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Real Estate Analysis

Just a little while ago myself and my patriarch sat down with another family and began discussing real estate and our strategy.  As the family office really didn't understand real estate, they started to ask questions on how we looked at deals and evaluated opportunities. Thinking back I think that a lot of the questions came from the fact that they created their wealth in the LBO market and thus understood the different nuances of businesses.  Now many families created their wealth from a business but this particular family was involved in 39 different industries, thus I believe their frame of reference was a little different.
Our family office created their wealth in real estate and one big part of that has to do with the degree of analytics that is used in our office.  In fact, I have been asking for about 10 years why people are not more analytical about real estate decisions.  
All too often a family office is approached by real estate funds or operators because they work in a specific area.  For the sake of conversation, lets use Multifamily properties as it is and continues to be a big topic of conversation. The question I would ask if you are a family office wanting to invest into real estate is "How do you make your location decisions."  "How do you make your type of multifamily asset decision." "If you are building why are you building/developing right now."  And more importantly "what will you be doing when a downturn happens and when do you think that is going to happen." If they can't answer these basic questions I would run in the other direction.  The reason and what you should hear is below.
Answers you DONT want to hear
Q: How do you make your location decisions -
A: We invest in the X market because we like that market
Q: How do you make the type of multifamily asset decision (A,B, C, D)  
A: We buy what we think is a good deal
Q: If you are developing why right now -
A: you make more money when you develop
Q: What will you do when a downturn happens - will you keep buying -
A: we will keep going because we buy all the time
Q: When do you think a downturn is going to happen -
A: oh we have a long time in front of us
Answers you DO want to hear
Q: How do you make your location decisions -
A: We make our decisions by looking at key metrics which include supply and demand, building permits, vacancy rates, the inflow of people, households.......
Q: How do you make the type of multifamily asset decision -
A: We specifically focus on Class X apartments. The reason why is because......
Q: If you are developing why right now -
A: The only time we develop is if we really see a need in the market which comes from our market demand analysis. Plus if replacement cost is lower than purchasing an existing asset it makes sense to build. If there is a demand in the market we need to know what inventory is available and what is needed. That will help us towards our answer.
Q: What will you do when a downturn happens - will you keep buying. 
A: We see a downturn happening in 2019. Because of that we are sellers of multifamily right now and when the downturn happens we will be buying discounted properties and notes.
Q: When do you think a downturn is going to happen -
A: Like i said we see a downturn happening in 2019 based upon the metrics of the industry.
As you can see one answer is detailed and the other answers are not. Plus you MUST realize that if you deal with a multifamily builder, or homebuilder or any type of one asset developer it is often feast or famine.  When times are good they buy buy buy and when things are not they are not active at all and living off of the money they made in the downturn.   What does this equate to? Overbuilding, bad decisions and good money chasing bad deals.
Just like any relationship - get to know your partner and not only watch carefully but be sure to listen.......especially at the beginning

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