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How to check an AI-built real estate model
AI can turn an offering memorandum into an underwriting model in minutes. Often it’s close. When it’s wrong, it looks exactly the same. Here is how to check it, in the order that catches the most mistakes for the least effort.
The short version. Don’t ask the AI whether it got it right. Check the model against the documents and trace its formulas: where each one points, where each input came from, and whether any money is counted twice. For why these mistakes happen, see Twelve mistakes AI makes in real estate models when nobody checks.
Plan for the time it takes. A properly built model has thousands of formulas, and a wrong one shows a number that looks normal. These ten checks find the worst mistakes, but checking every formula by hand takes hours on each deal.
1. The key formulas point at the right cells
A properly built model has thousands of formulas, so start with the ones that matter most: the loan amount, the debt payment, net operating income, the sale price and the returns. Click into each one and follow where it points, and check that every total covers all the rows above it. Do this one first: a formula pointing at the wrong cell gives a number that looks normal, and no other check will catch it.
2. No number is hidden inside a formula
Check every formula for a number added to it that shouldn’t be there, like a $12,000 tacked on at the end. A formula should point at cells, not carry a figure of its own. A number like that is one the AI added to make something match.
3. Every month is a formula
Check that every month on the cash flow is a formula, not a typed number. Outside the inputs there shouldn’t be any typed numbers: one typed month looks like the rest until an input changes.
4. Every input moves the model
Change the key inputs one at a time: the vacancy, the rent growth, the exit cap rate, the interest rate. Each should move the returns, in the direction you’d expect. An input that changes nothing isn’t connected to the formulas that should use it.
5. Every input is on a page
Go down the inputs one by one and find each on its page in the documents. A figure you can’t find was assumed or made up. Some assumptions are fine, but they should say so.
6. Nothing counted twice, and every sign right
Look for the same money in two places: reimbursements counted as income and left out of the costs, or a reserve taken out twice. Then check that every credit and concession reduces income. One added by mistake moves the total by twice its amount.
7. The loan is paid every month
Pick a few months and check that the cash to the investors is net operating income, less the debt payment, less any capital costs. If the debt payment never comes out, the levered returns are far too high.
8. Year one is today’s rent
Take the rents tenants pay today, not the asking rents, and multiply out a year. It should be close to the model’s first-year rent. If the model starts at the memo’s forecast, every return after it is too high.
9. The rent roll adds up to the building
Add up the units or square feet on the rent roll, and compare them with the totals it prints and the size on the memo’s summary page. If they differ, part of the building is missing.
10. NOI ties out by hand
Work out year one’s net operating income yourself: income, less vacancy, less expenses. It should match the model to the dollar.
One warning: a model that ties out can still be wrong, because the formulas and inputs behind it can be wrong. That’s why the other checks come first.
A quick checklist
- The key formulas point at the right cells.
- No number is hidden inside a formula.
- Every month is a formula, not a typed number.
- Every input moves the model.
- Every input is on a page, or says it’s assumed.
- Nothing is counted twice, and every credit is taken off.
- The loan is paid every month.
- Year one is today’s rent, not the forecast.
- The rent roll adds up to the building.
- NOI ties out by hand.