Quiz: Deal Analysis | Covey Learn

1. Stress testing a deal means:

Offering the lowest possible purchase priceModeling how the deal performs if key assumptions worsen (higher vacancy, lower rents, rising rates)Hiring an inspector to test the structural integrityRunning the numbers as fast as possible

Stress testing means asking 'what if things go wrong?' You model scenarios like 15% vacancy instead of 5%, rents dropping 10%, or rates rising 200 basis points. If the deal still cash flows (or at least breaks even) under stress, it has margin of safety.

2. A pro forma uses 'projected' rather than 'actual' numbers. The biggest risk in relying on a seller's pro forma is:

It's always wrongIt may use optimistic assumptions (market rents above actual, understated expenses) to inflate the property's apparent valuePro formas are illegalLenders never accept pro formas

Sellers' pro formas often show market rents (not actual in-place rents), exclude upcoming capital expenses, and understate items like management fees and vacancy. Always underwrite from actual trailing financials (T-12) and build your own pro forma with conservative assumptions.

3. When underwriting a deal, you should base your expense estimates on:

Whatever the seller's broker providesTrailing 12-month actuals, verified against comparable properties and adjusted for known changesNational averages from a blog postThe lowest expenses any similar property has ever achieved

The trailing 12-month (T-12) P&L shows actual historical performance. Cross-reference against comps and adjust for known changes (rising insurance, tax reassessment at purchase price, deferred maintenance). Never underwrite to best-case scenarios.

4. Your maximum purchase price should be determined by:

What you can emotionally afford to loseWorking backward from your target return: the price at which the deal meets your minimum cash-on-cash and DSCR requirementsThe ZestimateWhatever the listing price minus 10%

Professional underwriting works backward from return requirements. If you need 8% cash-on-cash and 1.25 DSCR minimum, you calculate the price that delivers those returns. The listing price is irrelevant; only the numbers at YOUR purchase price matter.

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