Any big decision needs supporting research. Firms that make big plays in the stock market usually have a team of analysts that gather the data needed to put a large amount of money on the line. Real estate professionals also have to make big bets. The difference is that the information that they need to collect in order to understand the impacts of a large investment (or divestment) is much harder to get. Public companies are required to have all of their earnings calls, 10ks and press releases available to investors. Buildings have no such requirement.
So, the real estate community has come up with a special name for this process: underwriting. It is akin to the due diligence used in the world of equity investments but rather than just compiling and sorting readily available documents it requires some real leg work. Understanding just the metrics of a building might require calls with accountants, insurers, lenders, managers, ownership associations and/or government record offices. Understanding a property market is even more complicated.
So, every (good) real estate pro has their own process to finding out the critical information on a property so they can make an informed decision. For whatever reason, this process usually is much less understood than other important procedures like customer acquisition and property marketing.
This might be changing with a number of new platforms that can help investors, analysts and professional alike understand how to best utilize their time spent on the arduous task of underwriting. One of those companies is Dealpath. Their co-founder, Mike Sroka, came from the private equity world. He got pulled into software design and has spent the last 10 years working with venture backed technology companies. Now he is turning his sights on the labor intensive work of the commercial real estate professional by developing Dealpath’s deal management platform. He has some important advice for all of us in the trenches to help better understand and improve our due diligence processes.
His first piece of advice is to standardize the process. Writing down every step to get a complete file for a deal seems like added work for people that have been doing this successfully for years. But, the work is worth the outcome. Having the SOPs laid out helps to make sure that nothing gets overlooked. “Documenting the process is critical and it helps to identify gaps that otherwise might get missed,” Mike pointed out. This might not be so important for a seasoned vet but it will be once they try to hand this task to a new hire.
Another advantage to having one principle checklist is that it can eliminate any overlap for teams doing the process together. Mike noticed early on that many of his clients were doing a lot of unnecessary work. “While going through this process, we realized that there can be multiple due diligence checklists – which can be very confusing,” he explains. To combat that Mike says that a central depository should be created that can be updated in real time. “By removing the overlap, we can simplify the tasks so it is clear what needs to be done.” For deals that have finite time frames (which is all of them really) critical tasks can be emphasized and timelines can be forecasted.
Once the process is standardized and multiple deal processes are documented, then then learning begins. Most people in the industry have never looked back on a list of their underwriting processes and figured out which ones were the most efficient. Even more important is to understand why. Every task has an efficiency curve that starts to level off. Market research for example is a literally endless task. At some point it is important to know that you have gotten the bulk of the info needed and more research will just result in diminishing returns.
No process is perfect. Or, better put, any process can be improved. But improving a process can only happen when outcomes are weighed against standard procedures. Improving the messy process of underwriting will not be easy but with new workflow technologies it is becoming a lot simpler.