Multifamily Accounts Receivable
This might be a dumb question. But if you are looking at a deal, how do you translate the snapshot of the accounts receivable report into your pro forma underwriting?
More specifically, say a property has really high bad debt write offs in the T-12, but the accounts receivable report shows most people are current with only a couple 60 or 90+. Would you assume the issue has been cleaned up and more normal bad debt going forward? Or do you think about it differently?
thanks in advance
Depends on the asset. Also, you ask why the bad debt was so high. Most of the time, in my experience, the honest answer would be "because we're getting ready to market a building and don't want to show massive economic vacancy."
Maybe there is a good reason; maybe the owners did a huge rehab job, and forgave a lot of past due rent to convince tenants to leave their leases early so they could do the in-unit work. A lot of our buildings saw abnormally high arrears during COVID; if a major local employer just shut down and lots of people lost their job, or a similar one off event (like COVID) that might be leading to distress.
There isn't really a rule of thumb but the high likelihood is that if you've got a clean arrears report but a troubling T-12, the answer is that the seller is fudging their numbers.
I wouldn't assume you can do much better than the current management to start off with.
Ozy is generally correct with his response above. I've seen sellers pay rent for people so that it doesn't show up delinquent.
Wish we could go back to the good old days, plugging in just 50bps of delinquency
The agencies are likely going to just use the T12 bad debt figure. Unless the aged receivables report is now sparkling, then it’s possible to get them away from the T12 figure. Conversely, my understanding is they won’t penalize you beyond the T12 figure too much as long as the A/R report isn’t a total nightmare plus an ugly T3/T1 trend on the statement.
I mention the above because, to answer your question, you have to consider the agencies’ approach in today’s world. However, for sake of discussion let’s put them aside.
When I look at an A/R report I’m considering several things:
Apologies if these are tips you know. I understand your question was related to how the A/R report is used to frame a bad debt assumption. First, I analyze the above information, and then I ask myself the below:
Like I said previously, the agencies are not going to put much thought into this. They’re going to use the T12 amount and may penalize further based on recent write-offs. So, you should probably consider that when making your assumption. All the above bullets are maybe more so what you should consider in terms of the asset itself. It may steer you away from the property (or towards it).
Great responses and exactly what I was looking for. It’s an area I admittedly don’t spend enough time thinking about so helpful to hear how others look at it. Thank you.
Another way to improve your understanding here is to learn the different ways properties write off bad debt. There’s helpful articles online if you google or ask Chat GPT to explain. It may not change your assumption, but understanding the underlying method is important in anything. If a cake tastes bad, I want to know how it was baked, not just blame the ingredients. So, learn the write-off methodologies that will tell you how management writes-off delinquent rent, but you should also know when. Do they use the direct write off method (upon the resident’s move out.. aka eviction/skip) or do they use the Allowance method (accruing over time)? The method tells you the how, and then you need to understand then when. If direct write off, do they write off an eviction in the month they were evicted, or 30 days after eviction? If the accrual method, do they write off 50% of the 30-60, 75% of 60-90 and 100% of 90+ for whatever is on the report at month end?
Beyond the above, you should also understand which line item(s) the property writes off and recovers rental income and also non-rental income to.
Delectus esse iste quisquam officia eos sit magnam id. Dolore quibusdam quo illo non placeat ut. Minima qui quis qui dolorem tempore omnis. Ducimus quo consequatur earum earum quidem voluptatem. Aperiam temporibus nemo ut sint quod soluta. Illo architecto modi quisquam sunt.
Numquam temporibus eaque consequatur ea eveniet fugiat vero quo. Quasi dolorem molestiae id quasi.
Quis debitis ratione consequatur sed beatae. Sunt quo quidem dolores ipsam. Veritatis dolores et sed. Assumenda nam nobis sapiente aliquid et magnam. Sunt et nemo earum qui.
Unde ut qui veritatis consequatur sit repellendus totam. Aut accusantium dolorem voluptatum qui dolore nihil doloribus aspernatur. Saepe molestiae ex architecto tenetur voluptate ducimus ipsa quis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...