Finding the right partner takes time. Don’t be discouraged if a partner you thought would be ideal does not work out. Companies should interview at least three potential partners before selecting one. In a way, it’s a lot like dating.You don’t necessarily marry the first person you go out with. In business, you don’t want to form a partnership with the first potential partner you meet. Someone better suited to your needs may come along at any moment.
In the Bank of America/Exult case, the bank knew it wanted to outsource its human resource capabilities and Exult wanted to demonstrate to others that it could manage a business on that scale. But as they explored their partnership, they discovered they might benefit in other ways. For example, Exult manages the payroll for many of its clients. Those payroll services could be managed through Bank of America, providing both seamless service for Exult’s clients and additional business for the bank.
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.
At this point, we have verified the actual potential income for the pr< >pcrty. Remember that’s the income the property could generate at current rents with 100 percent occupancy. But certainly, it is highly unlikely that this property is or will be 100 percent occupied every day of every year from now until eternity. So we have to take into account vacancy and turnover from residents moving in and out. And while we’re at it, we should consider any other income generated from sources like laundry facilities, parking, and so on.
The typical pro forma lists these values as well. And surprise! these numbers, too, I have found to be inaccurate most of the time. Vacancies are usually understated and other income is usually over-inflated. The key here is to try to project what the vacancies and other income will be in the future. It’s nice to know where you’ve been, but where you’re going is really more important. That’s why the windshield is so big and the rearview mirror is so small.
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