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Our response to a recent inquiry from a real estate professional. Whether you are an appraiser, real estate broker, banker or investor,
our comparison of Argus and Investment Analyst may be of interest.
His Question:
Hi:
Brokers often send us Argus files with complete information about properties they are offering. As a result, we're thinking of buying Argus. However, I'm intrigued by your application. How would you suggest we deal with Argus compatible files sent to us by brokers?
Thanks.
Our Response:
Thank you for your interest in Investment Analyst. To answer your question
directly, Investment Analyst does not import Argus files. But, if I were
in the position of reviewing offerings presented by others, I would not
want to input their data directly. Rather, I would prefer to perform an
independent analysis, using "clean" data, to verify their calculations.
Because of the approach used by Argus, it is very easy to "bury"
a number that will distort the overall calculation of value. I explain
this below.
Argus is a well-respected product that has been around for many years (not
quite as long as Investment Analyst) and is relied upon by many in the
real estate industry. This is also true of Investment Analyst. But Investment
Analyst and Argus approach the analysis of income producing real estate
from different perspectives. Argus uses a "bottom up" micro approach.
Lease terms must be entered for each space and critical assumptions that
affect the calculation of value are often hidden in the detail. This is
also true for expenses. Once all detail is entered, the "magic"
number is calculated by discounting the detail - a number that may, or
may not, represent Market Value. This approach to data entry is, perhaps,
good for property managers, but it is prone to user error or intentional
manipulation. Furthermore, errors that have crept into the data entry are
difficult to uncover, especially by a third party. I would not want to
start my evaluation of a property using potentially flawed data. This is
not a reflection upon the Argus product, but on the "bottom up"
method that is employed.
Commercial Complete and Investment Analyst use a "top down" macro approach to income analysis. It is not always necessary or desirable to enter the minute details of leases. Usually, a prospective purchaser is better served by the macro view. For example, take a typical office building. Most tenants are under 3 to 5 year leases, the range of rental rates varies, different pass-throughs have been negotiated on a per tenant basis, and the leases expire at different times.
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Regardless of the present lease terms for individual spaces, all leases
will tend towards market terms in a relatively short period of time. A
prospective purchaser of the property does have an interest in this lease
detail, but only after evaluating the long term potential of the property
under market assumptions, from the macro view. We always recommend that
our clients first perform a "stabilized" analysis using market
terms. The stabilized analysis becomes your benchmark. Then, as necessary, an analysis of the leases in place can be compared to this benchmark. This gives you greater confidence in your final evaluation of the value of the property. Please see our discussion of Occam's Razor to learn why our approach is usually a better way to perform an income
analysis.
Commercial Complete and Investment Analyst offer the capability to perform a stabilized analysis and a lease analysis simultaneously. It can be as simple as estimating gross income ($20 per s.f. per year times 100,000 s.f.), estimating a frictional vacancy rate, and estimating an expense ratio. One can then evaluate the income stream instantly, under different conditions. For example, one can change the mortgage terms, alter the growth rate assumptions, or change the required rate of return. As these conditions are changed, Investment Analyst provides instant feedback on the cash on cash yield, the debt coverage ratio, the overall cap rate, the terminal value, and many other key indicators that are critical to a thorough understanding of the property.
Using the macro view with "clean" data, one can quickly determine
whether an investment meets your criteria. If it does, Investment Analyst
provides the capability of "drilling down" to the lease detail
by allowing you to enter detailed contract lease terms for all tenants
or only selected tenants, as necessary. For example, most tenant spaces
may be at "market" under relatively short term leases, but one
anchor tenant may be under a long term lease that is above or below market.
Detailed lease information can be entered for just this tenant and the
effect upon value can be evaluated.
In summary, Commercial Complete and Investment Analyst offer both the flexibility to quickly evaluate offerings and the sophistication
to evaluate complex lease terms of individual tenants, when necessary.
I would recommend that you employ Investment Analyst in your evaluation
of offerings, even if you already owned Argus. Analyst is much easier to
use and its learning curve is short. I believe that it is essential to
start with "clean" data, rather than relying upon data that was
entered by the broker or other interested party. Importing data may seem
like it will save time, but it will actually make your job more difficult
and your conclusion of value more problematical.
Finally, Commercial Complete and Investment Analyst provide analysis tools that are not available in other income analysis products. Key indicators are at your fingertips. Assumptions are easily changed and the changes are instantly reflected in the value calculation. Both a stabilized analysis and a lease analysis can be performed simultaneously. Investment Analyst has a built-in Review tool that reviews the reasonableness of your inputs. The reports produced by Investment Analyst are presentation quality, they are easy to understand, and they are easy to explain
I am confident that our software will meet your needs and I look forward
to hearing from you. Thank you for the opportunity to explain our product.
Please feel free to call or email with further questions.
Financial Masterplan, Inc.
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The information contained herein is copyrighted by Financial Masterplan,
Inc. No portion may be reproduced without the express written consent of
Financial Masterplan, Inc. If you have purchased Investment Analyst, you
may use portions of the information contained herein in your narratives
with proper attribution to Financial Masterplan, Inc. and only under "fair
use" guidelines.
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