What is a property really worth?

The New Normal
Maximum Allowable Offer (MAO) &
Net Operating Income (NOI)
13 Feb 2010
London

Tuesday, 23 February 2010 1

Copyright

John B. Corey Jr.
Chelsea Private Equity, LLC
2


Copyright
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John B. Corey Jr.
Chelsea Private Equity, LLC
2


Introduction

3


Introduction
John B. Corey Jr.
BS in Computer Science
www.LinkedIn.com/in/JohnCorey
Follow me on Twitter -> www.Twitter.com/John_Corey
25+ years of real estate investing; UK resident since 1994
UK, US - spanning 11 time zones
www.ChelseaPrivateEquity.com/blog

3


What I Will Not Cover Today

4


What I Will Not Cover Today
No focus on why you invest
No focus on being a landlord
No focus on refurbishment issues or ideas
No focus on traditional lender financing tips & tricks
No focus of lease options or others forms of seller financing
No focus on the tax or legal aspects

4


Multiple Exit Strategies

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Before you enter think about how you expect to exit
If an exit becomes blocked what is plan B, plan C, etc?

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You create your profit when you buy. You realize the cash when
you sell or refinance
You are not buying based on a guess that appreciation will
happen. Build in the profit when you buy

5


You create your profit when you buy. You realize the cash when
you sell or refinance
You are not buying based on a guess that appreciation will
happen. Build in the profit when you buy
Be prepared to switch plans knowing you have alternatives

5


Two Formulas Today

6


Two Formulas Today
You want to look at the opportunity from multiple viewpoints.
Buy to hold, buy to sell, joint venture, HMO vs. single let

6


Two Formulas Today
You want to look at the opportunity from multiple viewpoints.
Buy to hold, buy to sell, joint venture, HMO vs. single let
Two formulas for establishing what you can afford to offer a
seller
What is the maximum the property is worth to you? (MAO)
If property has an ability to produce cashflow, what is
maximum cashflow available to ser vice a loan? (NOI)

6


For Buy To Sell — MAO

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The Maximum Allowable Offer you might present to a seller

7


Not the offer you expect to start at if you want room to
negotiate

7


negotiate
Similar to the maximum amount you would bid at an auction

7


negotiate
Similar to the maximum amount you would bid at an auction
Two keys
Work backwards from the OMV (ARV would be the US term)
Include all costs, fees, contingencies & profit expected

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MAO Formula

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MAO Formula

MAO = ((OMV * 70%*) - (repairs + holding costs + transaction
costs for buying & selling + profit margin + contingencies))

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MAO Formula

You will end up with a ridiculously low number
It is still the right number
It just shows you how many deals are not really deals

8


MAO Formula

You will end up with a ridiculously low number
It is still the right number
It just shows you how many deals are not really deals
If you stick to MAO you have lots of room to maneuver

8


Why MAO for BTS

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Why MAO for BTS
Time is not on your side

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Why MAO for BTS
Very likely you will have to flip deals. The next person needs to be
able to make a profit or see a good deal. Sell to an investor or sell
retail
DO NOT get greedy. Get the deal completed end-to-end

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Why MAO for BTS
retail
Focus on volume rather than a killing on any one deal

9


Why MAO for BTS
retail
Focus on volume rather than a killing on any one deal
Leave money on the table for the next person

9


For Buy To Hold - NOI

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Net Operating Income is the income the asset produces before
debt ser vice, taxes & depreciation. (No capital improvements)

10


Gross income minus operating expenses (OE)

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Operating expenses are the costs to keep the lights on

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Debt is a tool for how someone might buy. Debt is optional. The use
of debt is based on the investor, not the property

10


Debt is a tool for how someone might buy. Debt is optional. The use
of debt is based on the investor, not the property
NOI = ‘free cashflow’. Cashflow still available after OE

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NOI Formula

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NOI Formula
NOI = Gross scheduled income - (utilities + advertising + bad debt +
pro-rated legal and accounting costs + voids + property
management, etc.)
The running costs associated with the specific property
Not capital improvements; just expense items that are
directly associated with the property

11


NOI Formula
NOI = Gross scheduled income - (utilities + advertising + bad debt +
pro-rated legal and accounting costs + voids + property
management, etc.)
The running costs associated with the specific property
Not capital improvements; just expense items that are
directly associated with the property
The income the asset produces after the costs associated with
keeping the lights on

11


Think of NOI This Way

12


If you buy a bond that produces 4% income then we are receiving
after expenses (there are none) will be the 4%

12


If you buy a bond that produces 4% income then we are receiving
after expenses (there are none) will be the 4%
If you ran a business & the business produced an income after the
costs associated with keeping the doors open then we are talking
about that income
How you fund the acquisition or capital costs (paid all cash,
use debt, did a JV with a cash rich investor) does not change
what the business operating income

12


Examples

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Examples
Flat for sale - £249,950

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Examples
Rental income - £1,000 pcm

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Examples
Service charges and ground rent - £600 / yr

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Examples
Gross yield is _______

13


Examples
NOI is _______

13


Examples
NOI is _______
How much debt can you ser vice with this NOI?

13


Examples

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Examples
HMO available for £249,950

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Examples
£8,000 for improvements to get it up to HMO standards

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Examples
Gross yield is 12%

14


Examples
Gross yield is 12%
The implied gross income is _______

14


Examples
Gross yield is 12%
The expenses are _______

14


Examples
Gross yield is 12%
The expenses are _______
NOI (estimated) is _______

14


Examples

15


Examples
BMV lead, 30% off RICS

15


Examples
Light refurbishment is needed. Budget of _______

15


Examples
MAO is _______

15


Examples
MAO is _______
The project is scheduled to take _______ weeks

15


Examples
MAO is _______
Contingency of _______

15


Examples
MAO is _______
Contingency of _______
Exit plan _______. Profit projection _______

15


Examples

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Examples
HMO for sale. £600,000

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Examples
10 bedrooms, all at 105 / wk

16


Examples
£50,000 needed for refurbishment before open for business

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Examples
MAO is _______

16


Examples
MAO is _______
NOI is _______

16


Examples
MAO is _______
NOI is _______
BTS or long term rental?

16


F.U.D.

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F.U.D.
Fear, Uncertainity & Doubt are the three horseman that will kill many
a deal. Sometimes you have it and sometimes the counterparty has it.

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F.U.D.
Break down the issues. Smaller issues are easier to handle

17


F.U.D.
Use checklists so you do not miss things
Share the checklists so the counterparty knows you have them
covered and your competition is not equally prepared

17


F.U.D.
Use checklists so you do not miss things
Share the checklists so the counterparty knows you have them
covered and your competition is not equally prepared
Reduce F.U.D. by reviewing so many deals you know the checklist by
heart

17


What is a property really worth?

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