subject: Real Estate Proforma: Evaluation Of Property [print this page] Unlike residential real estate, where an investor can use comparable sales to determine a propertys value, commercial real estate values are determined by the income approach. The term Proforma denotes the process of evaluating a property and determining its value by estimating its future cash flow streams. In order to evaluate real estate decisions a proforma using a spreadsheet program, such as Microsoft Excel, can create a simple proforma to analyze revenues, expenses, and returns for any real estate project. However, not every proforma model is created equally. The parameters and calculation method could be different based on real estate type. For example, an apartment proforma is different than a shopping center Proforma
A real estate development proformadoes not solely rely on past results. Although past results are certainly important when looking at the future, a sophisticated real estate investor must know to make appropriate assumptions on a going forward basis to income/expenses on any building proforma . Furthermore, the real estate investor must accurately model any new construction or renovations costs as well as any borrowing costs to the proforma in order to yield a useful result.
Failure to take the time to gather the necessary data and make reasonable assumption on future income/expenses will likely result in unpleasant surprises for a real estate investor. Commercial real estate also tends to take longer to sell than residential real estate. As such, the real estate investor needs to have a good handle on the data so he or she doesnt end up losing significant amounts of money
