Many commercial real estate professionals rely heavily upon their valuation and underwriting software to generate the accurate valuation and cash flow projections they need to make smart, timely business decisions on the acquisition, disposition and financing of commercial properties.
Yet, despite this dependence, they may have limited understanding of how their software actually works or how it arrives at the numbers it generates. They just accept the software’s results as infallible.
In particular, most users are probably unaware that their software may have modeling switches — literal switches within the software’s settings — and that how those switches are set may have a profound impact on the calculations within their cash flow projections.
In fact, one of the most commonly used CRE valuation and underwriting software solutions has numerous switches, most of which are completely unnecessary and confusing to the average user, all of which impact how the software performs calculations. Take vacancy loss and gross-up calculations, for example. Vacancy loss and gross-up calculations are a critical component of any property’s proforma or DCF analysis, and this software has switches that allow users to select whether these metrics are calculated on a monthly or annual basis.
While it may seem that the time frame is irrelevant and the results would be similar regardless of whether the metric was calculated monthly or annually, in reality, the time frame used may produce materially different results. Those differences could ultimately cause someone to severely over or under-bid for a property, or walk away from a promising opportunity altogether because of the scenario the numbers portray. Or, worst case, an owner could end up losing money on a building because they overvalued it, due in part to how their software’s modeling switches were set.
A Notable Difference in Your Numbers
In one scenario for a white paper I recently wrote on the subject, I show how calculating general vacancy monthly instead of yearly could result in difference in net operating income in excess of 5% of potential tenant rent.
A 5%+ difference in net operating income, all because of how the valuation software’s modeling switches were set. Now maybe you can start to see just how important those mysterious switches are.
rDCF: Valuation and Underwriting Simplified
Conversely, those who know about the switches and understand their impact on a property’s pro forma can use them to their advantage. When they need more aggressive numbers—for dispositions or financing- they can set the switches accordingly. And, when it benefits them to present more conservative numbers, they can literally flip the switches and generate more favorable figures.
For all these reasons and more, we based the modeling policies in our rDCF software upon the valuation and underwriting best practices we learned in our 30 years as CRE consultants. Gross ups are defaulted to an annual calculation, for instance, and rDCF can generate a wide range of detailed, comprehensive reports so users can know exactly what’s included in their numbers and what’s not.
That’s just one of the many differences between rDCF and other commercial real estate valuation and underwriting software. rDCF was designed and built to deliver accurate and consistent results, and to be easy to learn and simple to use. Based upon the rave reviews from everyone who has used it or seen a demo, rDCF is all that and much more.
To learn more about the modeling switches that could be in your DCF software and how they could be hurting your business and skewing your data, download our free white paper, Bad Decisions and Squandered Opportunities: What You Don’t Know About Your Valuation Software Could Be Costing You Millions.