What Is A Pro Forma?

People love to show me the pro formas on the investment property they are trying to sell. And I look at them…with a wary eye.

What is a pro forma? It’s a set of numbers that project what a property should be getting/spending versus what it is getting/spending. It adjusts income and expense numbers to reflect true market rates. Or does it?
To me pro forma probably means “I’m lying to you.” Now, I hate to sound cynical. However, if an income property should be getting $850/mo in rents per side why is it only getting $725/mo per side in rents? Also, how can you say expenses will only be “Y” when it is an eighteen year old property with the original heating, air, roof and water heater. Don’t you believe there will be capital expenses to account for next year?

I know you can turn investment properties around. There is a lot of money to be made in doing so. But choosing the right property is a daunting task and it should not be based solely on what the seller’s pro forma is showing you. You need to research, fact check and look at the numbers with a cold, rational approach. Take off the rose colored glasses before you get yourself into trouble.

3 Comments

Filed under Real Estate Investing

3 responses to “What Is A Pro Forma?

  1. Jeff Brown

    Chris – Amen.

    I’ve done hundreds of pro formas, and the key to imbuing them with credibility is attaching supporting empirical evidence.

    Example: You mentioned forecasting higher than currently scheduled rents. If I did an exhaustive ‘boots on the streets’ rental survey clearly demonstrating the accuracy of my pro forma, no thinking investor will demur. (sorry, thought I’d go all ‘Greg’ on you.) 🙂

    Back in the day, when I was an expert witness, read: gun for hire – this is how I consistently blew pro formas out of the water. It was child’s play, because the agents being sued simply hadn’t done their homework. Homework that literally could’ve been done by an eighth grader correctly.

    You hit the nail on the head Chris – but then we’ve all come to expect that here.

  2. Chris Lengquist

    Expert witness? That’s cool. Did you ever stand up like Al Pacino and yell…

    “You’re out of order! You’re out of order! This whole damn trial is out of order!!!”

  3. jeff Brown

    Not quite. 🙂

    Once though, the judge interrupted my testimony to speed things up. He asked me what I thought of the plaintiff’s projections.

    I said if they were shredded and spread evenly on his honor’s front lawn, he’d have the greenest lawn in his neighborhood pretty quickly.

    Plaintiff’s attorney objected, he was sustained, and I was admonished by the judge to keep my answers more in line with the court’s required decorum.

    When asked then by the plaintiff’s attorney whether the judge had more questions, the judge said he had heard what he needed to hear.

    They immediately asked for a recess — and settled by the time we returned from lunch. 🙂

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