not all deals are that simple. But at the end of the day, the more brain damage and financial engineering I have to get through to understand a transaction, usually what it means is there’s something wrong, right? Or there’s fraud. Neither one of those are good, and I’m not saying that’s the case with everyone, and there are some complex deals we’ve been involved with of course that was worth the brain damage. But in terms of the model, I don’t think what kind of modeling you do is as important as your assumptions. And again assumptions are the mother of all screw-ups, and I’ve made assumptions, you know, that you’re buying in at a 5 cap and you’re exiting at a 3 cap. Those just aren’t reasonable assumptions. 

Richard: Right, right. And that ties back to your comment on being laser focused on one area, if you are then you can make that judgement in five minutes. Where as if you don’t know the price per door in the area, and you don’t know how much rents, you know, that can take you a while to figure out which way is up, obviously. 

Ben: Absolutely. And to your earlier point also, the more you specialize the smaller world in which you’re specializing in, I have a colleague of mine that is very similar to what you were mentioning, focusing on one or two blocks the added value of that if you’re actually making a market you’re becoming the market, right? And having that kind of leverage on an asset you understand, what you’ll find is over time, two three deals into it, you won’t worry as much because you’ll know. And that’s why buying stuff that’s contiguous, we’re doing a deal right now where we own a property five years, we understand it, and the one literally next door came on the market on the water in Ft. Lauderdale and it’s a no brainer for us. We don’t have to – we know what we’re getting. And that’s what you find…

Richard: Right. Makes sense.