Wednesday, June 24, 2015

Investment Property Won't Sell? ... Perhaps It's Not The Price.


 By Trevor T. Calton, MBA

When investment real estate is hot, or even when it’s slow, sometimes you miss the market and have a property sit too long, losing momentum and buyer interest while everything else seems to be moving. Many sellers think price is the only variable. But in investment real estate, price is just one piece of the puzzle. If a property hasn’t sold, it could be something else or a combination of issues. The good news is that there are only four reasons an investment property doesn’t sell, and all of them are under your control.

Price – Yes, the most obvious factor is price. How did you establish your asking price? Did you grab it out of thin air when you “heard the property down the street sold for ___?” Or did you take an analytical approach? Sure, you want to get top-dollar for your property, but if you price it too high, you’ll get nothing.

When determining the selling price for your property, look at it from a buyer’s perspective. Would you buy it at that price? Be realistic. Also, be sure to find out how much debt financing a buyer can get on your property. A good mortgage broker can give you multiple potential loan quotes fairly easily if your books and records are organized. Cash buyers are rare, so knowing what size of a loan your property will support will help you determine its market value. If the cash-on-cash return is too low, buyers will take their money elsewhere.

Income – Take off your “owner’s hat” for a moment and start thinking like an investor again. Have you been managing for occupancy rather than value? Have you been more concerned with vacancy than with maximizing rents? Remember, investors are ultimately just buying your net operating income (NOI.) If you want buyers to pay your asking price, make sure the income is there. Remember, a property’s value is equal to its NOI divided by the market cap rate.

Look at both your revenue and your expenses for areas to improve income. Ask your broker for his opinion on your operating statements and find out how your property performs compared to other similar properties. Then start thinking outside the box. What else can you be doing? If you need some ideas, check out my article 27 Ways to Increase Your Apartment Income.

Physical Condition – Did you personally conduct a thorough inspection of your property? If it hasn’t sold, it’s time to see it with your own eyes. Take a look at the interiors, exterior, landscaping, roof and structure, and identify any items that may need to be addressed in the next five years. You know a buyer will do the same thing, and having this information beforehand can work to your advantage. Important items to look for are structural deficiencies, mold, pests, leaking windows, safety hazards, old appliances, paint, carpet and floors.

If you spot a glaring problem, consider taking care of it now instead of leaving it for the buyer. If you would rather not deal with it, then you won’t be as surprised by low offers or if a buyer requests a credit at closing for the deferred maintenance. Either way, if you know about it in advance, you can choose how to handle it, and maintain the upper hand in any negotiations down the road.

Marketing – Finally, a successful sales strategy is all about exposure to qualified buyers. When it’s time to sell, don’t underestimate the value of a good marketing platform, and be willing to pay for it. 80% of investment properties are sold through by the top 20% of real estate agents for a reason: Marketing to the right buyers.

Investment properties are purchased by a very small subset of the population, primarily for their ability to generate a solid return and create wealth. Successfully selling your property requires getting the complete and accurate information in front of motivated buyers at the right time.

Look for experienced agents who have a robust network of clients, have a strong track record of sales of similar properties, and utilize “push” marketing tactics such as email, direct mail, and good old-fashioned phone calls. Ask your real estate agent to provide formal marketing reports and add you to their mailing list so that you are included in their campaign to sell your property. This will enable you to observe their efforts from the market’s perspective.

Once you’ve taken a look at these four factors – price, income, physical condition, and marketing – you’ll certainly find the reason your property hasn’t sold. Even in the most tumultuous market, buyers will always be out there looking for good, fair, reasonable deals. If your property hasn’t sold and you make the appropriate adjustments, you should start seeing offers immediately.

Trevor T. Calton, MBA, is a former Director of Asset Management for a portfolio of over 6000 multifamily units and he has underwritten over $3 billion in commercial real estate assets. He is a Professor of Real Estate Finance at Portland State University.