Podcast: Play in new window | Download
Today I want to lay some truth on you:
Everybody lies. Buyers lie, brokers lie, and even sellers lie. Now I have my reputation because I play by the rules and don’t misrepresent. It’s important to note, however, that there’s a difference between “lying” and “marketing”; they’re not one and the same.
For example, the term “pro forma” as defined directly from Investopedia.com:
“Pro forma, a Latin term, literally means ‘for the sake of form’ or ‘as a matter of form’. In the world of investing, pro forma refers to a method by which financial results are calculated. This method of calculation places emphasis on present or projected figures.” However, pro forma calculations have become incredibly inaccurate and can be misleading for investors looking into properties, to the point they contradict generally accepted accounting principles.
In the late 90s during the dot com boom, pro forma calculations were used to turn losses into profits. This is a problem today because these same calculations are used in the real estate market to put out fraudulent numbers for income and is punishable by the SEC.
Frankly, I’m not a fan of pro forma. In my 18 years in real estate, it’s NEVER been accurate. It’s not always intentionally fraudulent, but it rubs me the wrong way. This is a big one with wholesalers especially and I get a lot of phone calls after it’s too late to stop the deal.
So why do sellers and investors use pro forma? To demand that YOU pay based on what the property WILL do in the future.
Makes sense, right?