Underwriting Made Simple: Evaluating CRE Deals with Confidence

Underwriting is the cornerstone of successful commercial real estate (CRE) investing. It’s where your investment strategy meets the reality of the asset. At its best, underwriting aligns your vision for a property with the financial, market, and operational assumptions required to make it succeed, while fostering investor confidence in the strategy.

But underwriting isn’t just a technical skill based on Excel models. It’s about leadership, discipline, and aligning every detail of the deal with your goals and values.

Let’s explore how to build a process that gives you the confidence to evaluate deals, communicate with investors, and, most importantly, succeed in the long run.

The Foundation of Effective Underwriting

Underwriting in CRE is the process of evaluating whether a property is a good fit for your investment strategy. It’s more than financial modeling – it’s about aligning the unique characteristics of an asset with your goals and risk tolerance.

At its core, underwriting answers these key questions:

  1. What are the risks? Identify potential challenges such as deferred maintenance, tenant turnover, or market conditions.
  2. What is the return potential? Estimate cash flows, appreciation, and exit strategies to determine if the deal aligns with your financial objectives.
  3. How can risks be mitigated? Propose solutions to safeguard the investment, like contingency reserves or strategic leasing assumptions.

Underwriting starts before you see a specific deal. A well-defined strategy ensures that every opportunity you evaluate aligns with your overarching investment goals. This involves several key components:

  1. Define Your Investment Hypothesis

What types of deals are you pursuing, and why? Your hypothesis should reflect your desired risk profile, return expectations, and market focus. It’s the guiding principle for every investment decision.

  1. Analyze Target Markets

A comprehensive understanding of your markets – population trends, job growth, supply-demand dynamics, transportation infrastructure, public and private investment – lays the groundwork for confident underwriting.

Action Tip: Develop a “market dashboard” to track key indicators like vacancy rates, rental growth, and absorption trends. This is a good tool to help you evaluate markets and will serve as a sales aid when pitching potential investors.

  1. Tailor Your Strategy by Asset Type

Each property type carries unique risks and opportunities. Understanding the nuances of hotel, multifamily, retail, or other property types can help refine your assumptions and mitigate avoidable risks.

  1. Evaluate Partners Thoroughly

Your internal and external partners all play a role in deal execution. Misaligned or inexperienced partners can derail a project or create unnecessary complications that will prove more distraction than a growth catalyst.

Recommendation: Standardize partner vetting with criteria such as track record, local expertise, and alignment with your risk tolerance. Approach every stakeholder with the same level of scrutiny and make concessions more an exception than the rule.

The Mindset of a Great Underwriter

Great underwriting starts with the right mindset. We ground this mindset in LXK Group’s core values: honesty, creativity, and discipline. These values combine to ensure every deal is analyzed with integrity, innovation, and precision.

Honesty

Approach underwriting with a commitment to uncovering the truth – even if it’s uncomfortable. Investors respect transparency, especially when it reveals risks that can be addressed before moving forward.

Creativity

Underwriting isn’t just about finding problems; it’s about solving them. Creativity allows you to structure deals, explore financing options, and unlock hidden value in ways others might overlook.

Discipline

Consistency is critical. As the saying goes, “You get what you tolerate, not what you preach.” Discipline ensures that you don’t miss drilling into the finer details for convenience or because a ready answer isn’t available.

Leadership emerges naturally from these values. By setting high standards and sticking to them, you earn the trust of your team, investors, and other stakeholders.

The Three Secrets to Confident Underwriting

I once evaluated a deal for a property in Georgia. It showed a middling return on paper – not the type of deal the sponsor would typically pursue. However, the sponsor had a strong emotional attachment to the market and property. They asked me to tweak the numbers to make the deal look more appealing.

Reluctantly, I complied but made it clear these changes represented a high-case scenario, not the most realistic outcome. Unfortunately, the deal performed as I initially projected – or worse – and the sponsor barely broke even after five years.

This experience underscores a critical truth: anyone can make numbers tell the story they want. True underwriting isn’t about optimism but discipline, leadership, and aligning the narrative with reality. With this lesson in mind, here are three secrets to confident underwriting.

Secret #1: Underwriting Starts Before the Deal

Underwriting a deal doesn’t begin with the financial model – it starts with gathering the right context. The big-picture strategy ensures the deal aligns with your goals, but this step is about laying the groundwork for thorough, deal-specific analysis.

Effective preparation ensures you don’t miss critical details and allows you to make informed assumptions before opening your spreadsheet.

Three Steps to Effective Pre-Underwriting

  1. Build a Contextual Foundation
    Gather key documents and information about the deal, such as offering memoranda, trailing 12-month (T-12) income and expense reports, rent rolls, and property inspection reports. Look beyond the provided materials to verify claims and spot potential gaps.

    • Example: If the rent roll shows near-full occupancy, confirm tenant creditworthiness and lease expiration schedules. What looks stable on paper might mask risk if most leases expire within 12 months.
  2. Evaluate the Sponsor or Seller
    When you’re considering deals, consider the quality of the data room as an indication of the seller’s strength. A strong seller will have a well-organized data room with as much material as needed to make an informed decision. This is especially true when a top-notch intermediary represents the deal. Compare financial statements against your market benchmarks to identify areas for improvement.

    • Action Tip: Ask probing questions about operations, like why their rent roll is overly reliant on month-to-month tenants or what their primary leasing strategy is.
  3. Gather Market Intelligence
    Dive deeper into the specific submarket of the property. Research comparable properties, recent transactions, and local trends. Call around to competitive properties and recent trades to get a complete picture of what’s happening in the market beyond the numbers. Are rents truly on the rise? Is there new supply coming online that could impact your leasing assumptions? Were there any one-time events that disproportionately increased income or decreased expenses?

    • Action Tip: Use tools like Crexi, CoStar, broker reports, and public records to validate claims. For instance, if the deal hinges on 10% rent growth, look at historical trends for that market over the past five years.

Skimping on this groundwork can lead to major blind spots in your analysis. By taking the time to prepare, you’re setting yourself up to create an underwriting package that’s both accurate and defensible. This step ensures you’re working from a position of knowledge rather than guesswork.

While your overarching strategy ensures you’re pursuing deals that align with your objectives, this step is tactical and deal-specific. It’s about equipping yourself with the data, context, and questions needed for a detailed evaluation.

Secret #2: Use Checklists to Focus on What Matters

Commercial real estate underwriting involves many moving parts; even experienced sponsors can overlook critical details. That’s why checklists are indispensable.

Atul Gawande explains in The Checklist Manifesto that even experts in high-stakes fields like aviation and medicine rely on checklists to reduce errors and improve outcomes.

Checklists in underwriting work the same way: they ensure routine tasks are handled with precision, freeing you to focus on the unique challenges of each deal.

Why Checklists Work

Checklists provide three key benefits:

  1. Prevent Oversights: They ensure that no essential step is skipped, even under time pressure
  2. Foster Communication: A shared checklist aligns teams and keeps everyone informed
  3. Promote Discipline: Adhering to a checklist keeps you consistent and prevents rushing through steps that might otherwise be overlooked

These benefits translate to more reliable analysis, fewer mistakes, and greater investor confidence in underwriting.

Build Effective Checklists

A great checklist is dynamic, accessible, and tailored to your process. Here’s how to create and use one effectively:

  1. Make It Accessible to Everyone
    Ensure all team members have access to the checklist, embedding it directly into your underwriting package. For instance, include it as a tab in your financial model.
  2. Keep It Dynamic
    Checklists should evolve based on lessons learned from prior deals. If a property exposes a new risk – like an overlooked property condition factor – update your checklist to flag that issue for future transactions.
  3. Balance Specificity with Flexibility
    A checklist should be detailed enough to cover essential tasks but broad enough to adapt to different deals. Group items into categories like market analysis, physical inspections, and financing to keep it user-friendly.
  4. Focus on Routine Items
    Automate repetitive tasks like verifying rent rolls or calculating tax projections. This conserves energy for addressing unique aspects of a deal, like structuring financing or evaluating complex tenant agreements.

Checklists don’t replace expertise – they enhance it. By consistently handling routine details, they free you to focus on solving complex problems and refining your strategy. They reduce errors, improve communication, and build confidence in your underwriting process when used properly.

Secret #3: Build the Story, Not Just the Numbers

Numbers alone don’t make deals. Investors care about the story you’re telling – the rationale behind your projections and the strategies that support them.

What Makes a Great Story?

  1. Clear, Logical Flow
    Tie every assumption to market data, property features, or historical trends. For example, if you’re projecting rent increases, provide comparable property examples to justify your assumptions.
  2. Risk Transparency
    Be honest about potential risks and clearly explain your mitigants. Investors value transparency over blind optimism.
  3. Actionable Insights
    Demonstrate how your strategy aligns with the property’s unique characteristics. Use your experience, research, and creativity to connect the dots.

Revisit the Georgia deal. The story faltered because the numbers didn’t align with market realities. A strong narrative would have highlighted the risks and reframed the deal as a learning opportunity rather than an over-optimized investment.

Remember: A strong underwriting story not only persuades investors but also provides a clear roadmap for your team to execute successfully.

Bonus: Underwrite Everything

Underwriting is a muscle – strengthened through repetition.

The more deals you analyze, the sharper your instincts and the more confident your decisions.

Why Underwrite Everything?

  1. Learn Market Dynamics: Exposure to different markets reveals patterns and outliers that improve your ability to spot opportunities
  2. Improve Execution Strategies: Analyzing varied deals builds experience in structuring creative solutions for unique challenges
  3. Build Confidence: Repetition makes it easier to communicate your findings and defend your assumptions with authority

Final Thoughts

Ultimately, underwriting is as much about leadership as it is about analysis. A disciplined approach, rooted in sound strategy, builds trust and sets you apart as a sponsor.

It isn’t just about crunching numbers – it’s about aligning your strategy, leadership, and analysis with the realities of the deal. Starting early, using tools like checklists, and crafting clear narratives will build the confidence and discipline needed to succeed.

Remember: Every deal you analyze strengthens your skills and prepares you for the next opportunity.

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