What Is Preliminary Underwriting?
We like to think of “underwriting” as the analysis and vetting of a prospective project – all the backroom work that needs to be completed before hefty sums of money and time are invested in a project. This underwriting, which is also referred to as due diligence or feasibility analysis, should be very thorough and complete prior to committing to non-refundable deposits or the close of escrow.
“Preliminary” underwriting is what we would consider a lighter version prior to making an offer for property. In a previous post, we discussed that the thorough due diligence or vetting process will require some significant money, which means you want to make sure your offer made some economic sense. No company owner or division president wants to waste due diligence dollars on a project where the offer was essentially infeasible.
This preliminary underwriting can often be completed in as few as a couple of days or maybe up to a couple of weeks. Outside consultants are probably not as important at this stage, and the land acquisition manager is largely responsible for completing this preliminary analysis. Maybe the primary objective is to complete a preliminary pro forma – either static or cash flow – that would analyze what price can be offered for a property. This preliminary pro forma requires some revenue and cost assumptions, of which the land acquisition manager should be able to generate based on experience and light research. The primary components of this preliminary underwriting will probably include market research, cost estimates, project schedule, and the pro forma.
Please feel free to share with us below any of your comments, experiences, or questions.