In the Explore Stage of Partnership Development, your main concern is finding out what a potential partner wants. You already know what you want because you’ve completed the Needs Assessment Tool. When you first contact a potential partner, make sure you share your information first. This will demonstrate your willingness to be open and direct. Make it clear that you’re looking for an equitable partner. This engenders openness and invites the other party to disclose information.
If this potential partner expresses an interest in the possibility of working together, ask them to explain what expertise they have, where they’ve been, and where they’d like to go. And make sure that you listen attentively to their answers. The point is to learn what they need and how you might fulfill that need. Stick to possibilities. Don’t ask for specific commitments or plans yet. If they’re still interested in working together after you’ve exchanged some information, explain the Partnership Continuum model. Explain how the model helps people communicate effectively and provides a blueprint for creating mutually beneficial partnerships. With this tool, you can see what information you need to give and get. At the same time, it will help your potential partner communicate more easily. It will put the discussion where it belongs: in the context of partnerships. To help you structure this discussion, ask your potential partner to complete the Partner Compatibility Analysis with you. While you’re getting information from your potential partner, you’re also providing information about yourself and where you want to go.
Keep in mind, at this point in the process your goal is to get an idea of the ongoing services and repairs as well as upgrades the building may need. Later in the process, you’ll go into lots more detail. This is the time to put rough numbers on paper and analyze if the cost of the needed repairs will still allow you to be profitable. There is a real balancing act between spending enough to get the place in shape and overspending. Again, your property management representative can help you determine many of these costs.
The goal throughout this whole exercise is to get a picture of where your expenses are and try to find ways to do things better, smarter, and for less money. Those increase your net income and increase your profitability. So what are the expenses? To answer that question, we’ll turn to the pro forma expense table. It shows the seller’s anticipated expenses for the coming year (the pro forma column) and the actual expenses for the prior year.
As I’m sure you have guessed, when I formulate my offer I disregard the other two income numbers and use my own projected figure, the one that takes into account the real property rents. The best part of this strategy is that because the numbers are real, they are easy to defend during the negotiation process.
This is how easy it is to verify income and how easy it is to catch these kinds of inconsistencies in the numbers. As I mentioned, income is often inflated, so don’t be shocked if the difference be¬tween the numbers on the pro forma and the numbers you project are in the thousands. That is common.
Before we leave the topic of income, let’s address future potential income. Recall that future potential income is the total income the property could generate at today’s market rents, 100 percent occupancy, and by taking full advantage of all other income opportunities. You may find through your income verification process that the reported rents are well below the market. This could be your ‘Advance to Boardwalk” card, so keep it close to your vest. It’s this kind of upside potential that property investors dream about. With income verified, it’s now time to turn our attention to expenses.
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