As a commercial real estate broker I often get asked to analyze a person’s investment property to determine whether it is an optimal time to sell.
Inevitably, the expectation of sales price is the main issue the Seller seems to be concerned with; however, there are other issues which should be addressed PRIOR to putting your investment property on the market. Not all of these issues will add value, but will definitely make the property more sellable and/or make for a much smoother transaction.
I actually wrote this column back in June 2007 and, when reviewing, I expected to change a lot of things; however, I found that all of these five tips are still very relevant in today’s investment real estate market. I have summarized the tips below:
First, take care of any deferred maintenance issues. Taking care of deferred maintenance items and doing some cosmetic work, including landscaping, can greatly enhance the value of your property and give the buyer confidence that the property has been properly maintained during your ownership. Also, this will speed the closing process and eliminate any holdup due to the deferred maintenance issues by the bank or appraiser.
Plus, based on my experience, most buyers will deduct these costs from their offering price. Their anticipated costs to cure deferred maintenance items are often much more than the actual costs.
Second, renew all expired leases or those that will expire within the listing period. Buyers have a tendency to be pessimistic when purchasing investment property and stable income streams are what most are searching for. Unless the tenant’s rate is well below market, it is a good idea to renew all leases if only for a year.
In today’s market, most lenders and underwriters are insisting that month-to-month leases be converted and/or assumed vacant. In addition, the buyer may assume certain month-to-month tenants will leave and deduct their income from Net Operating Income (NOI) which will have a negative impact on value.
Third, analyze income and expense reports. Properly analyzing your previous three year’s income and expense reports will give you a chance to review and explain any rent loss or non-related property expenses or major improvements which may have been expensed and should have been capitalized such as HVAC units, carpet or tenant improvements which are not reoccurring.
Remember, most buyers base their offering price off of Net Operating Income (NOI). By deducting a misappropriated expense of $3,000 to $5,000, NOI increases. This makes the effective value increase anywhere from $30,000 to $50,000 based on the NOI increase.
Fourth, look into a possible tax-deferred exchange. Most Sellers will become buyers following the sale of their investment property. Don’t wait until the property is under contract or the day of closing before looking into doing a 1031 tax deferred exchange. If you have held the property for a long time, or took any sort of accelerated depreciation, you may be facing a large capital gains tax or hefty depreciation recapture upon sale of the property.
Speak with your CPA, tax advisor and/or attorney well in advance to make appropriate preparations. The replacement property identification period is only 45 days following sale and I recommend to start looking for replacement properties when your investment property goes under contract.
Fifth, work with an experienced real estate investment broker. The best brokers for your investment property are experienced commercial brokers with professional designations such as CCIM, SIOR or CPM. Do not work with a broker who has open houses on Sundays and expect them to facilitate a sometimes very complex transaction involving surveys, title issues, appraisals, detailed income and expense reports, and large lending institutions.
Marketing commercial investment properties and negotiating with sophisticated and informed buyers is very exhausting and challenging work. An experienced commercial real estate broker can maximize value of a project based on his/her experience.
In summary, taking the above simple steps prior to placing your investment property on the market will save you time during the due diligence process and bring a higher price from investors looking for stable cash flow. Working with a competent commercial broker should never be underestimated. Make sure the broker you are working with not only has a professional designation, but also has experience in selling your type of investment property.
The Estes Group, Inc.
613 Crescent Circle, Suite 102
Ridgeland, MS 39157