Software for underwriting commercial real estate leases
Hey all -

We're building a deal underwriting software for Commercial Real Estate. 

1) I was curious what are people's thoughts on using a software to underwrite deals? 

2) What are some pain points when it comes to underwriting a deal. 

3) How can software help simplify the complex process of underwriting deals 

4) Thoughts on existing products like Argus. How can it be improved?
[{"id": "gvps2gz", "text": "Good luck.", "replies": [], "depth": 1}, {"id": "gvpsuyu", "text": "Argus already does this, and it\u2019s used by all of the big firms.", "replies": [{"id": "gvpw0f2", "text": "Yes. We're taking a different approach to rental prices, market assumptions, renewals and optimizing lease terms.", "replies": [{"id": "gvpwe45", "text": "You can already edit all of these in Argus.", "replies": [{"id": "gvpx64x", "text": "Yeah, we calculate them based on models and data analysis. We have a space pricing model that takes into account current market conditions and other features like cash flow and scenario analysis, asset stabilization etc.", "replies": [{"id": "gvpy6io", "text": "Where do you get the data from", "replies": [{"id": "gvpykg1", "text": "Different data providers, location data companies and some publicly available  data.", "replies": [{"id": "gvqatlj", "text": "Costar gonna sue your ass.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "gvq4wre", "text": "What do you mean exactly? In argus you account for market conditions with your market rent assumptions, rent growth, cap rate, etc. What exactly are you doing differently? What do you mean \"based on models and data analysis\"? Everyone in CRE is basing their assumptions on data analysis.\n\nAre you suggesting something that  effectively \"automates\" the data analysis? Nobody is going to rely on that.", "replies": [{"id": "gvq5q9u", "text": "We built proprietary supply and demand models that dynamically calculates rental rates. We don't make rent assumptions. We calculate in-place cap rates using a model that takes into account several factors including market rents, vacancies, etc. Can't share too many details here. Happy to chat in dms and potentially connect if you'd like to learn more.", "replies": [{"id": "gvq710f", "text": "That's essentially the same thing that costar does, which is generally regarded as junk data and unreliable. People in the CRE industry manually input their rental rate assumptions, cap rates, growth rates, etc based on a careful human analysis of the data. Costar already gives estimated rental rates and cap rates based on their massive database, and much of they time these are completely off. \n\nI am curious to know what your actual experience within the CRE industry is and what motivated you to make this. Based on your comment of not knowing what excel is used for, it sounds like you may have no experience working in CRE", "replies": [{"id": "gvq86ub", "text": "Right. So, there is a reason why their estimates are completely off. We make precise adjustments to rental prices based on data we've gathered through different sources. It's like RealPage' YieldStar which is much different from lease data which is what CoStar provides.\n\nPer sq.foot price is just one component, there are other lease variables that affect pricing as well. Ultimately, it comes down negotiation with tenants to settle on a deal / price. So there is a bit of art involved as well.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gvpuavh", "text": "What kind of commercial? Worlds of difference between MultiFamily, storage, and office. What platform?", "replies": [{"id": "gvpx362", "text": "Office, Industrial and MF.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gvpvve9", "text": "Argus is great for lease modeling. Wouldn\u2019t change it. Need excel for everything else because each deal is unique, there\u2019s no one size fits all model because there really can\u2019t be. Anyways good luck.\n\nETA - not to pile onto this but looking at your post history it\u2019s clear you don\u2019t work in CRE investments or have any experience with the industry for that matter. I\u2019m all for new prop tech - I love evaluating new service providers (especially the big data guys providing demographic predictive analytics) - but I question whether you have the experience or knowledge of the industry to really understand the problems that need to be solved. Anyways good luck, I sincerely hope you figure it out and create a cool new product that we\u2019re all using soon.\n\nETA 2 - you say yourself in your blog that people will just revert to excel if the model doesn\u2019t work. People are just going to revert to excel and the overhead for an analyst is cheap, not only do you need someone to do grind work but you also need the \u201cnext generation\u201d at a company - there are non-financial reasons to hiring junior talent. Also most institutional shops have template excel models for different property types. Those that are smaller are probably more focused and don\u2019t need a robust one size fits all model. Anyways my $0.02", "replies": [{"id": "gvpxdps", "text": "Exactly. We hope to be a product that's flexible enough for different deal and property types. What do you use excel for?", "replies": [{"id": "gvpyjn7", "text": "Um everything? Argus cash flows get dumped into an excel model, can\u2019t see using anything other than excel. Excel is incredibly flexible and easy to use, can\u2019t see manipulating cash flows in anything other than it. Use it for all asset classes and for both acquisitions and asset management. Our AM team is dependent on it because of plug in functionality to accounting databases to streamline their quarterly revaluations.", "replies": [{"id": "gvpzd8b", "text": "That makes sense re: plug in functionality. We're taking a different approach to producing cash flow scenarios. We analyze market, location, lease pricing data to come up with better pricing and cash flow models.  Would your team be open to a demo? I can share more info and gather feedback.", "replies": [{"id": "gvq0ixm", "text": "Sorry but no thanks, all set. Also the items you mention are for our acquisitions team to determine during DD we wouldn\u2019t outsource that or trust a data feed.", "replies": [{"id": "gvq1zl5", "text": "We're focused on operational efficiency, i.e for Asset management teams to optimize space pricing, lease terms and renewals. It's for teams to obtain all the info &amp; analysis they need to make better operational decisions vs outsourcing it. This could possibly be extended to Acquisitions as well.", "replies": [{"id": "gvqaglq", "text": "Do you analyze the market, location, and lease data? Who does? A professional appraiser, local investor, experienced broker? \n\nOr do you mean you built an objectively driven algo that will compute subjective information and spit out either 1) a huge range or 2) nonsense?", "replies": [{"id": "gvqcedb", "text": "We analyze data and built an algo which is utilized by a professional/pricing expert to complement their intuition.", "replies": [], "depth": 8}], "depth": 7}, {"id": "gvqcdpp", "text": "That\u2019s  all work that I want my team doing, not a machine. All of those are super subjective depending on the asset business plan and you can\u2019t automate that...", "replies": [{"id": "gvqd6uy", "text": "Correct. We can't and we aren't trying to. We're building a product that can take input data from accounting software and help those who are making these decisions. It's meant to help those making these decisions with better insights. Underwriting leases is extremely complicated as pointed out by others and it's challenging for humans to consider all the information to make optimal decisions. An underwriting software can be a critical component of decision making stack. More here: [https://ninefour.vc/underwriting-software-one-size-does-not-fit-all/](https://ninefour.vc/underwriting-software-one-size-does-not-fit-all/)", "replies": [{"id": "gvqdt9p", "text": "Right but you\u2019re solving for a problem that no one really has. On the resi side Yardi and Yieldstar already make great industry leasing revenue optimization software, in hospitality its manual pricing by a revenue manager against the company set, senior housing is same way, and office / industrial / retail is part art part science. There\u2019s really no need for software to help an asset manager with this, it\u2019s a task that requires human input, knowledge, analysis, negotiation and internally understanding the assets business plan", "replies": [{"id": "gvqewdk", "text": "This is why flexibility is key. There are several factors to consider which vary by market. It's challenging to process all this information and also time consuming to collect all relevant info. Deal underwriting can be improved. The article I linked above does a good job of explaining how a deal underwriting software can be a game changer.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "gvqouta", "text": "Agreed, if you\u2019re good you can link excel to your other software for data dumps then build whatever tools you need in a family reunion environment.", "replies": [{"id": "gvqqdg0", "text": "Yea I mean my shop has full time programmers who\u2019s sole job is to better link our data sources to our models and vice versa. Everything ends up feeding into a data lake environment and then manipulated however it needs to be manipulated. \n\nSeparately to this guys point if you\u2019re big enough you don\u2019t need this software you have enough internal resources and proprietary data on leasing to \u201cknow\u201d a market just based on your own data. We typically look to our own data is a source for UW in addition to the \u201cstandard\u201d data providers like rca/costar/Trepp/Reis/axio/etc (wow that makes me realize just how many companies are already out there doing this exact same thing... but with scale).", "replies": [{"id": "gvs6ffu", "text": "I built my own Excel model to try and duplicate Argus analysis. It wasn't my job or anything just something I did in free time while working at a commercial brokerage. It took me 5 years to get it really good. But it only works for a single space and I do office. Dear Lord. Imagine doing a 60 story building x 1-5 suites per floor. \n\nInstead we use it for lease underwriting and it works amazingly as a service to tenants. The hardest part in Excel was making everything automated. So you plug in a start date and term and it creates it's own rent schedule to the day. We work in multiple states so factoring the different commission styles, staggering commencement dates, separate opex and parking calcs with free expense options, converting free rent to additional TIs, etc. etc. \n\nI guess I could string copies together into a master sheet so it works for a whole building, but frankly leasing has become my main focus. So eff it. We have an Argus group at our disposal anytime we want so... Lol", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "gvrwuad", "text": "I personally don't have CRE Investment experience. However, the people that I'm working with do and customers (some big players) have told us they're interested in a product like this.\n\nSince you're keen on PropTech, it might be worthwhile to connect and help you better understand the product.", "replies": [{"id": "gvrxdox", "text": "Sorry connecting my Reddit to my real life is a big no-no. Good luck!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gvq3gax", "text": "This feels like an area that should remain human. No need to automate everything.", "replies": [{"id": "gvq4ptc", "text": "Agreed. Not trying to automate.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gvq8h4n", "text": "It woild be nice if you could integrate montecarlo simulations and make sensitivity analysis.", "replies": [{"id": "gvq8vhj", "text": "Interesting. Yeah, simulations and scenario / sensitivity analysis is something we're looking to add. I'm curious why you think MCMC would be useful application for the use case?", "replies": [{"id": "gvq9u7y", "text": "Well because you can set the risk of each variable and make long term predictions. I think it would be particularly useful for multifamily. For example, you could set currency, inflation, interest rates, and caps with different risks. Of course, this is particularly useful for riskier markets or longer term.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gvq8h4q", "text": "It woild be nice if you could integrate montecarlo simulations and make sensitivity analysis.", "replies": [], "depth": 1}, {"id": "gvq8q67", "text": "Buildout just released a product similar to excel for underwriting directly into marketing documents.", "replies": [], "depth": 1}, {"id": "gvqbb6n", "text": "I think most people will ignore your analysis of market data and use their own analysis based on CoStar data, conversations with brokers and their own market knowledge.  Commercial real estate is too granular at the lease level to use data analysis, AI, or whatever you want to call it to arrive at useful conclusions.  Data feeds aren't going to have any information on TIs, rent escalations, termination options, options, etc. and those (and other factors) are what's important to understand a market.", "replies": [{"id": "gvqbq1i", "text": "Agreed about the TI, Rent escalations, termination options, etc. part. which is why I wrote this: [https://www.reddit.com/r/CommercialRealEstate/comments/mxlw9t/software\\_for\\_underwriting\\_commercial\\_real\\_estate/gvq86ub?utm\\_source=share&amp;utm\\_medium=web2x&amp;context=3](https://www.reddit.com/r/CommercialRealEstate/comments/mxlw9t/software_for_underwriting_commercial_real_estate/gvq86ub?utm_source=share&amp;utm_medium=web2x&amp;context=3)", "replies": [{"id": "gvqzkmf", "text": "No data feed is going to have the information that would make your analysis have value above what is already in the market.  Unless you have an army of trained people analyzing and abstracting leases-which you won't be able to get- you are not going to get the results you think you will.  There are a lot of comments on here trying to help you understand that what you are trying to do has astronomical barriers to entry.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gvqcvjy", "text": "Not to pile on, but there\u2019a basically no chance your data feed could be used to underwrite. Possibly could be useful for high level supply/demand analysis though. Underwriting specific deals is extremely complicated using broad market level data.", "replies": [{"id": "gvqdfwv", "text": "Yeah, underwriting deals is extremely complicated and we want to provide all the information, and insights needed to help make those decisions. There is a bit of art involved in underwriting, but with better insights and data this can be done much more efficiently.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gvqm9du", "text": "&gt; what are people's thoughts on using a software to underwrite deals? \n\nDo you have at least a hundred million dollars to spend getting and maintaining good data?  Once your data beats other options, price a *lot* cheaper than the competition and let them buy you out.  Until then, IMO you are completely wasting your time and someone's money.  \n\nYou could start smaller by spending a ton of money to become the best in one market, then another in the same state, and so forth.  \n\nI'm not sure if anyone is doing this, but it seems like a good way to start would be to pay brokers for copies of their data.  Once you get enough data to be useful, you can offer smaller brokers discounts on your service in exchange for copies of their data.  \n\nIf you can think of a good service to offer to a city's economic development/planning department for free in exchange for their data, that'd help also.", "replies": [{"id": "gvtapjc", "text": "The problem is that it\u2019s not the brokers data. It\u2019s governed by the lease and parties who do not want to disclose even for a fee. You can get brokers to give approximate data but value...", "replies": [], "depth": 2}, {"id": "gw1tc6m", "text": "Compstack it trying to do this but I have found the rewards are not even worth the time to engage with them.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gvqn0ks", "text": "LOL", "replies": [], "depth": 1}, {"id": "gvqp50f", "text": "I feel like underwriting needs a human element to it, the numbers can look good.  But you still need that human element to say - does this deal make sense, what developing risks are there 1, 5, 10 years out", "replies": [], "depth": 1}, {"id": "gvr5ysg", "text": "Underwriting is called **underwriting** and not **undernumbering** for a reason. It\u2019s 90% writing and only 10% numbers. Any errors with that 10% make giant chunks of the other 90% worthless. That 10% is the foundation for the other 90%, for sure, but it\u2019s the lightest lifting when it comes to underwriting.", "replies": [], "depth": 1}, {"id": "gvrc3hv", "text": "Used moodys/CASH suite for the finance underwriting. \n\nWould recommend a way to read rent rolls, tax returns, and automated copy/template design to make it easier on credit analysts and RM\u2019s.\n\nJust a banking POV", "replies": [], "depth": 1}, {"id": "gvrs6t8", "text": "Feel like you're wasting your time on this. The bigger guys already have Argus or other software and the smaller guys don't underwrite Leases like this. The deal either makes sense on returns taking out broker fees, construction costs, etc but not too complicated to see if it will work.", "replies": [{"id": "gvrutbi", "text": "Yeah, Argus is leading software provider. We're trying to improve upon it. I have pointed out how we're taking a different approach. Argus or any other software providers don't offer a dynamic pricing component.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gvwd7bw", "text": "Do you have a video demo?  \n\nOn your title, you mention leases, so do you mean lease abstract or underwriting properties?  \n\nWhat is the problem you've identified and trying to solve?  \n\nWho is your target user?  Acquisitions team, Lenders, Individual Investors, Tenants?", "replies": [{"id": "gvwl66y", "text": "We do have a video demo : [https://youtu.be/R5UpROc64-0](https://youtu.be/R5UpROc64-0) \n\nThe product is for pricing, lease analysis and underwriting. It is for Asset Management Teams, Property managers and brokerages involved in leasing spaces. \n\nProblem: Leasing office / industrial / retail spaces is complex. There are several things to consider (Lease term, market condition, tenant renewals, cap rate / valuation, location) which could have an effect on cash flow / NOI. All of this requires a ton of data / information. We make software to simplify lease analysis and underwriting.", "replies": [{"id": "gvyd71t", "text": "You may be confusing revenue optimization (Yieldstar) with market leasing assumptions. The first makes sense in multifamily with high lease velocity, obtainable spot rents/concessions, and obviously simple leases. MLA's are used as part of the assumption set when valuing or managing an asset and usually contain more than asking base rents. Take a look at what VTS is already doing in this space.", "replies": [{"id": "gw0av5p", "text": "Our product is a mix of Revenue optimization (incl  future rents) for office, retail, industrial and MLAs. Given the long and high value leases, base rents + mla's are to be considered when making lease decisions.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gwezlcv", "text": "we have recently release a similar product. Being an Excel-junkie i understand the reason why most people will stick to their own spreadsheets. For us the key is to keep it cheap and flexible enough, basically an Excel spreadsheet in the cloud, with some other features. No point in trying to guide users with Data, \"AI\", or similar as some have commented before. We just think it as a tool, users put the data in and calculates fast and accurate. Plus we will add Monte Carlo,  sensitivity analysis, Census data and rental history. You can try for free for some days and then a max price of 19,99$/mo. Link: [www.realis.us](https://www.realis.us)", "replies": [{"id": "gx4drpn", "text": "Looks like a neat product at a great price point.  Our angle is a little bit different as we're combining Revenue Management with Deal underwriting and cash flow modeling.\n\nI am curious, where would you obtain rental history data from? and what would be the use case for MCMC?", "replies": [], "depth": 2}], "depth": 1}]