Last year, Bruce Kirsch introduced Valuate an online tool for valuation analysis. On the heels of its successful launch, Bruce continues to add new features like the Comparison Module which he explains in this guest post.
The last three real estate cycles bottomed in the third year of the decade (1983, 1993, and 2003). A former mentor of mine used to say “a bell doesn’t ring at the bottom of the market” (implying nor at the top either). So is it definitive that we have bottomed as of the end of 2013? Nobody knows, at least not yet. It’s just too soon.
What is known is that many local commercial real estate markets are warming, and some are already hot, which is reflected in an increase in deal volume. As a property buyer, half of the battle is knowing where to spend your time and energy i.e., which deals to pursue. There are only so many hours in the day, only so much investment capital available, and only so much bandwidth that we have to do financial analysis.
Think back to the last cycle — how many hours did you spend doing financial analysis on deals that you ended up rejecting? Probably hundreds of hours (everything in Excel always takes three times as long as you think it will).
If the goal is to get to the pursue/don’t pursue decision point, isn’t it a failure on our parts to spend a second more than we absolutely must to get to the “don’t pursue” decision? I think so. At the time we are doing it we feel noble in that we’re doing the hard work to see if the juice is worth the squeeze on a property, but when “just 20 minutes” turns into 3 hours and then 5 hours, we’re not benefiting ourselves or our companies, and we’re wasting energy, too.
When I was on the acquisitions side, as offering memorandum books started to pile up on my desk, the fear that I used to have was that because more kept getting added, and my analysis throughput remained constant, I would never reach the bottom without working every weekend and late every night. And if I wasn’t reaching the bottom, was I missing the deal that was in the fact the right one or the best one to pursue? I would never know before it was too late.
So as we look at the new 5-year upswing on this iteration of the real estate cycle, are we hoping to waste hundreds of hours again? Not if we’re sane. One way we can get to the pursue/don’t pursue decision point faster is by leveraging a great first-pass “litmus test” approach to deal screening.
We can do this using some version of a back of the envelope analysis (some call it a back of the napkin analysis). The point of this purposefully higher-level analysis is to serve as an initial indicator as to the attractiveness of the transaction. If it looks terrible to begin with, we pass, and we don’t spend another second on it. If it looks decent, we dig a little deeper. If it looks great, we get down to the granular analysis.
Until now, we have been limited to either high-level back of the envelope analysis or highly-detailed projection modeling. With Valuate, we achieve both — pro-forma detail at back of the envelope speed. And we can run sensitivity analyses on the deal quickly using the new Comparison Module, getting to yes or no much more quickly.
Good luck out there! Work smarter, not harder.