Carefully Consider Your Situation Before Rushing into a Sale of Your Investment Property
You’ve held a property for years, and now, for one reason or another, you’re thinking it might be time to sell. Rushing into a sale, though, can be a costly mistake. Before you stick a “For Sale” sign in the front yard, consider these seven elements that can influence the profitability of your sale.
1. Market conditions
Timing is everything. Sell when the market is depressed or your property is in distress, and you could lose a substantial amount of your investment. On the other hand, if properties in the area are in high demand, it may be a great time to sell. Also, consider the rental market. Have rent rates dropped, resulting in a negative cash flow, or is the market strong, like it is right now in many communities throughout the country?
But it’s not always as simple as that. There could be any number of reasons why you’re thinking about selling: You think you can make a profit, you’re tired of being a landlord, or you want to buy another property. Maybe you have more personal reasons, like needing to pay medical bills. In the end, you have to weigh the market conditions versus your personal needs.
“The reasons why you might want to sell can be almost endless,” says Ryan Paliukaitis with Real Estate Solution Providers, adding that because you have a personal need doesn’t necessarily make it a good time to sell. “If it’s during a market crash, it’s a terrible time to sell, even though you’d like to.”
2. Tenants
If you have tenants in place, they can complicate the process and make it difficult to sell when you want.
Lawrence A. Stein, a Chicago-area attorney, recommends having an attorney review your lease and your circumstances whenever there’s a tenant involved.
Stein says that if you plan to sell the home to someone who will occupy it (versus selling to another investor), you usually need to honor your lease. If the lease doesn’t expire for a while, you may be able to buy the tenants out of the lease. Again, consult an attorney to help in the process.
Another option, regardless of when the lease expires, is to let the tenants know you want to sell and offer them the opportunity to purchase it. (In some cities, like Washington D.C., you may be required by law to do this anyway. Landlords who don’t adhere to the Tenant Opportunity to Purchase Act in the nation’s capital face stiff penalties.) Of course, the tenants may panic when you mention selling and react by breaking their lease and leaving you holding the bag. Some very upset tenants may even damage your property.
3. The cooperation factor
Putting your property on the market impacts your tenant’s life on many levels. Ideally, he will be making an effort to keep the home clean and ready for showings on a daily basis. At the very least, strangers will be walking into his space, looking at his things. He may even need to take time off work to be available to a photographer, various inspectors and repair and maintenance workers. It can have a huge impact on his life, so his cooperation is essential, according to Brad Chandler, founder of Express Homebuyers USA.
“If you are going to market a home with the tenants, you need to consider how accommodating the tenant will be,” he says. “An uncooperative tenant can make it very difficult for a landlord to show the property to potential buyers.”
4. The buyer
Whether you intend to sell to another investor or to someone who wants to purchase it for his own enjoyment will influence your dealings with your tenants, how much money (if any) you put into renovating the property, and how you market, just to name a few things.
Stein says that if you intend to sell to another investor, you actually want to put the property on the market when you have a good tenant with a good history of paying the rent on time. The tenant then becomes an asset that helps market your home to other investors. He adds that since the lease usually supersedes the sale unless specified otherwise, you have minimal obligations to the tenant other than advising him of any showings and telling him where to send the rent check after the sale.
However, if you intend to sell to a homeowner, Stein recommends waiting for the lease to end.
The buyer also figures into how you market. The typical homebuyer probably will be looking for properties on the MLS and maybe Craigslist. With investors, you have a few other options. You may forgo the MLS and advertise, instead, through your local real estate investors association or through networking.
5. Repairs
Depending on the condition of the property and whether you plan to sell to an investor, you may decide to sell as-is. In all other cases, you probably will want a home inspection before you list the property so you are at least aware of issues that could affect its value even if you decide against making those repairs.
Aaron Schroer, owner of Tennessee Home Inspectors, says having a home inspected before listing can help you avoid surprises, sell the home faster and, if you address the issues, streamline negotiations during the buyer’s inspection period. It has an added benefit if you have tenants in the home. By framing it as a “maintenance inspection,” you can have the home inspector evaluate the property, and then you can begin making repairs while the tenant is still in place. He may suspect you are getting ready to sell, or not.
There are other advantages to having a home inspection before letting the tenant know you are selling, Schroer says. A home inspection may plant the seed that you’re thinking about selling and allow the tenant some extra time to get used to the idea, possibly diffusing some hard feelings. Plus, the inspection will include photographs—if the tenant causes damages on the way out, you have a photographic record of its “before” condition.
6. Renovations
There is no hard and fast rule about renovations—what you should do, what you shouldn’t do—other than you shouldn’t put more money into the renovation than you can get back out of it. Take a cue from the neighborhood. What’s the market like? What’s the norm?
Paliukaitis points out that if you have a property in Manhattan Beach, for example, it doesn’t make sense to make any repairs or renovations because buyers are knocking down homes to build bigger, newer ones. In other areas, though, you might need to do more than re-carpet and paint to successfully market your property, he says.
Chandler goes into more detail. He suggests making renovations that yield the highest return on investment, with your budget in mind. For example, let’s say you have the choice between spending $5,000 and increasing the property’s value by $7,000 or spending $30,000 and increasing the property’s value by $50,000. Assuming you have the funds, it makes sense to spend $30,000 and get $20,000 versus $2,000 out of the sale.
Sometimes, you have to make renovations to sell. Kimberly Smith of Avenue West says she dropped the price $30,000 on the corporate rental she was trying to sell but still couldn’t generate interest. After putting less than $10,000 into updating and staging it, it sold for the original asking price in less than 30 days.
“It’s in your best interest to put some effort into making the house look good,” she says.
7. Tax ramifications
You also need to take into account the tax implications of selling. The first step is to determine your adjusted cost basis by adding capital improvements and the cost of selling the property (such as advertising and agents fees) and subtracting the cost of selling the property. To calculate your gain (or loss), you would subtract the adjusted cost basis from the selling price.
The IRS classifies capital gains as either short or long term, depending on whether you hold the property for more than a year. Most investors pay 15 percent on their long-term gain. Since you may be able to offset your gains either partially or fully, discuss your options with a tax professional.
Occasionally, investors get a surprise when they start looking at the tax implications. Matt Carbray of Ridgeline Financial Partners says he recently worked with a woman who held a property for over 40 years. Because her cost basis was so low (it generally gets lower over time) and because she took depreciation, she had a taxable event of $100,000. You definitely want to be aware of this before—not after—you sell and are on the hook for the taxes, he says.
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