A few weeks ago, Adam and I interviewed Aram Sarkissian on our Wealth Independence podcast, and he dropped a perspective that stopped me in my tracks:
"The pro forma is always wrong."
I'd never heard anyone express it quite that way before. And as he explained his thinking, I found myself nodding along in complete agreement.
This idea has been bouncing around in my head ever since, so I wanted to explore it with you today – why every passive investor should go into a deal knowing the pro forma is going to be wrong, and why that's not necessarily a bad thing.
The Engineering Mindset Problem
If you're like me (or many of the passive investors we work with who have tech or engineering backgrounds), you probably love detailed financial models. There's something deeply satisfying about a complex spreadsheet with dozens of inputs and outputs all working together.
The problem? That level of detail often creates a false sense of certainty.
It can also convey a false sense of competence from the sponsor/GP. I've seen investors choose deals primarily because "the model is so thorough" rather than focusing on the fundamentals that actually matter.
Illustrating this, Adam shared in our podcast conversation that one of the most successful investors he knows says that if he can't do the math for a deal on the back of a napkin, it's not a good enough deal.
Let that sink in for a second.
There’s a reason that real estate has been called “finance for dummies.” And while that’s a silly quip, the sentiment is spot-on – real estate math just isn’t that complicated.
So if you find a sponsor whose main selling point is their proprietary model or how complex their underwriting is, it might be time to run the other direction. That's not what moves the needle in real estate.
The Big Picture vs. The Decimal Points
The trap I see many passive investors fall into (especially those with technical backgrounds) is over-scrutinizing specific details in the underwriting while missing the big picture – what I call the "overarching story" of a deal.
This leads to several issues:
Focusing exclusively on projected returns
Evaluating deals based on just one or two metrics
Missing the market forces that actually drive success
Making investment decisions purely on spreadsheet outputs
I've written about this before, but it bears repeating: a single number never tells you everything you need to know about a deal.
Just because Deal A projects an 18% IRR and Deal B projects a 15% IRR doesn't automatically make Deal A the better investment. Those numbers are guesses at best.
Surfing the Tide vs. Fighting It
Aram used an analogy I absolutely love: "Don't fight the tide, surf it."
It gets right to the heart of what really matters in real estate investing – alignment with larger market trends.
When you're investing with the tide (population growth, supply shortages, demographic shifts), there’s room for error. The pro forma can be off by 10%, 15%, even 20% in some cases, and the deal will still be okay if the bigger trend is working in your favor.
Think about it this way: if a market has a rapidly growing population and an apartment shortage, a few missed projections on the renovation timeline or slightly higher expenses won't tank the deal. The market-level tailwind is too strong.
But if you're fighting against market trends? You have to get everything else perfect.
And that’s never going to happen. “The pro forma is always wrong.”
The future is uncertain, and we can never predict every single variable. Even with the most rigorous and sophisticated planning, parts of the pro forma will always end up wrong.
This is why surfing with market trends de-risks an investment from the start. When the fundamentals are working in your favor, small misses in the projections won't sink the ship.
The De-Risking Power of Market Alignment
When evaluating a deal, I always ask myself:
If the pro forma is off by 20%, will the larger market trends still support success?
Will one relatively small miss on any part of it tank the project?
Does the business plan align with the market’s needs?
As Aram so perfectly put it, "pro formas are just business plans expressed in numbers."
They describe operations but don't execute them. And execution is where deals succeed or fail.
What This Means As A Passive Investor
If you take just one thing away here, let it be this: when investing in a syndication, you're not investing in a spreadsheet – you're investing in people executing a business plan.
The best sponsors understand they won't get everything right. They know the pro forma will be wrong in places. But they position their deals to surf the tide of larger market trends, giving themselves room for error.
So as a passive investor, always look for the market “story.” Why is there market alignment with the business plan? And does this deal make sense on a napkin before we even dig into the details?
Because in a world of uncertainty, the safest bet is to go with the flow of proven market fundamentals rather than fight against them.