Risk
Spot the Red Flags and Price the Risk
The goal is not a risk-free deal, there is no such thing. It is to see every risk clearly and price it before you commit.
The expense ratio is your fastest check
Operating expenses divided by effective gross income is the quickest tell in any deal. When a park claims an expense ratio far below what comparable properties run, the expenses have usually been understated, not managed away. It is the first ratio to sanity-check.
Flat maintenance across years is a warning
Real repair costs bounce around year to year. A maintenance line that is suspiciously flat, or suspiciously low, usually means deferred maintenance you will inherit, or a number that was smoothed for the sale. Ask for the actual invoices.
Token or absent management fees are artificial
A management fee of zero or a nominal amount is almost never real. Someone runs the property, and that cost transfers to you. Normalize it to market before you believe the NOI.
Annual occupancy averages hide seasonality
A single annual occupancy number can bury a sharp seasonal swing that changes the whole risk profile. Always look at the monthly breakdown, and treat a seller who only offers the annual average as a flag in itself.
Structural risks to price in
Beyond the financials, some risks are baked into the deal: a balloon that forces a refinance at an unknown future rate, insurance premiums rising fast in hail, coastal, and wildfire markets, and cap rate compression that flatters today's exit assumption. You cannot remove these, but you can price them, and a deal that only works if none of them bite is not a deal, it is a bet.
Put it to work
The underwriter scans for these automatically and returns a ranked red-flag list with the reason behind each one. Underwrite a deal free.
Questions
What expense ratio is normal?
It varies by asset and how utilities are handled, but a ratio far below comparable properties is a red flag that expenses were understated rather than genuinely lower. Compare against similar deals and a normalized rebuild.
Is a balloon payment a dealbreaker?
Not by itself, most commercial loans have one. The risk is refinancing into an unknown future rate. Price that risk by stress testing the deal at a higher rate before you commit.
Related guides
Part of the RVP Underwriter guide library: practical guides to underwriting and buying income property. Browse all guides, or read the complete free guide with a full worked example.