Underwrite is a vetting process to assess the financial viability of an investment. It usually involves forecasting the financial performance of an investment for a few future years using some key assumptions.
The goal of underwriting is to ensure that the investment makes sense, both financially and from a risk perspective.
Underwriting can be a critical step in the CRE acquisition process. For example, the buyer might underestimate the cost of improvements at the property, or it could need more money than expected to renovate the property in order to attract tenants and increase rent income. In either case, underwriting can help to ensure that the purchase is a sound investment.
The process of underwriting helps to provide potential buyers with a realistic assessment of the value of a property, as well as the risks associated with that value. The buyer will then have a clearer picture of its ability to pay for the property and understand how it will impact the bottom line of its operations. This can be helpful in making projections for the future and making a business decision about whether to move forward with the purchase.
One requirement for CRE transactions is that a buyer must be able to finance the purchase of the asset through debt and equity financing. Underwriting is an important step in making sure that the buyer has enough money to take on this financial commitment.
