Turns out, we’re all human. Every single one of us has made a mistake at some point and we hope it didn’t bring down the company. Here are three common ways firms waste time or money on manual calculations.
#1 – Every time Excel yells at me
#REF! - Excel is the backbone of the real estate industry. We love Excel. We build all of our models in Excel before we ever build them as software. But that #REF! can drive us nuts!
Fortunately, there are some solid alternatives to get around the inherent limitations of Excel. Some, like smartsheet, feel very similar but with a lot of added features and collaboration tools. Some, like Zoho take it a step further and are cloud-based, customizable versions.
But they all suffer from the same limitations, which is, they each require manual updating of information periodically. If you want to calculate a defeasance penalty using existing cashflows and live interest rates, you’re out of luck. This leads to manually, error-prone, updating.
Speaking of defeasance penalties…
#2 – Litigation from Defeasance and Yield Maintenance
Most firms run prepayment calculations online or make a request to their broker. The people running these calculations are frequently multi-tasking and stretched very thin. Two recent instances highlight the risks of making a mistake:
While working remotely, a firm ran a defeasance penalty using one of many online calculators. The calculators themselves are solid, it’s the inputs that are dangerous. Without access to the loan docs, certain assumptions were made about the defeasance provisions. A PSA was executed and DD began. When a payoff was requested from the lender, it turned out the Seller had underestimated the defeasance by $1.1mm.
A broker was asked by their client to calculate the yield maintenance for a loan they had originated four years prior. They went to an online calculator but where they were supposed to put an amortization of 360 months, they put 120 months. In effect, they ran a calculation on a 10 year, fully amortizing loan. This underestimated the yield maintenance calculation by more than $600k.
Online calculators are great, but they are inherently limited by the inputs. Frequently updating these calculations provides more and more chances for an error.
#3 – Lender Deadlines
Most firms don’t have a centralized process to manage deadlines around things like extensions, repair schedules, reporting requirements, etc. Like most other systems, they have developed a system that usually works, but is prone to something slipping through the cracks every once in a while.
Is a lender going to refuse to extend a loan because you didn’t provide 30 days notice? Probably not. But will they charge you something extra? They might.