Underwriting a real listing: walkthrough

The listing says 7.11% cap rate. The leases say, with admirable restraint, absolutely nothing about that number.

“Where does that come from?”

The marketing page points to its pro forma. The leases remain seated.

Good. We have found the job.

This is a real listing workflow applied to a completely hypothetical 24-unit property. The address, seller, tenants, broker claims, loan, dollars, and outcome are invented. No actual deal or return is being described. This is education, not investment, legal, tax, or accounting advice, and it is not an offer or recommendation.

The listing gets the first word

Our fictional listing asks $3.6 million. The marketing page promises renovated rents of $1,450 per month, 95% economic occupancy, $14,400 of other income, and $155,000 of annual expenses.

That produces $256,120 of pro forma NOI:

Broker calculation	Amount
Gross potential rent: 24 x $1,450 x 12	$417,600
Less 5% economic loss	($20,880)
Other income	$14,400
Operating expenses	($155,000)
Pro forma NOI	$256,120
Cap rate on $3.6 million	7.11%

The arithmetic is fine. Nobody objects to multiplication. The trouble starts when the room asks where $1,450, 95%, and $155,000 came from.

The leases answer without enthusiasm

Start with the dated rent roll, then sample every lease type. Match unit number, resident, lease start and end, contractual rent, concessions, deposit, balance, and occupancy status. Tie the rent roll to tenant ledgers, bank deposits, the trailing 12-month statement, and the last three monthly statements. Pull move-in and move-out reports too. Physical occupancy is a body in a unit. Economic occupancy is money arriving.

In this hypothetical, nearby renovated comps advertise $1,400 but give one month free on a 12-month lease. Net effective rent is about $1,283: $1,400 x 11 / 12. The subject’s signed leases and actual trade-outs support a blended $1,300, not $1,450.

“Can we keep the $1,450 as upside?”

Certainly. Upside may sit in the upside case. It cannot impersonate current evidence in the base case.

I also use 7% for vacancy, concessions, and bad debt. Fannie Mae’s current Underwritten Net Cash Flow guidance separates vacancy, concessions, and bad debt and calls for support from collections and operating history. It is lender guidance, not a law for every acquisition, but the discipline travels well.

The bills take their seats

Do not accept one T-12 total labeled “operating expenses.” Pull the monthly general ledger and invoices. Separate recurring operations from owner perks, capital work, casualty repairs, deposits, and unpaid bills. Then inspect:

• current and prior property-tax bills, the official assessor parcel record, assessed value, appeal history, and the local written reassessment rule;
• utility bills and meter schedules for 24 months, including water, sewer, trash, gas, and common electric;
• the current insurance policy, loss runs, claims history, deductible, exclusions, and a binding acquisition quote;
• payroll registers, management agreement, landscaping, pest, elevator, fire, laundry, internet, and other vendor contracts; and
• work orders, delinquent payables, code notices, permits, certificates of occupancy, roof and mechanical ages, and the property-condition report.

The verified expense case is $168,000, not $155,000. The seller’s old tax and insurance numbers had a pleasant run. The buyer will be paying the next bills.

The cap rate meets the full cost

Now rebuild the listing beside the evidence:

Stabilized case	Broker	Underwritten
Gross potential rent	$417,600	$374,400
Economic loss	($20,880)	($26,208)
Other income	$14,400	$10,800
Operating expenses	($155,000)	($168,000)
NOI	$256,120	$190,992
Cap rate on asking price	7.11%	5.31%

Price is still not basis. Add $72,000 of closing and diligence costs, $144,000 to renovate 12 likely turns, and $60,000 of working capital. All-in basis becomes $3,876,000. The $190,992 NOI yields 4.93% on cost. At a hypothetical 6.00% market cap, that NOI implies $3,183,200 of value, about $692,800 below basis before selling costs.

The underwriting changed twice. The listing’s 7.11% became 5.31% when the income and expenses met evidence. Then 5.31% became 4.93% on cost when the deal admitted that closing, renovation, and working capital also needed money.

That does not prove the property is bad. It proves $3.6 million needs a better argument than the listing supplied.

Future rent sits beside yesterday’s bills

The classic trick combines future renovated rent, immediate perfect occupancy, today’s low tax bill, the expiring insurance premium, and no cost or time for renovations. Each input can look plausible alone. Together, they describe a year the property has never lived.

Also watch asking rents passed off as signed rents, physical occupancy passed off as collections, and sale comps without deed dates or financing context. A broker opinion is a lead. A signed lease is evidence.

Every important cell gets a witness

For physical risk, pull the survey, title commitment and exceptions, zoning verification, property-condition assessment, permit file, code violations, and a current Phase I environmental report. EPA’s current All Appropriate Inquiries page identifies ASTM E1527-21 as a route for satisfying the federal inquiry standard. Have qualified counsel and environmental professionals handle the actual liability analysis.

For a syndicated purchase, also inspect the PPM or offering memorandum, operating agreement, subscription agreement, sources and uses, fee schedule, waterfall, sponsor co-investment evidence, and Form D on EDGAR. The SEC’s private-placement bulletin warns that disclosure may be limited, offering documents generally are not regulator-reviewed, and Form D is not SEC approval.

Then ask the questions that can stop the work before it consumes a month:

• Which signed leases support $1,450 after concessions and fees?
• What changed between the T-12, T-3, rent roll, and bank deposits?
• What are taxes and insurance after acquisition?
• Which repairs are excluded from the contractor scope?
• How many units can turn before cash runs thin?
• What price works with $190,992 of NOI and no refinance rescue?
• Who funds overruns, and what do the governing documents allow?

End with a kill sheet

Build a one-page kill sheet today. Use five columns: claim, exact source document, verified number, haircut, and unresolved question. Fill the rent, economic loss, taxes, insurance, repairs, capital work, debt, and exit rows.

Any blank source cell gets zero credit.

The transferable rule is to let the listing state the claim once, then rebuild rent, economic loss, expenses, capital work, debt, and exit from named evidence. If the cap rate survives, keep studying. If it falls from 7.11% to 4.93% on cost, do not argue with the file. Reprice the deal or leave the room.