The Benefit of Real Estate Analysis Software

Crunching rental property cash flows, rates of return and profitability numbers adequately enough for investors to make prudent real estate investment decisions can be quite labor-intensive. In fact, prior to the advent of computer technology it was very time consuming because it required the analyst to manually compute and format the results manually.

Now with the advance of third-party software solutions, however, it has become common practice for investors and analysts to rely on software to do the number crunching for them. The benefit derived, of course, goes without saying: The time and effort they save by eliminating as many manual tasks as possible frees up time for them to pursue their real estate investing objective. Namely, to locate rental properties they might be able to acquire for profit.

Nonetheless, this benefit is not understood by everyone who works with rental income property and conducts a real estate analysis. Strangely, it’s not uncommon to find, despite this age of technology, investors and agents who still compute and format the results manually.

So it seemed needful to address the issue and to make a case about the benefits of using software to those of you that remain uncommitted.

Rest assured, however, that my purpose is not intended to highlight any one particular software product, but rather to get you thinking about the “concept” overall. In other words, hopefully once you consider how we conducted a real estate analysis in the “old days” you will come to more fully appreciate why software evolved, the issues it solves, and how you can benefit as a result.

Origin

The challenge to create a cash flow and rate of return analysis has been around as long as real estate investing. It’s difficult to imagine, in fact, that any investor throughout any time in history didn’t use some method to determine whether or not a property would result in a profit.

Prior to the advent of computers, of course, that process had to always be performed manually. Even as recently as the early 1990′s, for example, I was conducting a real estate analysis with a calculator in one hand and pencil and paper in the other.

Some of you remember the hardships and difficulties those of us working with income property had to resolve manually in those “early days”.

The Data

The data associated with investment real estate is the heart and soul of any real estate analysis. This goes without saying. The real estate investor must understand the financial performance of a property in order to discern its particular value.

Before computer programs, however, this presented several problems.

Foremost, especially for novices, knowing what data was required for a meaningful bottom-line was not always understood. What constitutes a rental property’s operating expenses, for instance? Or what data is needed to arrive at a property’s net operating income, cash flow, or rate of return? What must be included to make revenue projections? And so it was.

Then, of course, there was the issue of the math. Because by the same token the correct data is required, computing the numbers correctly is paramount. As a result, there was always the laborious task of checking and re-checking the numbers to ensure accuracy.

Up until computers and third-party software programs came along that process always took plenty of time and involved a lot of second-guessing.

The Formulas

There are a host of returns real estate investors rely upon to measure the worth of an income-producing property in order for the investor to determine how it compares to their individual investment objectives, and/or how its value stacks up to the values of similar types of property in the local market area.

As a result, investors look at returns such as cap rate, gross rent multiplier, cash-on-cash, internal rate of return, and numerous others. Some of these returns require just simple math that can almost be computed in one’s head. But there are also many returns far more complex. For instance, rates of return associated with the elements of tax shelter and time value of money are certainly going to require nothing less than a financial calculator.

The point is that each return constitutes a formula, and up until the availability of software solutions, those formulas needed to be learned.

The Presentations

Another (more subtle) issue facing anyone conducting a rental property analysis concerns the presentation. For in addition to ensuring complete and accurate data, at the same time it must be displayed well. That is, the reports must be constructed so the facts and figures are easy-to-read and easy-to-understand.

Over the years I’m sure there have been real estate deals transacted with numbers presented on a napkin. But that’s far from the norm, and would certainly not fair well for presentations made to investors, colleagues, partners or lenders.

Thanks to computers and software, all the efforts we once made to create professional-quality reports are a thing of the past. In today’s world, reports are created automatically and look better than ever.

Conclusion

A computer or third-party software program cannot guarantee your real estate investing success. Whether you own the most advanced PC, most recent MS Excel version, or maybe even more than one real estate analysis software solution, you’re not off the hook. You still have to do your research and homework.

Nonetheless, there is a benefit to this technology if you wish to employ it. Hopefully this article has shed some light on the advantages. Here’s to your success.

8 Reasons Why a Rushed Real Estate Deal Still Requires Disclosures

With the recent spike in home sales, buyers and sellers alike are feeling the pressure to quickly close on their purchase transaction before mortgage rates go up and demand for new homes slip. But before rushing to “ink the deal,” understand that real estate professionals are required to provide written disclosures to their clients on a variety of important items necessary to the transaction, as they directly affect the buying or selling decision. Here are 8 areas where written disclosure should be or are required:

1. Affiliate Disclosures. These days, it’s common for a mortgage company to have a business interest in a title company or a real estate brokerage to also own a mortgage company. These are called “affiliate” relationships, and the relationship must be disclosed to the potential end users of these services. For instance, a mortgage company must disclosure in writing to its loan applicants that is also owns a title company that will close on the mortgage and purchase transaction. A loan applicant is not required to use the “affiliate” title company and can use another suitable title provider instead. Most importantly, a home seller or buyer cannot be pressured to use an affiliate service or be prevented from seeking a loan or making an offer on a home, just because one chooses to do business with an “unaffiliated” business.

2. Third- party services. Similar to the above paragraph, a home seller and real estate agent cannot require someone to use a third party service in order to purchase a home. A third- party could mean a lender, a title co, an appraiser or inspector. However, one can give better pricing to a buyer who uses their services. For example, a lender can waive fees if the buyer uses one of their “affiliates,” however, they cannot prevent you from making a loan application or denying a loan for refusing to use their business affiliates.

3. Real estate agent disclosure. If a real estate agent is selling a home that they own, they must disclose that they are a licensed real estate agent. Some states limit this disclosure to only an agent’s primary residence. Other states require the disclosure for any properties that the agent owns.

4. Dual agency. A seller’s agent or “listing agent” represents the seller. The seller’s agent does not have any professional duty to a buyer who is not represented by their own agent. The buyer should hire their own agent. A dual agent is an agent or real estate broker that represents both parties in the transaction. Agents must provide written disclosures to both a parties when they act as dual agents. In theory this disclosure is supposed to make a dual agent in a transaction neutral. However, a real estate deal is never without some controversy and give and take, and therefore this writer suggests that a prospective purchaser hire their own “buyer’s” agent.

5. Title agency. A title company’s function is to insure that the ownership to a specific property is valid according to public property records so that a lending institution can provide a mortgage on the property or a purchaser can take proper title from the rightful owner. Title agents represent the insurance companies that provides this coverage. They do not dispense legal advice to buyers or sellers. They do not represent lenders or real estate brokers. Title companies must disclose when they have an affiliate relationship with a property service provider, meaning that they are owned by the lender or real estate brokerage, or even an appraiser.

6. Provide all offers. A real estate agent is required to provide its sellers with all offers. Unless a seller specifically instructs an agent not to bring certain offers, say one below a certain price or time frame, the agent must present the offer. Therefore, if a buyer feels that an offer was not presented, they should contact the agent’s broker. In some states, it’s customary for a buyer or their agent to present the offer directly to the seller. But nothing prevents an enthusiastic buyer from directly speaking with a seller, it’s just not commonplace.

7. Terminating a real estate agent. It is a common misconception among sellers that they cannot fire or terminate their listing agent. They can. However, the best way to still market one’s property without bad feelings is to approach the agent’s broker and have the broker assign a new agent to the listing. Understand that the agent and broker still have a “protection period” that protects them against the seller closing a transaction with a buyer that the agent, through their business efforts, had previously procured. The period is usually for 180 days, but at time of listing a property this period can be negotiated down to 90 or even 60 days. Regardless of the time limits, it is wrong for a seller to take advantage of the agent’s efforts and is grounds for legal action.

8. Attorneys. Like a property agent, an attorney cannot represent a buyer and a seller in a transaction unless the attorney discloses the conflict in writing and both parties sign the disclosure. If two parties to a transaction have completely different versions of a transaction, then it’s time that one party hires their own attorney.

In a residential real estate transaction written disclosures comprise most of the real estate package. For those new to real estate, hire the right adviser to guide one through a successful transaction. But make sure to read and understand the disclosures and how they apply to one’s deal, as they are there for the buyer or seller’s benefit.