This blog post was last updated on Tuesday, October 25th.
Investor intuition and market trends are invaluable as your firm evaluates deals to find the best ones, but data must be the bedrock of multi-million dollar investment decisions. Every real estate offering memorandum (OM) you review can add value to your investment decision-making in the form of a real estate comparable or comp.
To keep pace with today’s fast-moving market, deal teams have found new ways to programmatically leverage these insights by creating a reportable deal database. Read on to learn how investment managers seamlessly harvest the value of latent data through powerful data analytics in real estate investment software.
- What Are Real Estate Offering Memorandums (OMs)?
- What Are Commercial Real Estate Comps?
- What Data Should Be Included in Commercial Real Estate Comps?
- Building a Database of Commercial Real Estate Comparables With OMs
What Are Real Estate Offering Memorandums (OMs)?
A commercial real estate offering memorandum, or OM, is a legal document prepared by brokers to inform prospective buyers about a seller’s property. Real estate OMs provide all of the information buyers need to determine if the deal is worth pursuing, or does not align with their strategy. Typically, OMs include:
- An executive summary, or a brief synopsis of the key points investors need to know about a property’s location, financials and other points
- A description of the property, including the asset class, zoning classifications, demographic details, and pertinent operational details
- Information about current tenants, including rent rolls, lease expiations and more
- Critical financial details, such as profit and loss statements, balance sheets, investor distribution schedules, IRR and more
- Return summaries predicated on varying assumptions
- Property management stakeholder profiles
- Legal information, such as participation requirements and confidentiality agreements
- Photographs of the property to help investors understand the asset
- Local maps to show investors the property’s location and its proximity to amenities and other hotspots
- Lease and sale comparables to provide financial benchmarks for prospective buyers
For the seller, real estate OMs are a fast, simple way to distribute information about a property listed on the market. For potential buyers, offering memorandums help investors to quickly and easily determine if the property is worth pursuing.
Critically, though, each real estate OM also adds endless value in the form of comparables and data analytics.
What Are Commercial Real Estate Comps?
Also called comparables, commercial real estate comps provide investors with market intelligence in the form of data, such as prices on similar deals. Comps help investment deal teams to set internal and external benchmarks when screening and underwriting pipeline deals. Consequently, they empower investors to act with confidence that their thesis and projections are supported by data.
There are two types of commercial real estate comps: sales comps and leasing comps. Sales comps are based on recent pricing or sales data, and help investors to learn how a property’s price compares to market value. Leasing comps, on the other hand, are used by asset management teams to project potential ROI. In this blog post, we’ll focus mainly on the value sales comps deliver to investors.
Comps from the same sub-market as a pipeline deal can yield tremendous insight when gauging how a deal is priced according to current market conditions. For this reason, comps from other markets or asset classes may not add actionable context. After all, how could a 40-unit multifamily acquisition in Atlanta add clarity about a similar deal in Kansas City?
The closer two properties are when it comes to their size, age, quality, amenities and other variables, the more insight comps lend. However, that’s not to say that mismatched comps are devoid of value. It’s not uncommon for investors to adjust prices after accounting for size, age or other discrepancies.
What Data Should Be Included in Commercial Real Estate Comps?
Commercial real estate comps are powerful tools, but only when they include data relevant to investment decisions. For maximum value during the screening process, real estate comparables should include:
- The property’s address
- The property’s sale price
- The cap rate
- The projected IRR
- The net operating income
- The asset class or property type
- The names of the firms that bought and sold the property
- The date of the transaction
- The size of the building
- Operational costs
Dealpath allows firms to track unlimited data fields, helping investors to quickly reference any aspect of a transaction they choose to record.
Paid third-party data from providers like Compstak can prove useful, with some caveats. These datasets are often outdated by the time they are called into question, which can limit their utility.
Previously, comps might have only been available following a transaction, potentially buried beneath other data in a drive folder. The evolution of real estate technology, and particularly deal management technology, has made this information easier to gain and access.
Building a Database of Commercial Real Estate Comparables With OMs
When it comes to uncovering the most profitable opportunities in your deal pipeline, proprietary historical real estate comp data is the most telling. Prior to purpose-built software, deal data was recorded in spreadsheets, which eventually landed in folders. Despite sufficiently archiving data, this approach made accessing and leveraging data challenging and time-consuming–leaving decision makers without the confidence necessary to act.
The way that investors store, find and leverage comps has naturally evolved with commercial real estate technology. With Dealpath’s deal management software, for example, every OM you evaluate adds value in the form of another real estate comparable that can guide future investment decisions.
Ingesting new deals into your pipeline adds tremendous value to your ever-growing database of comparables, strengthening your analytics. Even deals that your firm instantly passes on can act as important benchmarks down the road.
Searchable real estate analytics tools help investors find the same answers faster and with stronger precision. This structured data allows for streamlined “apples to apples” comparisons, reducing decisions from hours to minutes. As you add deals to your pipeline, you can choose to track any data point that could prove valuable, such as price per square foot.
For example, an industrial-focused firm managing deals in Dealpath considering an acquisition in Dallas could simply filter old deals for “industrial” and “Dallas” to access historical data. After a few simple clicks, they could learn everything they need to about recent deals and transactions they’ve logged.
Eliminate Manual Data Entry With Dealpath Data Ingestion (DDI)
Polluting your pipeline or deal management software with bad data is dangerous–there’s no room for error or time to waste on deal evaluation. Tested and vetted by firms of all sizes, Dealpath Data Ingestion (DDI) is a proven data service that eliminates manual data entry.
Click the link below to learn how your firm can accelerate deal flow to meet capital deployment goals with DDI.