Disposing of Income Property
Some Often Ignored Issues
There are many issues that can cause problems when selling an income property, some of which are not always considered even though quite basic. Attention to the following issues can reduce the number of potential delays and conflicts during the sale process.
Some Contract Issues
Illogical Contingencies – Do not accept any contingencies that are likely to affect the closing or will cost you more than you are willing to spend to in order to close. For example, do not accept a contingency that all air conditioners be in operating condition when you know that some are not, unless you are prepared to repair them. In this case you should have done so before even putting the property on the market.
Escrow Length – Be sure that the requested closing date is realistic based upon the time required to complete all contingencies including financing. Although you, as seller, want to close as soon as possible, it is extra hassle to grant extensions because the original date was unrealistic and you will likely be unwilling to cancel the deal after being into it for a significant period.
Restrictions during Escrow – You should not worry about restrictions regarding what you can do during the escrow period unless the buyer does. In the case he does, try to limit the restrictions to the degree possible, remembering that you don’t want to limit your control more than necessary when there is never a guarantee that the deal will close.
Estoppel Certificates – be sure to require estoppel certificates. Although it is usually thought to be for the buyer’s benefit that estoppel certificates be obtained, they can also benefit the seller because they eliminate potential disputes by buyer or tenants as to rents, deposits, and other lease terms. You don’t want a tenant arguing the terms of his lease or some other matter after close of escrow because you will almost certainly be involved in the dispute and, for a serious issue, could suffer financial repercussions.
Failing to disclose material facts in the beginning is dangerous, both because failures may create legal problems and because the facts will likely be discovered by the buyer later anyway. Discovery late in the deal can result in an upset buyer who will want to use his discovery as a reason to kill the deal or to at least renegotiate the price.
Is the property in a Superfund site? Was it the site of a dry cleaners or auto repair shop? If so, disclose it up-front and then don’t allow the fact to be a contingency except as regards inspections or assessments that might be desired. Do you have a previous Phase One Assessment Report? If so, provide a copy and require the buyer to accept it without contingency if possible.
For a residential property built before 1978, provide copies of executed lead-based paint disclosure forms for each tenant. Also, provide the buyer with the legally required lead paint pamphlet and disclosure form and any required related documentation. This is in addition to providing him copies of the tenant-signed forms.
If you’ve had radon testing performed and/or abatement done, provide the appropriate documentation. The same goes for mold. Regarding any issue, keep in mind that failure to disclose is much more dangerous when there are records proving that you had knowledge of a problem and failed to disclose compared to being truly ignorant of the problem.
Since you will want cooperation of tenants regarding buyer inspections and estoppel certificates, it is recommended that you notify tenants of the pending sale as soon as there is a fully executed purchase contract. You should explain that the buyer or his agent will be making inspections and thank them in advance for their cooperation. Keeping tenants in the loop and remaining on good terms with them may reduce the chance of them voicing complaints about the property to the buyer or his agent. Not only does this reduce the chance of defects becoming more important, but it also is best that the tenants appear to be happy when meeting the potential buyer. Disgruntled tenants may concern the potential buyer enough to kill the deal or at least affect the price he will pay.
Contingency Cooperation & Assistance
Although you might resent the need to assist in getting access for inspections, it is again to your advantage to cooperate and even assist in getting the contingencies out of the way as soon as possible and with the least amount of trouble. Again, your presence when the buyer or his agents are interfacing with tenants may reduce the chance of the tenants voicing complaints about the property to the buyer. You might even want to be the one to get signatures on estoppel certificates so that you can deal with any misunderstandings or disputes yourself rather than have the buyer or his agent involved.
Transfers & Terminations
Failure to make sure that all necessary transfers and terminations of services are done can result in problems for the seller after close of escrow, including possible financial liability regarding ongoing services.
Licenses, Permits & Taxes – Be sure that you inform the relevant governmental agencies – e.g., the office that collects rent taxes – about the sale so that you don’t end up being liable for the new owner’s failure to pay fees or taxes or for some other ordinance violation.
Insurance – You will want to cancel insurance coverage after closing escrow. Pro-ration of insurance premiums are usually to the effective date of sale of the insured property rather than to the date when notice is given, so there is no reason to jump the gun and risk cancellation prior to the date of ownership transfer. Doing so could result in an uninsured loss resulting from either a physical loss or a liability claim because closing was delayed and the insurance agent didn’t get the word that coverage needed to be continued beyond the previously scheduled closing date.
Utilities & Miscellaneous Services – While you don’t want to discontinue utilities or other services prior to closing escrow, you do want to be sure to do so immediately thereafter. You should coordinate this with the buyer to avoid disruption of services to tenants and it can be beneficial to even cover this issue in the purchase contract. It’s a good idea to follow up with phone calls after the discontinuance date to verify that it actually happened.
Send written notice to all tenants that escrow has closed and provide the name of the new owner and his address and phone number. You might also state that they should contact the owner regarding the exact payee for future rent checks unless you have agreed to pass that information to them for the buyer.
Check the closing statement carefully. In particular check pro-rations of rents, property taxes, and interest and be sure that you are correctly debited for deposits and that the loan payoff amount is correct.
File the closing statement and related documentation where you will be able to find them when it’s time to prepare income tax returns for the year of sale.
For more detailed discussions regarding disposal of properties see 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.