How long do you typically spend underwriting a vanilla multifamily value-add deal? In my opinion, this shit isn’t rocket science and I feel comfortable giving rough pricing guidance usually after an hour or two of getting the model set up (our firm uses the template I built).
The partners always seem to believe there’s more research or modeling to do so we’ll sit on deals for weeks.
Thoughts?
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How old are the partners? Could be a "back in my day" scenario or they could just be incredibly cautious and want to dig into the assumptions & projections more.
UW to provide initial feedback (verbal): 30 minutes of my time (not including analyst time getting market studies prepared or models loaded)
UW to provide 1st round LOI: 2 - 3 hours
UW for B&F or LOI that has potential to be signed: ~1 full office work + site visits
Barring anything unforeseen, my pricing rarely moves more than a few % between these three levels of diligence.
Assuming youve been underwriting for 1-2 years in the same market, you should generally know if a deal is penciling after the first 10 minutes of looking at OM/ whisper price. You know what each type of building generally needs and likley have an assumptions tracker filled with historic project budgets, schedules & scopes. All of the little details are a bit of a time suck IMO. If it dosnt work on a napkin its not gonna work on a 10 sheet model
All up id say 30-45 minutes max to get the base model then however long it takes for iterations that partners ask for
Basically this, but if you’re running the deals, you’d know immediately (would maaaaybe take 10-30 seconds to gather the info from an OM for you to know if it checks your boxes or not) if it’s worth digging in or not, and if you’re digging in, it’s because you know the owners pricing and your pricing I’ll be within a range worth discussing/spending any sort of money. Otherwise it takes 10 seconds to say no on 95-99% of deals for an acq runner…
While I'd generally agree with you in "typical" times (and so would my IC), immediately writing an acquisition deal off these days because owner's pricing is far above mine is a recipe for losing deals.
A couple deals recently where I wrote it off because we were 15-20% below guidance, and moved onto the next one. Check back in with the broker after initial call for offers and all of a sudden my value is in play, but because I wrote it off and didn't do a deep dive, now I'm behind the groups that stuck with it, got their ducks in a row, and submitted offers where they felt comfortable.
I've finally gotten my IC on board with "if it checks our boxes but we don't like guidance, just submit where we like it". We have discretionary equity and can offer certainty of close, which sellers value these days. I know I'm probably not going to be the lowest offer since there are a lot of people bottom-feeding (have literally gotten bid sheets with 100% spread between low and high offers), so reputational risk is low. Brokers understand the dynamics of the market today and realize guidance is just a suggestion. Two years ago guidance was the pricing floor.
Ultimately, if you're on the bid sheet, at least you're getting a call back when/if any other offers fall out. I sold a deal this year that eventually went to the 4th place bidder because the top three dropped out as rates ran.
I'd agree with the prior commenter that ~10 min is the right amount of time to get a sense for a deal. Not sure how you're getting a feel for unit layouts/finishes, unit mix/rents, high-level trailing expense structure, current year taxes/levy rate, etc within 10-30 seconds, but maybe I'm just wildly inefficient.
Few things to tap into on this one but appreciate the response:
- we aren’t talking 10-20% off lol, we are talking 50-100% off.. 10-20% is “worth your time” basically every time. That’s not what we are discussing tho. My point is that you would know immediately if it’s 10-20% or 50-100% and would know instantly if it’s worth chasing and spending time and money on. So you are honestly helping to prove my point here…
- next, I come from a background of sponsorship that we are not in the business of just wasting time and money to offer on everything. We chase stuff that we know we will be the top 1-3 groups, or simply the only group, usually through extreme off market searching only… we rarely chased a marketed deal because a traditional private equity sponsors can’t compete with a tishman/related head to head, unless you’re the sponsor like my firm who controlled the submarket as well as anyone and certainty to close was potentially even higher than the tishmans/related of the world, but still had a lower price than them for land.
- All of this is to say, why would you spend $3-5k per deal, if not more, just to pass on it? That’s a waste of company time and resources, even if it comes around 6 months later because it fell out. You’d still need to reprice and reunderwrite the deal. Sure, you can keep the same massing from an architect if zoning hasn’t changed at all, but gc pricing and rent comping will all need to be updated: more time and potentially money to spend.
If all you are doing is whale hunting, sure you can tend to only spend time on a single deal or a few at a time, but you aren’t wasting money chasing deals you have no business offering on… btw, if you are the preferred team in a market, you usually get first glance to take it down, and you wouldn’t deal with a broker asking you 50-100% more for land than the other deals you’ve taken down, so again, you’d know within 10 seconds if it’s worth your time and money or not. Shouldn’t take much thought to know this, to me..
New to acquisitions, but it seems that you guys are talking about select markets and even submarkets you're focused in. In the past I've worked with groups who own in say NY and FL, but then have more of a shotgun approach to looking at all value add/ground up multi in like 10-15 markets. Brokers would just send us the most random shit, so is that just to say those groups are very disorganized and that's not the norm? These are groups with billions under management (but more legacy assets from their parents before).
Going off of that, are the first things you're looking at in these deals is PPU and PSF and going in cap rate (especially now with rates) to get an idea ok this multifamily deal is within the range. Again having historicals of costs, but if not what do we think costs will be to renovate, is there enough value left for it to make sense. From there plugging the RR, expenses, etc into your template model and seeing if IRR hits mid/high teens levered IRR ideally and depending on your funding maybe that doesn't matter as much. For dev knowing costs in a market, seeing what YoC is and exit cap rate. That's what you're looking at in these first 30 min and hour looks right?
Then from there if it's interesting move forward with more diligence (taxes, getting more detailed on costs, rent growth, what do market dynamics look like), etc.
Sounds pretty disorganised to me unless they’ve identified these 10-15 markets on a logical basis and continually monitor them / generate pipeline there. If they’ve bought on the basis of something was for sale there it sounds like it’ll be a painful place to work (I worked for an MD who was willing to look at anything, won’t work for someone like that again).
There was no real monitoring of those markets and thanks this confirmed my thoughts they were disorganized. Thesis revolved around politics (red vs blue states) and thus tax friendly states and where migration was happening aka very high level and not a true thesis in my mind, especially with this shotgun approach.
They had never bought any multifamily outside of those two markets above, this was a push by the younger generation to build out another platform but I don't know how much intention there was to pull the trigger on anything we saw (disregarding interest rates being unpredictable). Still having that many markets and not taking tracking demographics, deals closed, etc means to me you either you will do that when an interesting deal comes along or it's not very interesting to you.
Was I on target with initial look? We'd do that with some deals, but it was really only for me to learn otherwise not going anywhere but again was very sporadic and disorganized.
Have to look into legalities of rent increases, taxes, renovation costs, etc etc.
My boss says “I’m rushing” if I don’t take 3 days lmao
2-3 hours at most for the initial screen
Maybe more exclusive to NYC , but underwriting multifamily takes 30 minutes to see if it pencils. Then the subsequent DD vetting the free market rents takes 30 days+ of prodding and 20k in legal fees just for them to tell "you might be okay, but i cant say for sure"
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