This Situation Analysis uses a hypothetical case to present a property sale scenario. It is intended to show how a property sale might transpire in the income property market – and to get you thinking about how to determine your own asking price, and receive and accept an offer.
Investor “X” purchased a triplex three years ago for an investment only. It was ideal for her at the time because it was located only ten minutes away from her home. The property had three tenants that were all on a month-to-month basis with no leases. When she purchased the property the vendor was asking $475,000 but with some expert negotiating by her agent she was able to purchase the property for $450,000. Based on her deposit, and the rental income at the time, her projected return on investment was just over 5% in Year 1. She promptly signed all tenants to leases at the same rent they were paying, which she thought was fair market value. She then decided to spend a little money to clean up the common areas and the outside of the property. She also built a garage and was able to charge two of the tenants a little extra for covered parking. All tolled she spent $35,000 to upgrade the property.
Now, three years later, she suddenly has to leave town and determines that it would be wise to sell. She determines that she has spent $485,000 on the property and since the income property market has gone up slightly that it should be possible to make a little profit on the property sale. With her agent, they determine the following:
i. If the property sells for $500,000 with commissions and closing fees, her net figure will be $475,500. Not enough!
ii. If the property sells for $525,000 with commissions and closing fees, her net figure will be $498,750. That’s more like it!
Together they set an asking price of $549,900. They have an open house and are pleasantly surprised at the response. The next day, there are three offers on the property. Here are the particulars of each one:
Offer 1: Purchase price of $535,000. Conditional on financing & Building Inspection. 60 days to close. Vacant possession must be given to one of the tenants for the new owner to occupy a suite
Offer 2: Purchase price of $525,000. No conditions. 30 days close. All tenants will be assumed.
Offer 3: Purchase price of $540,000. Conditional on financing, building inspection & lawyer’s approval. Also, there is a clause to vacate the entire building as the new owner intends to convert to a single-family residence. There must also be a declaration that the building meets certain municipal codes in order to do this. 120 days to close.
Which offer should be accepted?
Of course, there is no correct answer here.
Offer 1: Offers a situation somewhere in between. Being asked to give notice to a tenant is not uncommon. However, some landlords do not relish telling their tenants that they have to leave.
Offer 2: The cleanest and the only one that is firm. There are no conditions and she will be paid in only 30 days.
Offer 3: Offers her the most money – but the potential for something to go wrong is higher. I.E. if one or more of the conditions are not met within the 120 days the deal could be off and she would have to re-list the property.
The best thing to do in a case like this one is to set priorities in advance so that the decision can be made more easily. Is getting as much money as possible the goal? Is getting paid as quickly as possible and being done with it, the goal? The more conditions an offer has, the more likely that something may go wrong and cause the deal to fall through.