Uncovering Value: The Power of Accounting in Identifying Underpriced Assets

Here's how understanding accounting can help you find underpriced assets.

Unsophisticated owner with poor accounting. What you'll often find is that they include capex expenses into their repairs and maintenance category. When they do this, it incorrectly reduces NOI. Capex items should be below the NOI line and not count towards it.

Most brokers don't understand accounting either so they'll overlook this. They base the price on the reported NOI divided by the cap rate in the market based on comps.

The issue is the comps don't have their capex included in the NOI so it's a mistake to compare the two NOI's.

Example:

Say two properties are similar in age, assets class, location etc. A broker determines they'd sell at the same 6 cap rate supported by the market.

The seller who reduced the NOI by including capex above the line included $75,000 of incorrectly accounted for costs.

Since the value is based on the NOI / Cap Rate, the seller sold their property for $1,250,000 less than what it was worth.

$75,000 / 6 Cap rate = $1,250,000