How to Sell Your Property Without Leaving Money on the Table
The 7 steps of a sale — from picking a broker to picking a buyer — and why the highest offer isn’t always the best
Last week I introduced the concept of selling your property.
This is often the culmination of years of hard work, perseverance, and (hopefully) some luck.
You studied the investment fundamentals.
You took the time to pick your niche and build your team.
You reviewed many properties until you found the one with economics a little better than the rest.
You completed the acquisition and set yourself up for successful operations with your team.
You successfully executed your business plan and increased the net operating income.
Well done!
Now you are ready to reap the rewards by selling your property.
This week we are going to dive deep into the sale (aka disposition) process and unpack the key steps that will yield the best results including:
Understanding market and economic conditions.
Working with a broker.
Preparing your property for sale.
The marketing and bidding process.
Selecting a buyer.
Navigating the purchase and sale agreement, the due diligence process, and closing.
What to do with the sale proceeds.
Let’s dig in.
Understanding Market and Economic Conditions
One of the realities of owning real estate (and any other investment) is that there are two main things that affect value: (i) things you can control and (ii) things you cannot control.
Things you can control include the systems, processes, and actions you take to manage your property such as painting the building, selecting a broker, and how you treat your tenants.
Things you can’t control include everything else. Humbling, isn’t it?! Examples of things you can’t control include how the economy is doing, the policies politicians put into place, and whether your tenant can pay rent.
Understand and accept the difference between these two things and take advantage of the economic tailwinds when they are blowing in your direction.
If the economy is strong and buyers are paying high value for real estate like yours, this may motivate you to sell. On the other hand, if market conditions are poor, you may not want to sell until they recover.
A good broker will help you navigate this.
Working With a Broker
A good investment broker will be your main ally in the sale process. “Investment” brokers specialize in selling properties, as opposed to leasing them. However, there are many brokers that do both. The most important thing is to find one that regularly sells properties of your type (aka asset class) in your property’s market.
A good broker will:
Educate you on the market conditions.
Give you an estimate of what your property will sell for. This is known as a “broker opinion of value”. Values will mainly be based on cap rates as discussed in Cap Rates: The Simple Math of Real Estate Investing.
Advise you on how to prepare your property for sale.
Prepare marketing materials and run the sales and marketing process.
Help you select a buyer and navigate the closing process.
In exchange for all this critical work, you will pay them a sales commission when (and only when) the property sells. This commission will be between 1% and 6% depending on the value of the property. The smaller the property, the higher the commission. Here are two examples:
$1,000,000 property value at 6% commission rate = $60,000 commission.
$3,000,000 property value at 4% commission rate = $120,000 commission.
Commissions vary from market to market. Start by asking the broker what they think is fair and work from there. Once you come to an agreement, you will sign a broker listing agreement. This is just like a broker listing agreement for leasing I discussed previously, but modified for a sale. The broker will have a template to use.
Pro tip: talk with multiple brokers about selling your property before you select one. Getting multiple opinions of the market and value is extremely helpful. And remember, just because you talk with a broker doesn’t mean that you are committing to do anything. It is just a conversation at this point.
Preparing Your Property For Sale
Once you decide to sell and you select a broker, I highly recommend you follow their advice on how to prepare your property for sale. Here’s an example:
My company owned a 100% leased, 30-year-old industrial building in an excellent market. The only problem was that the building looked old. We followed the broker’s recommendation to (i) paint the building and (ii) re-coat and re-stripe the asphalt.
Wow! It looked almost brand new and made such a better first impression on buyers.
The result: our sale price increase far exceeded the money we spent on these two cosmetic upgrades.
The Marketing and Bidding Process
The first step the broker will take is to prepare the marketing materials which include a 1-4 page brochure and a 5-20 page offering memorandum (OM).
The brochure is the teaser that they will email out to their database of brokers and investors, as well as post to sale websites like CoStar and LoopNet. Interested buyers will then express interest and request an OM.
Most brokers will have potential buyers sign a confidentiality agreement before releasing the OM. This allows them to (i) register the potential buyer in their database for follow-up and (ii) legally require the potential buyer to keep non-public information confidential.
In a strong seller’s market where values are high, the broker may not list a sales price. They will run a bidding process with a group of buyers to maximize the price.
In a weaker seller’s market, the broker may list a sales price and react to offers as they come in.
It all depends on (i) the market conditions and (ii) the strategy you and your broker agree upon.
I have experienced successful sales as a seller using both strategies at different times. However, it is MUCH more thrilling as a seller to see a broker run a bidding process that drives up the sales price. Good brokers are masterful at this.
Selecting a Buyer
Selecting a buyer? This is just about picking the one with the highest price, right?
Yes and no.
Remember that an offer (aka a non-binding letter of intent) will include the price and other deal terms such as (i) the due diligence period, (ii) the closing date, (iii) whether there are extension options, and (iv) the deposit amounts.
Additionally, each buyer will have their own reputation based on previous purchases (if any) that the broker will share with you.
Here’s an example of three offers:
Table 1: Buyer Offer Sheet
You are faced with some trade-offs. The strongest price is from a buyer with a bad reputation (for not closing deals), the longest timeline, and the lowest deposit. The long timeline (30 + 30 + 30), the low deposit ($10,000 vs. $30,000), and the bad reputation are red flags. Be careful. You could spend 30-90 days with this buyer and end up with a dead deal.
The lowest price is from the buyer with the best reputation and timeline.
Who should you pick?
There is no right answer. Talk it through with your broker and make the best decision for you.
I have gone both routes in my investing career. My preference? If the price is close, I go with the buyer with the strong reputation. It is rough to spend 30-60 days with a buyer only to have the deal collapse at the last minute.
Pro tip: Watch out for “re-trades”. A re-trade is when a buyer tries to renegotiate the price down, typically because of an issue they find in due diligence. Sometimes this is warranted: the roof needs replacing immediately and you never disclosed this. Sometimes it is not: the buyer later decided their rent assumptions were wrong. Buyers typically develop bad reputations because they try to re-trade on each deal. If re-trades come up, lean on your broker to help you navigate a workable solution.
Navigating the Purchase & Sale Agreement, the Due Diligence Process, and Closing
Once you select a buyer, the process is very similar to the acquisition process I previously wrote about. I suggest you revisit:
But…there are two differences worth highlighting:
Due Diligence
As you prepare the due diligence for the buyer, make sure you look for potential red flags from a buyer’s perspective. Do this before or during the marketing process so that you have time to clean up any issues.
For example, I was once selling a property that had 8 years remaining on the roof warranty. As we prepared the due diligence, we couldn’t find the warranty document. We had to request this from the roof installer. They provided a copy, but it took a couple of weeks. No harm, no foul. But this would have been a stressful scramble if the buyer had found the problem in the last days of their due diligence process.
The lesson: review your files in advance of giving them to the buyer to address any gaps or red flags.
Lender Communication
As soon as you are considering selling the property, talk with your lender to confirm that you can sell it and what the loan payoff amount will be.
I was once selling a property and didn’t take this important step. The loan was set up such that if the loan was paid off at any day after the 1st of the month, the borrower (i.e. me) had to pay a full 30 days of interest. We closed on the 3rd, so had to pay for 27 extra days of interest.
Had I checked this in advance, I could have structured the sale to close on the 1st.
Learn from my mistake. Talk with your lender in advance of committing to sale terms and dates.
What To Do With the Sale Proceeds
A successful sale is the culmination of a successful investment. It is the “points on the board” of your hard work. Your profit is secured.
But…you will still need to pay taxes unless you complete a 1031 tax-deferred exchange as discussed in 5 Tax Advantages That Make Real Estate Investing So Powerful. I suggest you re-read the 1031 exchange section of that newsletter before you consider selling your property.
Here are two examples from my investing history:
Sell & 1031 Exchange
We successfully executed the business plan of a retail property. I didn’t need the cash and wanted to use the proceeds to invest in another property. I completed a 1031 exchange into another cash-flowing property.
Sell & Pay Long-Term Capital Gains
We successfully executed the business plan for an industrial property. I wanted to use the cash and was willing to pay the tax now.
Just remember that by completing a 1031 exchange, you are deferring (not eliminating) your tax to be paid in an uncertain date in the future. The economic conditions in the future are unknown. This is a future risk you are taking.
Closing Thoughts
Whether you decide to 1031 exchange or not, selling a property can be an excellent way to turn your hard work into cash.
The most important thing is to work with an investment broker who regularly sells properties similar to your property in your property’s market. They will know what the property is worth and who the likely buyers are.
Responding to a random offer you receive or trying to sell the property without a broker is like gambling: it may work out, but the odds are against you.
Be a professional.
Leverage the power of a good broker.
You got this.