Property Won’t Sell? Perhaps It’s Not the Price…
Real estate sitting on the market can cost you time, money, and opportunity. There are only four reasons why an investment property doesn’t sell, and understanding them will help you control the process with potential buyers. Today we are going to discuss which of those you can control, and how to best position yourself for the one you can't.
Yes, the most obvious factor is the price. But how did you establish your asking price? Did you grab it out of thin air when you “heard the property down the street sold for "X-dollars per unit”? Or did you take an analytical approach? You want to get top-dollar for your property, but if you price it too high, you’ll get nothing until you are ready to meet the market.
When determining the selling price for your property, look at it from a buyer’s perspective. Would you buy it at that price in today’s market? Be realistic. This becomes especially important during market cycles with rising interest rates. If you bought the property when cap rates were higher than they are today, then you may be in for a reality check about its value in today's market.
Also, be sure to find out how much financing a typical buyer can get on your property before you put it on the market. Cash buyers are rare, and stupid buyers are even more scarce.
Knowing how much debt financing your property will support in today’s market will help you determine its appeal to active buyers. Most buyers focus on cash-on-cash return, rather than cap rate. So understanding the potential financing on your property is critical. If the difference between your asking price and the loan amount is too great, most buyers will take their money elsewhere. A good mortgage broker can give you an estimated potential loan amount fairly easily (Contact us at Evergreen Capital Advisors for help.)
Income & Expenses
Now take off your “landlord hat” and start thinking like an investor. Have you been managing “for occupancy” rather than value? In other words, if you have been more concerned with minimizing vacancy and turnover, rather than with maximizing income, your property may underperforming relative to other similar properties in the area.
Your property’s value is equal to its NOI divided by the current market Cap Rate. (Remember the formula “V=I/R” or Value=Income/Rate). If you want buyers to pay your asking price, the income needs to be there.
Look for areas to improve income in both your revenue and your expenses. Ask your real estate agent for a rent survey to find out how your property compares to others in the area. Pay attention to deposits, utility reimbursements, and other income. Then see if you can identify areas of inefficiency for opportunities to reduce costs.
Once you’ve looked at your current income and expenses, start thinking outside the box. What can you do differently? If you’re looking for ideas, check out my 27 Ways to Add Value to Your Investment Property.
I’m surprised by how often sellers are oblivious to the actual condition of the property they’re selling. Don’t wait to learn about an issue from a prospective buyer in due diligence.
Did you personally conduct a thorough inspection of your property? Before you put a property on the market, see it with your own eyes. Take a look at unit interiors, exterior, landscaping, roof, and structure. Pay attention to everything, from structural deficiencies, mold, pests, leaking windows, safety hazards, to old appliances, paint, carpet, and floors.
Identify any items that may need attention in the next five years. A buyer will do the same thing, and having this information beforehand can work to your advantage. If you spot a glaring problem, consider taking care of it instead of leaving it for the buyer. If you would rather not deal with it, then don’t be if a buyer requests a credit at closing for the amount of the repair. Either way, if you know about it in advance, you can choose how to handle it in any negotiations down the road.
Finally, a successful sales strategy is all about exposure to the market. When it’s time to sell, don’t underestimate the value of a good investment sales broker, and be willing to pay for it. About 80% of investment properties are sold by the top 20% of agents for a reason: Marketing to the right buyers.
And unless you are trying to sell FSBO (you shouldn’t) then you can’t really control this part. But you can find the best broker for the job, if you look for the right things.
Only a very small subset of the population buys investment properties. Selling your property requires getting complete and accurate information in front of qualified buyers.
Look for experienced agents who have a strong track record of selling similar properties, a large network of clients, and a robust marketin platform. The best agents also utilize “push” marketing tactics such as email, direct mail, and good old-fashioned phone calls. Ask your agent to provide weekly marketing reports, and have them add you to their mailing list so you. This will enable you to observe their efforts from the market’s perspective.
Insider Tip: Some brokers will wait to list your property on the various MLS services (such as LoopNet or Crexi) until after they have already marketed it to their own database, in an attempt to keep both sides of the commission in-house. Although this may benefit you in some ways, be sure to ask your broker how and your property will be advertised to the public so you can ensure that the most competitive offers come in together.
Once you’ve examined these four factors – price, income, physical condition, and marketing – you’ll certainly find the reason your property hasn’t sold. In the most tumultuous market, there is still no shortage of buyers out there looking for fair deals. Make the appropriate adjustments, and you should start seeing offers immediately.
Trevor T. Calton is the founder of Real Estate Finance Academy and President of Evergreen Capital Advisors. Since 1997, he has analyzed, acquired, or sold more than $5 billion of commercial real estate assets, financed over 500 commercial investment properties, and overseen the asset management of over 6000 units of multifamily housing.
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