Disposing of Income Property Part 2 Of 3
As was stated in an earlier newsletter article dating Jan 5, 2011 regarding basic issues related to disposing of income property, most of the same considerations apply when selling an income property as when buying one. This includes selecting an agent, determining the value of the property, maintaining control over the deal, being careful about contingencies, and financing issues.
Using an Agent
A good agent will often increase your net proceeds by significantly more than the amount of his/her commission. Furthermore, if the buyer has an agent, his purchase price will likely be reduced by the commission paid to his agent.
To determine what your property is worth when it’s time to sell, you follow the same procedures as when you bought and as covered in much more detail in our “Valuing Income Property” eCourse or “9 Fundamentals of Real Property Valuation” Mini Training Guide. You should have valid reasons for your asking price because the buyer will have good reasons for the maximum he will be willing to pay.
Regarding both physical and legal issues, it is usually best to correct even expensive problems that might be considered an issue by a buyer.
This applies to issues known by the buyer before writing an offer, which can result in a lower offered price, and issues that are likely to be discovered during the due diligence performed after acceptance of the offer. Having them become an issue in the middle of a deal can result in cancellation of an escrow or re-negotiation of the price or other terms. The seller is often at a disadvantage when having to re-negotiate the price after a long escrow when the idea of starting over can cause the seller to give in to demands he wouldn’t have considered in the beginning. A buyer may also discount the value by more then the costs of fixing problems because he will worry about what other unknown items might later cost him money.
Physical issues include inoperative sprinkler systems, out-of-code electrical or plumbing systems, and cosmetic issues such as cracked windows and components in need of paint. Also consider various relatively inexpensive cosmetic upgrades that might make a difference. New exterior paint, cosmetic landscape improvements, re-coating of asphalt, correcting roof problems, and repairing superficial defects that make the property look ragged can have a significant impact on a potential buyer’s initial reactions even to the point of his writing the offer.
Legal issues include tenant disputes, building code violations, delinquent taxes, and missing licenses or permits. If there are any problems regarding inability to obtain legally required licenses and permits, get them resolved before putting the property on the market. One reason to take care of these issues before even putting your property on the market is that some might suggest to a savvy buyer or agent that you are having financial difficulties that could make you desperate to sell and could result in lower offered prices.
If there are any issues regarding zoning or building codes, it is best to disclose it up front so that it doesn’t become an issue two months into the escrow where it could either kill the deal or require re-negotiation of the price and when you will likely be more compliant after investing so much time into the deal. If there are things that you can’t fix ahead of time or at all, it is best that they be considered in negotiations up front rather than after everyone is expecting escrow to close.
When you are selling your property it will be the buyer who will be writing the original contract terms and they will likely be written to his advantage. It is almost certain that no offer written by the buyer and/or his agent will be ready for the seller’s signature. You should be particularly concerned about certain items and should try to change them to your own advantage or at least make them neutral. There are a number of general principles that you should follow when trying to modify contingencies in your counter offer.
- It is to the seller’s advantage that all contingencies are automatically approved if not disapproved in writing.
- As we recommended to you as the buyer, it is usually in your best interest as the seller to require the buyer bear the cost of inspections and then take that fact into account in deciding the minimum price you will accept. The reason in this case is that you want the buyer to be responsible for timely completion of inspections and that it not be your fault if a contingency is not met in a timely manner.
- Rather than wanting maximum time for contingency periods as you do as the buyer, you want to be sure that the requested periods are not unreasonably long to avoid them being used to buy time for a non-performing buyer. If the buyer requests a time that is too short, that’s his problem and you can always give him additional time if desired.
- To the degree possible, inspections should be scheduled in order of importance relative to decision making by the buyer in order to force him to cancel as soon as possible if there are problems.
In order to avoid tying up your property with a deal that has impossible-to-meet contingencies, be sure that all specified terms including maximum interest rate, discount points, and other costs as well as the minimum number of years of the loan are realistic in terms of the current market, with room for probable changes.
Sellers need to be careful when agreeing to pay closing costs for a buyer. They must define exactly (1) which closing costs are to be covered, (2) whether or not any excess from the maximum amount agreed to can be spent by the buyer to buy down the interest rate for his loan, and (3) the maximum amount that can be paid in fees so as to prevent the mortgage broker or lender from increasing commissions or other fees in order to burn up the seller’s allowance.
The value of the property and the amount that a buyer will be willing to pay for it, particularly for commercial properties and for larger residential properties, are dependent upon the income and expenses so you should expect to provide sufficient financial documentation to enable the buyer to make his decision.
Be prepared to provide the same documentation when you sell as you should have required when you bought, as discussed in an earlier article. This should include accurate income and expenses data, verifiable from source documents, for at least two years.
Provide good readable copies of all leases and other documents, including amendments, checklists, and house rules so that the buyer can provide copies to lenders rather than you having to make additional copies.
As stated elsewhere, you should have taken care of any deferred maintenance before putting the property on the market, so that physical inspections don’t find serious defects that haven’t been disclosed.
Additional brief discussions regarding several issues related to disposing of income properties will be provided in future newsletter articles. Currently, significantly more detailed discussions regarding a wide range of related issues can be found in our “Buying & Selling Income Properties” eCourse. For additional discussions regarding a wide variety of real estate investing and management issues see our other eCourses and our Mini Training Guides.