A slow housing market is not the only concern for modern Realtors; in fact, it doesn't’t hold a candle to the larger, longer term threat looming. Some call it Web 2.0, and it will surely be the downfall of Realtors who don’t learn to leverage it to their advantage.
The nature of the Real Estate industry is about to change and it’s anyone’s guess who will come out on top.
There are many examples of the effect of the Internet’s change in information distribution in other industries. A few biggies? The major newspapers thought nothing of Craig's List until it was too late; after realizing they were losing millions in advertising revenues they tried to jump on the bandwagon but were too far behind to ever have hope of catching up. The music and movie industry stood idly by while the likes of Napster devastated their profits.
Will the Real Estate industry fall prey next? Any information based industry is in jeopardy. The signs say the Real Estate industry is likely to be the next victim.
There is a general principle changing here, and grasping its meaning makes the future evident. Pre Web 2.0, the thought was that holding onto information tightly was valuable; possessing proprietary information put a business in a position of power. (In Real Estate, of course, this was the MLS.) Realtors had the information and buyers had to come to them to find the right house. Anyone in the industry knows that typical practice was to give out as little information as possible to draw in the buyer.
In today’s world that tactic spells disaster; as information becomes more and more readily available, buyers won't stand for the old tactics. They will simply go to whoever will give out the information. In light of this, all signs point to this one simple fact: whoever packages the information in the best way will be the victor.
Technologies are nearing a point where a buyer can simply shop on line for a house. A myriad of Web 2.0 websites are working hard at becoming efficient packagers of information. Zillow became one of the first to give buyers and sellers quick estimates of Real Estate value, as well as leveraging Google maps to enable potential buyers to see the lay of the land, so to speak. While the accuracy wasn't always right on, the concept most definitely was. Real Estate ABC quickly followed, taking the same concept and enhancing it; while Fisbos uses Craig’s List and it is quickly becoming a strong Real Estate listing site. Trulia is one to watch in the near future; they are attempting to scrape the internet for Real Estate listing information and put it all together in one convenient package. Their technology is growing by leaps and bounds and if it comes together as well as it might, they will become an even bigger player than they currently are. Others like Housing Maps are scraping the Craig’s List data and creating mashups to package the information into a convenient, easy to understand format for consumers.
Possibly of a bigger threat: the latest rumors that Google is working on a Real Estate related project. It’s anyone’s guess what might come from the minds of Google!
There are many possibilities for how this will turn out. Who will wind up on top? A behemoth company with the resources to gather the information through deals with information providers, possibly? That sort of play would take a great deal of negotiating to bring it all together. Maybe a smaller company with a little more people savvy will perfect a system of gathering information from participating Realtors and consumers; similar to the concept of a Craig's List. One thing is for sure: no matter how it happens, when it happens the old school Realtors will quickly become a thing of the past. Buyers are going to skip the middle man and deal with the information providers directly. What a Realtor provides in services will have to far exceed the value of the commission paid, or someone else will step in and do the job.
Amidst all of this there is a large amount of possibility. For those industry professionals who can understand the new concept in information sharing, who truly understand that information held tight is no longer valuable, success will be easy to attain. Today, information that is widespread is valuable. Real Estate professionals who become information providers, able to leverage Web 2.0 technologies to spread that information, will succeed.
The Web 2.0 world allows experts in a niche market to flaunt that expertise to their credit, building huge followings utilizing web technologies. Some of these niche marketers already have readerships which surpass that of major national periodicals. Realtors are definitely niche marketers, experts in a geographical area and a Real Estate specialty. There are as many niche Real Estate markets as there are geographical areas.
If a Realtor develops expertise using Web 2.0 technology, she will develop a loyal following. And we all know that in the Real Estate market, loyalty = money. And the best part of all is that these technologies are very simple to use: blogs are easy to set up and run; RSS feeds are one of the most powerful features of the world of Web 2.0, and they can be totally automated. Real Estate pros can form relationships with buyers and sellers in large numbers, all on their own website. Networking can be done fairly effortlessly and super efficiently from a computer if you have the right tools. A perfect example is myspace. Or facebook. Or LinkedIn. The possibilities are endless if a Realtor knows how to navigate the landscape.
It’s time for Real Estate professionals to take a deep breath and plunge into the world of Web 2.0. Brochure websites do nothing to entice a buyer or seller to use one’s services; it’s time to get involved with the Web 2.0 world or get left behind by it!
Saturday, September 6, 2008
How a Proforma Evaluates Investment Real Estate Future Performance
A proforma is a useful way for real estate investors to evaluate an investment property's future cash flow performance. Unlike an APOD, which merely gives a snap shot of the property's first year cash flow, proforma income statements look at revenue and expense projections typically up to ten years, enabling the investor to evaluate the investment real estate's cash flow, tax benefit (or loss), sales proceeds, and other financial projections.
Pro forma income statements are generated by looking at the financial performance of the rental property the year before and then using a variable to make projections into the future.
For example, if last year's income was $30,000, the operating expenses $12,000, and the net operating income was $18,000 ($30,000 - 12,000), and you would like to determine next year's net operating income in the event revenue increases 5% and operating expenses increases 4%, you would compute as follows:
Revenue (next year) less Expenses (next year) = Net Operating Income (next year)
Revenue (next year) = $30,000 + (30,000 x .05) = $31,500
Expense (next year) = $12,000 + (12,000 x .04) = $12,480
Net Operating Income (next year) = $31,500 - 12,480 = $19,020
In other words, now you know what net operating income (NOI) you can expect the property to generate in the event that next year, the property's rental income increases (inflates) 5% and its operating expenses increases (inflates) 4%.
This is the essentially the pattern for each year in the proforma, starting with the end of year one and extending out through the end of year ten (i.e., EOY1, EOY2, EOY3, and so on up through EOY10). This year's data is inflated by some variable to compute next year's data.
Moreover, its exactly the same way the computations are made each year for the other returns such as cash flow before tax (CFBT), cash flow after tax (CFAT), sale proceeds after tax (generally requires an inflation rate for property value), cap rate, return on equity, and other returns provided by your specific proforma. Rates of return are recalculated annually according to the changes made to the property's income, operating expenses, and resale value.
How do I create a proforma income statement?
1. Software You can invest in a real estate investment software that will automatically create a proforma income state for you. Bear in mind, however, that software solutions tend to vary and whereas one might include computations for tax shelter, another might not.
2. Manually You can use an Excel spreadsheet to create a Proforma Income Statement. In this case, it helps to have some knowledge of Excel, and you should allow yourself several hours to create a good proforma.
Whatever method you choose, though, real estate investment software or a spreadsheet, here are a few important considerations to keep in mind about your statement.
1. Understand what you want to accomplish with the proforma. You want to analyze the cash flow and other performance measures resulting from changes to such variables as income, operating expenses, and property value over future years.
2. The pro forma is just an estimate (a guess). Do not rely solely upon a proforma income statement to make your investment decision.
3. Though a proforma can be constructed to reflect any number of future years, it is speculative, therefore you might not want to project out further then ten years (I normally don't).
4. Be sure to use realistic numbers. Start with the current income and expenses and inflate them annually by a reasonable amount. Don't inflate income 10%, for instance, when 2-3% has been normal for your market over the past several years.
As stated earlier, a proforma is a good way for a real estate investor or analysts to evaluate the future financial performance of investment real estate. Whats more, because it does look into the property's future performance, a pro forma makes a good report to present lenders.
Pro forma income statements are generated by looking at the financial performance of the rental property the year before and then using a variable to make projections into the future.
For example, if last year's income was $30,000, the operating expenses $12,000, and the net operating income was $18,000 ($30,000 - 12,000), and you would like to determine next year's net operating income in the event revenue increases 5% and operating expenses increases 4%, you would compute as follows:
Revenue (next year) less Expenses (next year) = Net Operating Income (next year)
Revenue (next year) = $30,000 + (30,000 x .05) = $31,500
Expense (next year) = $12,000 + (12,000 x .04) = $12,480
Net Operating Income (next year) = $31,500 - 12,480 = $19,020
In other words, now you know what net operating income (NOI) you can expect the property to generate in the event that next year, the property's rental income increases (inflates) 5% and its operating expenses increases (inflates) 4%.
This is the essentially the pattern for each year in the proforma, starting with the end of year one and extending out through the end of year ten (i.e., EOY1, EOY2, EOY3, and so on up through EOY10). This year's data is inflated by some variable to compute next year's data.
Moreover, its exactly the same way the computations are made each year for the other returns such as cash flow before tax (CFBT), cash flow after tax (CFAT), sale proceeds after tax (generally requires an inflation rate for property value), cap rate, return on equity, and other returns provided by your specific proforma. Rates of return are recalculated annually according to the changes made to the property's income, operating expenses, and resale value.
How do I create a proforma income statement?
1. Software You can invest in a real estate investment software that will automatically create a proforma income state for you. Bear in mind, however, that software solutions tend to vary and whereas one might include computations for tax shelter, another might not.
2. Manually You can use an Excel spreadsheet to create a Proforma Income Statement. In this case, it helps to have some knowledge of Excel, and you should allow yourself several hours to create a good proforma.
Whatever method you choose, though, real estate investment software or a spreadsheet, here are a few important considerations to keep in mind about your statement.
1. Understand what you want to accomplish with the proforma. You want to analyze the cash flow and other performance measures resulting from changes to such variables as income, operating expenses, and property value over future years.
2. The pro forma is just an estimate (a guess). Do not rely solely upon a proforma income statement to make your investment decision.
3. Though a proforma can be constructed to reflect any number of future years, it is speculative, therefore you might not want to project out further then ten years (I normally don't).
4. Be sure to use realistic numbers. Start with the current income and expenses and inflate them annually by a reasonable amount. Don't inflate income 10%, for instance, when 2-3% has been normal for your market over the past several years.
As stated earlier, a proforma is a good way for a real estate investor or analysts to evaluate the future financial performance of investment real estate. Whats more, because it does look into the property's future performance, a pro forma makes a good report to present lenders.
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