What does underwriting actually mean? / Does underwriting have another definition?

lolcakes's picture
Rank: Senior Baboon | 244

Hi,

I am currently trying to move into an acquisitions role, at an investment firm, and I am teaching myself how to model since I am coming from a non-financial role.

I have been keeping an eye on some job openings and some job specs have the term underwriting in them, eg your role will provide underwriting for their acquisitions (this one in particular is for an investor, not a lender)

Now this confuses me because i always associated underwriting with debt, but does underwriting mean something different in this scenario? A friend of mine who works as an analyst says that in this case, it means being able to "underwrite" factors affecting cash flows in a model.

If this is the case, how is this any different just being able to model/analyse an asset?

Thanks for any help!

In addiition to the above, the term was also used in this post

If your lost by putting assumptions into a model and forecasting cash flows than you have no business in that position. He is asking you to build a proforma to demonstrate that you know how to underwrite an investment and show the projected yields. If you cant do this for a simple single property acquisition in excel, than your going to have alot of trouble when it comes to portfolios and developments. The majority of investment analysts sit at their desk all day looking at deals and this is a pretty straight forward request.

If your serious about this job, I would buy the BIWS real estate modeling course or something off REFM b/c you clearly dont know the basics yet

found http://www.wallstreetoasis.com/forums/pursuing-acq...

Comments (6)

Apr 20, 2015

It just means you're performing due diligence on the investment. For example, you're determining what rent revenue might be, operating expenses, vacancy rates, and capital expenditures might be. You might be determining what acquisitions costs should be, will be, might be and what the cost of renovation, construction, etc. might be. You're throwing that information into a financial model and determining what your returns project to be and deciding if the investment fits your risk profile and you or your company's asset profile.

So underwriting an investment is just performing your due diligence on the investment and deciding if it makes sense.

Apr 21, 2015

Thanks! That helps clear things up for me I think.

I'm assuming that once I complete the biws course , I should have the basic knowledge to underwrite an acquisition?

Best Response
Apr 21, 2015

Agree with above, underwriting is more broad than just valuation, in my experience it included vetting, valuation, DD, marketing, etc, pretty much everything up to and including distribution.

That said, I underwrite deals in mining, oil and gas, oilfield services and tech, not just real estate.

Also, buddy that you quoted comes across as a cnut. A) that's a spectacularily condescending way to speak, B) how do you speak that arrogantly when you can't use your and you're correctly?

    • 3
Apr 22, 2015

Or "than" and "then".

Apr 23, 2015

can someone go into detail regarding the differences in underwriting a direct investment vs. a portfolio of properties? what metrics are used and what sensitivities do you guys run when underwriting a portfolio? do you guys underwrite each property separately and determine an aggregate cash flow, or do you guys underwrite a different way? any insight would be helpful. thanks!

Apr 23, 2015
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