Overview I ran into a deal once where when asked for expenses, the seller's response was, "If you do not understand your expenses to operate this deal, you should not buy it."
While this perspective has issues, the purchaser must understand their own cost to operate an investment. Methodically, consistently, and accurately determining the cost to operate and also the cost to acquire an investment is a critical investment process.
Purpose · Define each key expense & capital cost area that a properly planned and executed investment will require.
· Provide guidance assisting a well executed analysis.
· Offer checks and balances to prevent misuse of the checkslists and guides provided.
Limitations First, the investor should avoid considering this checklist the total set of actions for a project. Individual projects have individual needs. Varying jurisdictions have different requirements for transfer taxes, permitting, occupancy rights, and more.
Overcoming Limitations Review your cost elements with experienced investors, lenders, appraisers, legal counsel, accountants, and property managers.
Review other project offers and transactions.
Review tax returns for similar projects.
Recognize that with all of this, as the investor you must take direct responsibility to verify your understanding, assumptions, bids, and agreements for suitability and deliverability at the costs offered.
Project Acquisition Capital Needs and Cost Checklists Acquisition Capital Costs and Expense Checklist Regardless of jurisdiction, country, state, province, the following list describes serious attention. The local equivalent steps may be somewhat different; However, this list if followed in principle will assist avoiding an investment error, may increase long term return opportunity, and provides a mechanism for risk mitigating plans.
Letter of Intent
Offering and / or Business Plan
Phase I Environmental (Phase II if significant finding incident on Phase I)
Property Condition Report (for commercial properties) or Property Inspection (or for 1-4 unit home purchases – house inspection, termite inspection, radon inspection or local equivalents)
Investors physical inspection, site and market review
Lenders Application Fee
Loan Origination Points
Transfer and Recording Taxes or Other Local Equivalent
Initial Insurance Payment
Initial Utilities Set Up
Initial Operating Reserve
Enhancements Bid Management
Property Records Review
Lease Review and Rent Roll Analysis
Expense, Bank Record, and Check Register Analysis
Operating Expense and Cost Checklist Lenders and buyers always want to see the historic expenses. While a prudent step, lenders and buyers often take the historical expenses as gospel. As investors, avoiding this assumption is critical to avoid major missteps that can cause a failed or poorly performing investment.
Next, lenders rely on the Property Condition Report to determine reserves. Often investors, hope or seek that the improvement reserve described will come in low thus reducing the closing capital reserve requirements.
Accurate and adequate capital reserves serve investors best. Further, if the investor can show the actual cost for PCR requirements, justification for a lower reserve legitimately exists.
Operating Expense Checklist
Insurance including fire, wind, flooding weather, workman's comp, umbrella liability, and others as needed
Landscaping and Grounds
Locks and keys
Office Supplies & expense
Credit and Background Checks
Marketing, Advertising and Promotion
Repairs and Maintenance:
O Common Area
O Office / Clubhouse
Summary Investor should account for or positively eliminate the items described here.
Investors should not assume that this checklist includes everything for any given property. However, using this checklist will go far towards avoiding any oversights during the planning and due diligence.