Importance (and umimportance) of modeling

Thought this would be great for everyone to see. For all the importance of financial modeling and the focus on it - it isn't as important as many deem it. 
 

financial times article link: https://www.google.com/amp/s/amp.ft.com/content/06b0a82d-b0fa-437f-b640-57bdaa508e59

Investment banks working to find ways to automate financial modeling. If this happened, and analysts lost that skill set, what would they do? They would think and we wouldn't be monkeys!!! Anyway, great food for thought. Just helps reinforce that as important as modeling is, it's not the be all end all. 
 

You can pop the article google search as well and find it: 'Investment Banks accelerate efforts to automate junior 'grunt work''

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Comments (30)

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  • Associate 1 in RE - Comm
Sep 14, 2021 - 12:05pm

No need to know modeling nor excel. A true investor can assess a good real estate deal on a napkin. Models are all assumptions anyways.

Sep 14, 2021 - 1:51pm

pudding

Thought this would be great for everyone to see. For all the importance of financial modeling and the focus on it - it isn't as important as many deem it. 
 

financial times article link: https://www.google.com/amp/s/amp.ft.com/content/06b0a82d-b0fa-437f-b640-57bdaa508e59

Investment banks working to find ways to automate financial modeling. If this happened, and analysts lost that skill set, what would they do? They would think and we wouldn't be monkeys!!! Anyway, great food for thought. Just helps reinforce that as important as modeling is, it's not the be all end all. 
 

You can pop the article google search as well and find it: 'Investment Banks accelerate efforts to automate junior 'grunt work''

Not sure this belongs in this subforum?  I think modeling is a lot more important in investment banking than it is in real estate - a business in which it's of absolutely zero importance.

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Sep 14, 2021 - 7:21pm

Bruh… you just made a huge mistake in responding to Ozymandia. Be prepared for a 7 paragraph response on why his original comment was 100% correct. Dude is the Ben Shapiro of the real estate forum

Unlike you, I'm not a troll, and unlike Mr Shapiro, I'm not a hack.

Intelligent people get intelligent responses.  Mouth breathing idiots get treated according to the quality of the comments they make.  Post some useful or insightful comment and someone will take you seriously.

Sep 14, 2021 - 7:20pm

Agreed.  I think it's just a function of these forums, which are geared heavily towards finance, that you tend to see a disproportionate emphasis on underwriting at the expense of execution.  Can underwrite whatever the hell you want, but you have to bear out those assumptions!

Sep 14, 2021 - 8:50pm

I put it here because I pretty much only use the RE forum. Also, as a large proportion of readers are analysts, and their day job is excel jockeying, I thought it would be great for people to see that they should also focus on the big picture - docs, execution, vision, etc. and that modeling, while important, isn't the be all end all. 

Sep 14, 2021 - 5:37pm

A model is a guide. One thing that is guaranteed is that whatever you put in your model is NOT going to happen in real life. 

The way I view models: look at all of the assumptions I am making, and determine how "tight" the deal is. Do all of these things have to go perfectly to make this deal successful? If so, that is certainly a much higher element of risk than feeling like you have a lot of "buffer" in your assumptions. It's a gut check. 

Sep 15, 2021 - 12:26pm

The models themselves are not the be all and end all...but you better believe the inputs and outputs are!

Plus RE is one of the worst industries for data, it will be a very very long time before they can automate the average analyst out. There is like 1 company doing it at the moment and they are using 30+ data scientists just to get 1 deal across the line.

Sep 15, 2021 - 12:36pm

I thinking having a strong understanding ability to build models from scratch in excel is basically a life skill. Even though I am far away from being a day to day execl wizz analyst, I still build models from scratch for firm level decision making as part of my job. So, I think it is really important, and can never be fully automated (nor should it), thus, we all get to learn it.

That said, is it going to be everyone's life blood for making money and creating value.... NO. I think WSO, students, and well people not far along in a CRE career WAY over emphasize its importance. BUT, so long as firms screen for excel skills at the junior level... you better be good.

Will comment on the I-banking thing... since they do a lot of deals for publicly traded firms, they can much more easily automate data entry and analysis as all those items get standardized in SEC filings. There is not anything close to this for property and real estate deals. Would you want your acquisitions model populated with CoStar data like it was the gospel truth? I think not..... 

Sep 16, 2021 - 4:02pm

Models help you learn how to think. If you are stress testing scenarios, doing a DCF, building a merger model, LBO, whatever, modeling it out makes you think through every assumption and how everything is interlinked. That then helps you think and speak through it. 

While it certainly isn't the most value-add, especially as you get more senior, definitely helps to build a foundation that compounds over time.

Sep 16, 2021 - 4:31pm

While I 100% agree with you, many real estate people will use pen and paper to determine untrended NOI PSF. From there you can get the future value, PSF, based on cap rates. If this number looks good, move forward, otherwise, pencils down. With this method, you only capture potential appreciation, but so much of real estate returns in the value add and opportunistic space are based on appreciation, that you don't really care if cash flow adds to your projected equity multiple, because it'll be so minimal. 

Sep 17, 2021 - 12:24am

I really don't understand why people make posts like these..it's as if you don't realize that people were still buying investment properties long before computers were even a thing..the fact is, you don't "need" any of the new age, technology like "sophisticated modeling" in order to successfully make money in real estate or finance for that matter.  The point is, times change and technology improves and most people can adapt and use the latest tech that gives them or their firm an advantage - in the case of modeling, it's a quicker way to analyze a deal on the fly and run with it to choose whether to invest or not.  You don't "need this".  But knowing it makes you a better, refined, all around candidate for hire and probably a better employee.  You don't "need" a ton of things we take for granted now, but knowing them definitiely helps your entire team and makes you a worthwhile employee to keep around..

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Sep 17, 2021 - 9:21am

I think many of you miss the point of modeling.  It isn't about building the model.  Any trained idiot can do that.  The value comes in testing assumptions.

Also let's be real here, how many of you are actually building a model from the ground up anyway.  We all utilize templates and structure to build off of.  

Having worked in the AI space, I can tell you that the data analysis capabilities are incredibly powerful and useful.  However, where they lack is in the extrapolation and forward looking nature that actually matters.  Can an AI system tell you how many widgets you should build to meet expected demands 6 months from now?  Sure and it can do it very accurately.  Now can current AI and near term AI systems predict how activists groups will protest proposed development opportunities?  No not really.

Sep 20, 2021 - 11:41am

PEarbitrage

I think many of you miss the point of modeling.  It isn't about building the model.  Any trained idiot can do that.  The value comes in testing assumptions.

Also let's be real here, how many of you are actually building a model from the ground up anyway.  We all utilize templates and structure to build off of.  

I mean... yes and no.  I don't need an Excel model to stress test my assumptions.  It's real estate - there are dozens of individual line items in my budgets, more than that when it comes to revenue (in MF, at least), so all we're really doing is lumping some like costs together and then stress testing that.  Doesn't really hurt to take it one step further and just have one expense line item, and one revenue line item, and test that out.  Can do that on paper very quickly.

Sep 17, 2021 - 11:13am

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