Underwriting a relocation firm interest letter as if it were an occupancy commitment

Consider a case where a relocation firm's interest letter got treated as a commitment, and the underwriting followed it. A buyer working toward a first purchase gets far along on a four-unit near a hospital and two office parks, planning three units plain and one furnished corporate. The seller's broker introduces a relocation management company active in that submarket, and the buyer receives a letter anticipating 6 to 9 placements a year in a unit of that quality, at rates in the $2,800 to $3,200 range, subject to vendor approval and availability. That letter gets read as a demand letter. The underwriting uses $2,900 at 75 percent furnished occupancy, which moves the deal from a 6.1 to a 6.9 on paper and makes the price feel comfortable. Money spent before the deal dies: $1,900 on inspection and a sewer scope, $650 on an appraisal deposit, $2,400 to a real estate attorney for review and entity setup, and $1,850 non-refundable on an early furniture order placed to beat an eight-week lead time. The deal dies once two direct questions finally go to the relocation firm's vendor manager in writing. Does the letter commit anything? No. What does approval actually require? A minimum of two years operating furnished inventory, a 24-hour contact, and rates set from their own rate card, $2,450 to $2,600 for that unit type, not $2,900. At $2,500 and a realistic first-year occupancy near 40 percent while sitting in the approval queue, the deal underwrites to a 5.4, and the buyer walks at day 21. The lesson is to send the two direct questions before spending a dollar. The letter cost the relocation firm nothing to write and was accurate on its own terms; the occupancy assumption was the buyer's own leap from "anticipate" to committed volume. And furniture, in general, should never move before closing, regardless of lead times.

tashaford30 SG2CPRO 16

Answer

laurenkim53 PF4APRO 14

I'd put the cause somewhere other than where either of you has it. The deal needed one furnished unit at $2,900 and 75% to work. That means the deal didn't work. Run it plain. Four units at market unfurnished rent, and see what it is. You said it's a 6.1 on your numbers before the furnished unit, and you were willing to buy at 6.9. The furnished unit was carrying 0.8 of cap rate on a strategy you had never operated. The channel was one where you were not yet an approved vendor. The rate turned out to be 15% above the buyer's own card. Any one of those going wrong takes you back under your threshold, and all three were unproven at the same time. The useful rule, and it applies to cheap rural product as much as to a four-unit near a hospital, is that the deal has to clear on the operation the buyer already knows how to run. Anything new is upside you don't pay for. Underwrite all four units plain and treat the corporate unit as a maybe, and the relocation firm's rate card becomes interesting news instead of deal-killing news. You'd probably still be in it. The $6,800 is mostly real diligence money on a deal you correctly walked from, minus the furniture, which was the only genuinely avoidable line.

laurenkim53 PF4APRO 14

3 replies

ehernandez74 PC3BPRO 12

The furniture order is the part to flag hardest. $1,850 gone on a unit that was not yet owned. Lead time pressure is how sellers and vendors get a buyer to act out of sequence. The letter deserves less blame than it is getting, though. Getting anything in writing from a placing firm during diligence is more than most people manage. The failure was narrower. The rate card never came, and the rate card is the only number that matters if the placing firm is the buyer.

ehernandez74 PC3BPRO 12

kevin_lombardPassivePRO

I had to read @laurenkim53's post twice and then I understood the whole thread differently. I've been writing down furnished numbers from posts here as if they were the going rate. It hadn't occurred to me that the company doing the placing publishes what it will pay and that number is the ceiling regardless of what the market comps say.

@tashaford30, when you asked the vendor manager for the rate card, did they just send it? Or is that something they only share with approved vendors?

kevin_lombardPassivePRO

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