Selling Your Income Property
What are the key factors to consider when selling an income property?
5 Steps to Success with your Property Sale
Before you list your income property be sure to review these 5 key steps in order to attract the best offer possible.
Some possible selling motivators include:
ProblemsFactors beyond your control such as a deteriorating neighbourhood or continual vacancies may be affecting the profitability of your investment. Or, you may simply decide after a while that you don't enjoy the process of managing a property. Some people just don't like having to respond to tenants concerns and feel a sense of inconvenience. If you have become uncomfortable it may be time to move on.
Changes in Life SituationYou may be at the age when it's time to retire and just relax with no one to attend to but yourself. Or you may feel after a few years of owning an income property that it has served its purpose. You may now prefer to move on to a single-family home. If so, the project has been worthwhile and successful in its time so be proud of you accomplishment.
Profit RealizationIt may be the right time to cash out your investment. You may need access to the capital that is in your property. If your area is in a hot market and prices are higher than ever you may be in a good position to sell. Before you do be sure you are aware of the tax implications of selling. Whatever your reasons there are several factors you should consider to help you understand exactly when to sell your investment property and how to achieve the highest sale result:
Your NeighbourhoodLook around your neighbourhood to get a sense of the state of the income property market. Are there many houses for sale currently? Have the "For Sale" signs been posted for a long time? Or are "Sold" signs going up very shortly after they go on the market. Pay attention to the activity going on around you. Timing may often be as important as location.
The EconomyIdentify whether the general economic conditions are favorable to selling your real estate investment (look at mortgage rates, economic forecasts, etc.)
Rental MarketIdentify whether there is still a strong rental market in your area to make your property attractive to another investor. How does your property compare to other rentals in the area? If you're not sure then go "apartment hunting" to see how you stack up.
InvestmentCompare the overall real estate market in your area to other forms of investments. Assess the relative merits of purchasing your property vs. investing elsewhere. Income property buyers understand different types of investments and will put their money where it will work best. Put yourself in the purchaser's shoes. Know how your property stacks up by comparing it to other investment vehicles such as stocks, bonds, mutual funds and money markets. Changes in the stock market may push more investors toward real estate and the demand for good properties with high rates of return will increase.
Determine the price range that you are comfortable with and that is reasonable for you to sell your income property. For example, if you purchased your home for $250,000 within the last five years and you put $25,000 into renovations your equity in your home is now $275,000. Is this acceptable to you? Or do you expect to sell your home for over $300,000? Of course we all want to sell for the highest price possible but you must be clear in you mind what is the lowest number you will accept. There are a few things you should do to determine this number or range:
The Cost of Selling
Calculate your selling costs (brokers' commissions, lawyers fees, etc.) and loan discharges (mortgage payout, termination fees, etc.) to arrive at a net figure. This figure is the anticipated sum of money that you will receive at closing.
Your Next Investment
Establish a plan to put the proceeds from your income property into another investment vehicle. Try to keep your money working for you all the time. If you need periodic access to large sums of capital, invest in short term guaranteed interest products. Establish a line of credit if necessary.
Spend time with your accountant or financial planner to determine how to make your money work best for you. Determine if you are prepared to offer a vendor take-back mortgage to a purchaser or if you will need all of your available equity in the property. For example, you may not want to realize all of your money in one lump sum upon selling to avoid potential tax implications.
If you have purchased another property investigate the possibility of porting your existing mortgage to it. Or it may be prudent to blend mortgage rates (depending on how favorable lending rates are at the time). Discuss your options with your lender.
The Financial Story
Prepare all the appropriate financial statements that will be requested by potential purchasers. This information is often more important to a potential buyer than the property itself. You real estate agent should be able to assist you in preparing and including proper financial statements in your feature sheets.
Establish a sell price for your property that you feel is representative of fair market value, but be aware that overpricing a property often aids in selling other lower priced ones that are comparable. Under pricing can be good strategy in a buyers' market but can hinder your success if your property doesn't sell quickly.
How do you determine the best price obtainable for your property?
Factors that DO NOT affect your property's value:
- What you paid when you bought (or built) your house.
- The cash proceeds you want or need from the sale.
- What any real estate professional says your property is worth.
Buyers dictate the best price obtainable for your property by engaging in comparison-shopping. A buyer will not pay more for one property than he or she would have to pay for another similar property.
To best determine your selling price you should have an experienced income property agent who knows the market for your property type complete a competitive market evaluation. This appraisal will show what buyers are willing to pay in today's market by:
- Demonstrating what buyers have actually paid recently for similar properties.
- Showing what buyers have not been willing to pay under current market conditions.
- Focusing on other properties which are now competing for buyers attention.
A competitive market analysis gives you a solid foundation for the realistic pricing of your property.
In Toronto Plex Realty is your best source for up to date market information on income properties.Call today for a Plex agent to appraise your property - (416) 422-4882.
An agent who specializes in income properties can aid many of the elements outlined in steps 1 and 2. You should have in your own mind an idea of the market in your area and what your minimum sale amount should be before speaking with an agent. Developing a relationship with an agent will flush out whether your initial assumptions are correct. For instance, an agent will be able to show you the state of the market in your area by providing you with the numbers on recent sales of comparable properties in your area. They will also be able to provide you with details like how close to asking price comparable income properties are selling for and the average number of days comparable properties were listed for before they sold. Choose the right Realtor.
- Engage a Realtor in your immediate area of choice who has extensive experience in the sale of residential income properties - ideally they will have the appropriate knowledge of landlord-tenant legislation, municipal by-laws, financial statement preparations, closing costs as well as a strong sense of market value for different properties in different areas.
- Ask for credentials prior to spending time with an agent. Look at how many income properties they have sold recently in your area and how successful their marketing efforts were.
- Understand what your financial obligations will be in advance. Make sure that you clearly understand what your selling costs will be prior to marketing your property.
- Request and review a current market appraisal on your income property from an agent before engaging them.
- Spend time with your agent prior to searching for properties to learn from them as much as you can about income properties (appraisal techniques, market capitalization rates, income analyses, city by-laws, etc.)
- Learn how your agent works (How will they market your property? How do they intend to show your rental suites? How will they represent your property to potential buyers? etc.) Get a general sense of their work ethic and how well you will be able to work together.
Working with an agent who knows how to market your specific type of property is the best course. The reality is that paying a sellers' commission is money well spent. It is not wise to sacrifice receiving topnotch service from experienced professionals by diminishing their importance in the real estate transaction process to save money. Most people do not have the time or knowledge to sell their home without an agent and many home buyers are reluctant to work with owners directly.
In Toronto, Plex Realty is your best source for up to date market information on income properties.
Call today for a Plex agent to appraise your property (416) 422-4882.
Your Tenant ObligationsIf you need to deliver vacant possession you will have to deliver your tenants a notice to terminate tenancy and you will need to allow them the appropriate number of days notice. For example, in Ontario tenants must have 60 days notice prior to vacating. Check with your provincial government for timelines in your area.
The Investment LandscapeNetwork with other investors or income property agents to stay aware of market conditions. Wait for periods of increased demand and be ready to act fast to capitalize on these favourable conditions.
The Cost to Carry a Vacant PropertyYou may choose to vacate your tenants prior to listing to simplify showings and transfer of ownership. Or, tenants may choose to leave when they find out the property is being sold. Determine how long you are prepared to keep your income property on the market without generating revenue if it doesn't sell quickly.
Now that you've made the decision to sell, have an understanding of your financial picture, engaged a well-informed agent and established your timeline you are ready to put together your selling plan:
- Develop a focused marketing plan with your agent. Identify the various means by which your property will be exposed to the buying public. Work with your agent to identify the key selling features of your income property and make them prominent in all of your marketing materials.
- Discuss open houses for both local Realtors and the general public but consider how these will impact your tenants.
- Put a sign on your property that is clearly visible for people passing by.
- Put out classified ads detailing your income property in the real estate investment section of your local newspaper. Your agent will likely have a robust newspaper campaign contemplated as part of their marketing plan.
Talk to your tenants and determine how best to allow for showings. Often owners do not tell their tenants that they are selling. This is not recommended. It makes it awkward for everyone involved in the process, especially buyer's agents and potential buyers. Also, if your tenants request notification prior to showings be sure to give it to them. If an agent books an appointment to show your property 24 to 48 hours in advance, and then arrives at the property to find the tenant had not been told about the showing it creates confusion and often tenants will refuse to let the property be shown.
Presenting your property
Ensure that your property is clean and adequately prepared to be seen by potential purchasers. Fix up the little things (scratched paint, loose moldings, etc.) that can be done quickly and easily. Consider what other improvements and determine if investing some dollars into renovations could bring you a higher sale price. Have your agent prepare a feature sheet of your property and make sure it includes a financial analysis of your property. Be sure to include information on the number of units, the income for each and the taxes and utilities for the property. Investor buyers need this information. In fact, to an investor this information may be more important that whether the kitchens are new or the floors have been refinished. Know who the target buyer is for your property and ask yourself what would they want to know.
Your bottom line
Determine your initial asking price but know in your mind your bottom line figure and make it clear to your agent. Discuss future price reductions and set a timeline for implementing them, if necessary. It is important that both you and your agent are very clear on your financial requirements. Be aware of the financial implications of the sale. Spend some time discussing your plans with your accountant or financial advisor.
Once your listing hits the market, be prepared to accept an offer quickly when it meets your criteria. There may be a hesitancy to wait and see if you receive more or better offers. You will ultimately have to decide what to do but it is not necessarily safe to assume that there will be a better offer in the future. If you have outlined your goals and needs you will be better informed whether to accept or reject any offers. Take any offers that you are contemplating to your solicitor for approval. He or she will be able to clarify all clauses or terms included in the offer.
And remember the old saying: "A bird in the hand is worth two in the bush". There can be a tendency to think when someone has brought an offer that it is only the beginning and a better offer is still out there. That may be. But then again, it may not. Sometimes properties stay on the market for months because a vendor has refused a first offer to wait for a higher one that never comes.