The majority of my sellers are seniors who have owned their building(s) a very long time. Maybe they purchased a building decades ago and have been operating it for all these years. Maybe they inherited their building from Mom and have just kept it. Maybe a probate executor inherited it through the probate process and the siblings decide to keep the building.
All in all there are many ways seniors acquired rental property
So now all these years later the questions are: Why do you sell? When do you sell? And how do you plan for the sale?
Why do seniors sell?
There are many reasons and I discuss them below. As always before you do anything, please consult your tax advisors, financial planners, or attorneys first. Remember I don’t not give tax or legal advice, I only bring up these issues to make you aware of options to discuss when you consult with your advisors. I am qualified to advise you on real estate matters.
This is pretty simple. If you are experiencing health issues that make it hard to run your building, and you don’t have professional management or family to help you manage it, it might be time to either get proper management or consider selling.
A family’s dynamics often influence a sale of a property. Maybe you want to sell because your daughter, husband, and grandkids moved to another state and you want to follow. Maybe one of your kids or family members were living in the building and they finally moved out and you don’t feel like rehabbing the unit and renting to a tenant. Maybe you have several grandkids soon to enter college and you want to retire from real estate and fund their college education.
The need for cash to take care of various issues is a common reason for selling. One client I had finally sold her Venice 4plex after 30 years of ownership in order to fund her and hehusband’s move to a really nice seniors assisted living facility. She otherwise could not afford this particular facility because you had to purchase your individual unit. She finally called me up and said it was time to sell, she and her hubby wanted to transition to an assisted facility and fund everything through the sale of her building.
Estate and Tax Planning Issues
Sometimes a financial planner will tell a client that it might be wise to sell one of their properties for tax reasons or to fund a particular investment. Maybe they have some issues to clear up and selling the building makes sense. Maybe the owner has some big tax loss carry forwards and these can help offset and capital gains taxes. I’ve had sellers approach me to say that their financial advisor simply said it was time to consider a sale.
The poor condition of the property.
Maybe your building needs serious repairs. Or maybe it needs to be earthquake retrofitted due to changes in the building codes. Perhaps you have a major water leakage issues and you have a bad mold problem. I meet a lot of senior sellers that are just not up to the task of hiring contractors, getting bids, getting permits, and coordinating the repairs. It can be a daunting task especially if you don’t have friends, family, or professional management to assist you. This is a common situation and many times it is easier to sell the building as is and let the next owner do the needed improvements to the property.
The passing of a spouse or partner
Often times a widow or widower finds it difficult to carry on ownership and management of a building especially if the decedent was the one doing most of the management. If you have no family members to assist you and you do not want to hire a manager and you don’t particularly want to take over the management reins, it might be time to consider a sale.
You have management Issues
Look, operating a building can be difficult enough when you are young and healthy. But when you are in advanced years it often becomes harder and harder dealing with tenants, repairs, changes to rent control laws, doing your taxes every year, doing maintenance, etc. Especially if you self-manage your building which many owners do. Many of my senior clients have had bad experiences with property managers. Managers are sometimes not that responsive, sloppy with repairs, and sometimes present you with questionable repair bills. Sometimes they don’t handle tenants properly and don’t keep good records. So often owners that self-manage their property decide to sell when they get up in years and decide it is just too much time and hassle to keep the building.
You’re moving out of the area
I have had many sellers approach me to sell when they want to move out of the area and do not want to hire a property manager. Maybe they want to go to another state and retire. Maybe they want to follow their kids and grandkids who move away. Maybe they are considering an assisted living facility that is out of the area. Whatever the reason, a move away from the property often necessitates a sale of their rental property.
You have nobody to leave property to
I have experienced this issue many times. Perhaps an owner has no kids or close relatives to bequeath the property to. Or maybe she has many kids and grandkids who would inherit her estate and it is easier to sell the building and just give everyone their share of the proceeds because sharing ownership of the building would be difficult between everyone. Sometimes the kids do not want to inherit the property for whatever reason. Maybe they are too busy with raising kids, their job, and other responsibilities plus they don’t have any experience operating a multifamily property. So they really don’t want the building and they would be happier with cash from the proceeds of the sale.
It’s time to end a partnership.
Maybe you own a building with a long-time partner or family member and it’s time to part ways. It happens. Both parties might be up there in years and it just seems like it is time to go separate ways. Hopefully things are amicable and aren’t adversarial, but occasionally I have seen adversarial situations that complicate matters.
You’re just plain tired
Sometimes a seller will call me and say they are just sick and tired and just want out. They can’t take another call from a complaining tenant, can’t stand the thought of having to drive out to the building to fix something else, they’re done. I hear that a lot. Look operating a building without help when you are in your later years is no picnic. When it’s time it’s time.
When do you sell?
The best time to sell is when your affairs are organized, you’re relatively healthy, and your team is assembled and ready. You have consulted with your tax and financial advisors and they’ve analyzed your situation and have made recommendations. Your estate plan and living trust are up to date. Your health is good, you are not facing any serious surgeries or being treated for a serious disease and mentally and emotionally you are ready and able to make important decisions.
When your team is ready is also important. Your CPA is aware of the sale and ready to handle your taxes for the next year. The CPA has also prepared profit and loss statements for your building. Your maintenance crew has been tasked to finish any repairs or maintenance issues. If you have a manager, they are ready to assist with inspections and providing information to the buyer. You’ve decided on an investment broker to handle your sale and he or she is ready to begin the marketing process.
How Do You Plan For The Sale?
Create a plan
Your financial advisors and your real estate broker can help you formulate a game plan to sell your building. Does your estate planner want you to make any changes to your living trust? Does the broker recommend repairs or painting your building or if you should you raise your rents? Do you need to evict a non-paying tenant? Together your team should help you lay out a plan for the sale of your building.
Are your kids involved with helping you sell? Hopefully the answer is yes. I have worked with many adult children of my senior clients to give Mom or Dad a hand when it is time to sell. Involving them to assist us in the sale is a good move and one I highly recommend depending on your situation.
Tax planning including tax deferral strategies
Before you sell you need to consult your tax advisor and have him or her calculate your estimated capital gains tax bite. You need this critical information. If you don’t owe that much maybe you opt to just pay the bill. But if you do owe a lot then you might want to consider one of several different tax strategies. Check the tax section of this website for more information on deferral options.
Get financials together
You’ll need to provide the year to date profit and loss statement as well as the previous 2 years profit and loss statements to the buyer and the buyer’s lender in order to get financing for your property. Hopefully your CPA or property manager can help you with the P and L’s.
Get paperwork together
You’ll need to get the broker copies of all of your leases or rental agreements, any notices of rent raises, copies of any service contracts, utility bills, and any receipts for maintenance and capital expenditures. These items are very important for the successful sale of a building.
Make improvements and repairs
Do you have deferred maintenance? Does your building need painting? Are there any repairs to be made to any of the units? Are there any leaks anywhere? If so, please consider making these repairs before you sell if you are able to.
Lastly your broker needs to prepare a market analysis and determine where to price your building for a sale. I also like to provide my sellers an estimated sellers net sheet from an escrow company so they know how much cash they will walk away with at the close of escrow. This sheet is especially useful to your CPA or tax person in order for them to help estimate your potential capital gains tax bite
I hope this information was helpful to you. I work with many seniors and am highly aware of the issues they face when it is time to sell an investment property. Thank you.
By the way I don’t give tax advice. I simply give tax awareness so you can be a bit more informed when it is time to sell your building.
For any specific questions about your tax situation please contact your tax advisor. Thank you.
Do you have some questions about your property? Please contact me at email@example.com or by cell/text at 310-308-3174. Or you can book a phone or an in-person meeting with me at https://calendly.com/derrick-ruiz