In my 35 years of selling real estate, I’ve seen a lot of sellers make a lot of mistakes.
I just wanted to go through the most common ones and help educate apartment sellers to avoid them.
#1 Not Preparing Your Tenants for the Upcoming Sale
A common mistake that some apartment sellers make is not properly informing and preparing their tenants for the upcoming sale. I realize that some sellers consider tenants like family and don’t want to worry them. Or maybe your relationship is not so good with some of them and you’d rather not tell them until it is sold.
However, I strongly believe that it is better to let them know up front what is happening and what to expect over the course of the listing and escrow period. Besides, you won’t be able to keep it secret for very long. They’ll see buyers and agents walking around the property with flyer in hand and it will be obvious something is happening.
When I take a listing, I always give the tenants a letter of introduction. I let them know that I have been hired to sell the building, what will be happening over the course of the listing and escrow period, and how to get ahold of me. I also tell them not to worry if they a buyer or agent walking around looking at the property. I also tell them that we will not be showing their unit the property is in escrow. I also let them know that they have rights as tenants and that I will respect their rights and follow the letter of the law which is especially important with all of the new rent control laws that are taking effect in 2020. I let them know that I will always post a proper “Notice to Enter” at least 24 hours before we need to enter their unit.
I also tell them about the escrow and inspection process. I tell them that once we are in escrow there will be a series of inspections including buyer walkthrough, physical inspection, termite inspection, bank appraisal, and the final buyer’s walkthrough. And finally, I tell them as we transition operations to the new owner I will get them all of the new owner or property manager’s information and where they are to send their rent check.
Selling a building so much easier when the tenants are well informed, and they know they can contact me anytime. The worst thing is when the seller keeps them in the dark and then when they do find out they’re usually upset which makes them uncooperative. Believe me it is much easier when the tenants are cooperative and not fighting me throughout the listing and escrow period.
So bottom line is I recommend we notify the tenants about the sale and let them know what will be happening during the sale and escrow. Don’t keep your tenants in the dark because they will find out you are selling quickly anyways.
#2 NOT THINKING STRATEGICALLY ABOUT SELLING
You need to think strategically about selling. Why are you selling? What are you going to do about taxes and how to minimize them? Do you just want to take advantage of the run up in prices and free up some cash? Are you going to do a 1031 exchange to another property? What kind of property? What location? Do you need a loan for the new property? Have you talked to a lender about getting prequalified, what’s the interest rate and terms, and if you even qualify for a new loan? How much to you owe and how much cash will you net when you sell? Do you know how much depreciation recapture you will owe? Do you know how much in capital improvements you can write off? Your reason for selling will help me determine and advise you on the best strategy to pursue.
Every investor is different, and every situation is different. Let me know what is driving your desire to sell and I can advise a strategy that makes sense for your situation.
#3 NOT DOING TAX PLANNING INCLUDING TAX DEFERRAL STRATEGIES
If you have a profit when you sell your building, you may owe Capital Gains taxes. You may also have to pay back depreciation you wrote off on your tax returns (depreciation recapture). You need to talk to your tax advisor prior to selling to determine your tax liability. I can supply the necessary sales expense information and a seller’s net sheet for your accountant so he or she can estimate your tax liability. You really need to understand what your potential tax liability is before you sell. Don’t make this mistake
Did you know there are several ways you can defer capital gains taxes? Let’s talk first about avoiding and deferring taxes. This can be accomplished by doing a 1031 tax deferred exchange. If you want to trade up from one building to another more expensive building, you can do this and defer any taxes due on the sale of your building with a 1031 exchange. However, this is not an exit strategy. You’ll still be in the real estate business albeit with a larger more expensive property.
One exit strategy for selling and avoiding capital gains taxes altogether is with a Charitable Remainder Trust. This strategy works especially well for senior sellers who have highly appreciated paid off real estate that they no longer wish to operate, but don’t want to pay capital gains taxes and want to give to charity.
A good strategy for some sellers to defer taxes is an installment sale with a monetizing loan. This strategy will allow a seller to defer their capital gains taxes for 30 years. Don’t forget California has the highest capital gains tax rate in the country and when you add depreciation recapture some sellers could be paying the 45% range when it is time to sell.
If you want more information give me a call. I have a team in place including a tax attorneys, financial planners, CPAs, that can advise you on this popular strategy
#4 NEGLECTING PAPERWORK
When you are selling you need to prepare and gather certain documents that you need to supply to any potential buyerandtheir lender. You will need to supply copies of your leases, a Year-‐to-Date profit and loss statement, tenant phone number list, a rent control certificate of registration, a current rent roll, copies of utility bills, and any service contracts like monthly pest control or landscaping. You’ll also want to total up and list any capital expenses that you have paid over the years of ownership. Start gathering all of these important documents before you sell so you are not scrambling around for everything during escrow. It will save you a lot of stress and hassle.
#5 NOT DOING BASIC MAINTENANCE AND REPAIRS
If you have deferred maintenance or repair issues get them handled before you list your building. You don’t want the buyer to be discovering repairs and maintenance issues during inspections. You also do not want the tenants complaining to the buyer that the landlord never fixes anything and then they proceed to tell him about every little issue that they have with their unit. This is always a bad scenario and if your tenants feel like you don’t maintain the property guaranteed they will vent to the new buyer.
I recommend we get a termite inspection prior to marketing the property. One of the reasons is that the termite inspector will check bathrooms for any water damage or leakage. They will also crawl under the building to check the wooden posts and beams if you have a raised foundation. They will note in the report if they see and moisture buildup or any active leaks. If any are found let’s get these issues resolved before we get your building on the market.
#6 NOT RAISING RENTS
As you know a good portion of the value of your building is the rents it generates. A lot of owners for some reason do not raise their rents out of compassion or because they are fond of the tenants or maybe because they are such good tenants and always pay their rent early. That’s all well and good but this practice really hurts you when you want to sell, and you want top dollar for your building. Make sure you raise rents consistently and try to get them to market value whenever possible.
#7 NOT HAVING ALL TENANT CONTACT INFO AND KEYS TO THE UNITS
Another mistake that I often encounter is a seller who does not have a complete contact sheet of all the tenants and roommates with everyone’s names, all their cell numbers, and all their email addresses. Also not having a set of keys to all units, gates, garages, clickers, laundry rooms, storage rooms, etc. is another big mistake I often see.
During the marketing period I am going to need access to the units. I generally like to walk through the units for a quick visual inspection and to meet the tenants. I’ll also be walking around the exterior to take photos and check out the laundry room and storage rooms if you have them. I’m also looking for potential issues with your building such as water leaks, busted light fixtures, locks that don’t work, landscaping that needs attention, or other things I might see.
Whenever I post a 24-hour notice to enter their units I like to follow that up with a text to everyone. It makes it tough when I don’t have all of the tenant information. Often times the tenants might be a work when I need to go in so of course I need keys to the units, unless you or the property manager want to meet me there. Sometimes the tenants will change the locks and not tell the owner which is a big problem. It is important that these issues are handled prior to a sale.
#8 CHOOSING THE WRONG BUYER
Buyers are not equal. The buyer with the highest offer isn’t always the best buyer if the terms of the offer are not favorable. A cash buyer might also be the wrong buyer if the terms of the offer are not good. One type of buyer that I have had problems with is the first-time investor. They can be tough because they are scared because they have never been a landlord and they nit-pick every little thing. I prefer seasoned investors who are well capitalized and don’t need hand holding.
After so many years of selling investment property I have a 6th sense about buyers who want to buy one of my listings. I can quickly tell if the offer makes sense, if the buyer’s story seems real, and if the buyer’s agent knows what they are doing. Some buyers and agents are not realistic about investment property. They wonder why the cap rate is so low or why they have to put such a high down payment on the property. Sometimes they might expect the seller to put on a new roof or new plumbing when the marketing flyer clearly states the building is a fixer and is sold as-is. Sometimes the agent or buyer makes it clear that they want to talk to the tenants and try to negotiate a buy out There are many components to a good solid offer such as bank statements proving the cash for a down payment and a lender who has vetted the buyer’s qualifications and has issued a pre-approval letter.
I will carefully review and analyze offers with you and will make recommendations on which offer is in your best interest and why. I will also advise you on how to structure a counter offer that’s to your advantage to avoid the most common financing pitfalls, which are a low appraisal or the buyer’s loan getting denied. I always personally meet the appraiser and provide him with my preselected comparable sales comps and let him know that I am here to follow up and provide him with any other data that she may need in order to complete the appraisal. Doing this greatly reduces the chance of having an appraisal problem. I’ll also show you how to protect yourself in case the buyer’s loan is denied by expertly structuring the contract upfront before we even open escrow. This is a crucial mistake to avoid.
#9 WAITING TO LONG TO SELL YOUR BUILDING
Almost every one of my sellers happens to be in their 60’s, 70’s or 80’s. That is just the reality of apartment ownership. Most owners in their 40’s or 50’s for example usually are not ready to sell unless there is some urgent financial problem, or they are moving out of the area.
I have helped many seniors in their later years finally sell their building, exit the real estate business, and retire with a nice nest egg to finance their “Golden Years”. However, I have personally witnessed owners who waited too long to sell and then when they finally did sell it was a lot more complicated then it needed to be. One woman I knew ended up in the hospital and then to a convalescent home, so her daughter had to oversee the sale of the property. We had to send a notary to the home to she could sign a power of attorney so her daughter could sell and sign all of the paperwork. And to make it more complicated the daughter lived in Houston so she was doing everything long distance. My advice? If you are getting up in years and you want to exit the real estate business, retire with your hard earned cash, and enjoy your golden years, do not wait too long.
#10 SELECT THE WRONG LISTING BROKER
The right listing broker is crucial. Is he or she an expert at apartment sales? Does he know commercial finance? Does she have a deep track record of success? Is he easy to talk to and communicate with? Does she offer you solid advice that makes sense? Who you select to market and sell your building is the most important decision you can make when it is time to sell. Check past sales history, get some references, and choose wisely. You can find out more about me and experience on my About Derrick page on this website.
I hope you have found this report helpful. I have over 33 years of real estate experience. I have helped hundreds of investors sell their buildings. I am 100% committed to getting you the best price and terms when you sell. I am responsive to your needs and will always stay in close contact with you during the sales process.
I am also an expert at the rent control laws, how to deal with code enforcement violations, how to get out of REAP, and how to effectively deal with tenant issues during the listing and escrow process.
There is nothing more important to my staff or myself than an owner who is ready to sell. So if you are thinking of selling and have some questions, give me a call or send me an email. We can have a confidential conversation about your goals and what you want to accomplish. There is no obligation, let’s just talk. Thank you very much.
Best regards, Derrick Ruiz – Apartment Broker and Expert