When Do You Sell?

[2ndstory]

Just curious about how investors decide whether it is time to sell a property. What are the factors that determine sell rather than hold? I have a tenant who needs to move. I could liquidate the property or I could find another tenant. I didn't have plans to sell, but it could be an opportunity to sell if I wanted to.



Nik

 

[RedlineBrett]

It only makes sense to sell if the opportunity cost of capital is greater than what your investment property is able to return.



So... if you have a better place to put the money then sell. If you don't then continue to hold. This includes paying off debt or upgrading other assets in your portfolio to yeild a greater return etc.



You also need to consider risk - is there maintenance that needs to be performed? Is the property outdated? If there are costs in the future then there is more risk associated with holding. More risk means you need a greater return to offset it... so even if you don't have a better place to put the money it can make sense to sell to avoid downside risk going forward.

 

[ChrisDavies]

First, feel free to list whenever it's vacant. That's the best time to sell because it's easy for potential buyers to get in and see the property, while you have the most control over how clean it's kept.



Second, I have a 25% rule for my properties. It doesn't matter what the market is doing, I plan to bail at 25%. I might take some of that money and pay off my JV partner, then keep the property or buy something else, but I'm keeping that as an ejector button.

 

[2ndstory]

[quote user=ChrisDavies]

Second, I have a 25% rule for my properties. It doesn't matter what the market is doing, I plan to bail at 25%. I might take some of that money and pay off my JV partner, then keep the property or buy something else, but I'm keeping that as an ejector button.





Can you clarify this? Do you mean a 25% ROI? How do you "bail" and then keep the property?



Nik

 

[Thomas Beyer]

I talked about this last night at the Calgary REIN meeting, to be repeated tonight in Edmonton. You sell for a variety of reasons, such as you need cash, your investor partner needs/wants out, if the market is very hot, if you have negative cash-flow or if you have repair bills coming up (say a new $20,000 roof) that exceed your reserves.

 

[kfort]

I'm looking forward to that audio Thomas as I'm currently evaluating a condo I hold. It's paid off (100% equity), but the condo assc manager is less than keen on doing anything well and I foresee multiple medium sized ($1-$2k) assessments coming my way in the next 5 years. My issue is that in the last 15 months two units (both slightly less desireable than mine) have sold for very low numbers (10-25k below market)... This leaves me wanting to hold until enough time passes to make those comparisons void.... ah decisions..

 

[2ndstory]

[quote user=ThomasBeyer]I talked about this last night at the Calgary REIN meeting, to be repeated tonight in Edmonton. You sell for a variety of reasons, such as you need cash, your investor partner needs/wants out, if the market is very hot, if you have negative cash-flow or if you have repair bills coming up (say a new $20,000 roof) that exceed your reserves.




I would say that the only one of those that really stands out is that the market is strong. I don't think Winnipeg has peaked though, which makes holding onto it probably the best thing to do.



Nik

 

[TangoWhiskey]

[quote user=2ndstory] [quote user=ThomasBeyer]I talked about this last night at the Calgary REIN meeting, to be repeated tonight in Edmonton. You sell for a variety of reasons, such as you need cash, your investor partner needs/wants out, if the market is very hot, if you have negative cash-flow or if you have repair bills coming up (say a new $20,000 roof) that exceed your reserves.




I would say that the only one of those that really stands out is that the market is strong.


So how does one determine if the market is strong? Really obvious signs of irrationality - like sales of multi-family in California in 2005 that didn't even cover operating expenses let alone mortgage payments? With the demand for multi-family right now could this asset class becoming over-valued in the hunt for yield?

 

[ChrisDavies]

I mean 25% gross appreciation. Buy at $200k means sell at $250k. There's a common clause in many JV agreements now for something similar.



I intend on many properties to execute the math like we're disposing of the property, but instead of taking my (projected) $50,000, and give another $50,000 to my partner, I'll refinance myself and supply what other capital is needed to buy my partner out and give them their $50k, but retain the property myself. All my JV's have a 25% or 5 year shotgun clause.

 

[bizaro86]

[quote user=ChrisDavies]All my JV's have a 25% or 5 year shotgun clause.



If it's a shotgun clause, doesn't that mean they would also have the right to buy you out at the same price? Has that ever happened?

 

[RedlineBrett]

[quote user=bizaro86][quote user=ChrisDavies]All my JV's have a 25% or 5 year shotgun clause.



If it's a shotgun clause, doesn't that mean they would also have the right to buy you out at the same price? Has that ever happened?




Yep - shotgun clauses mean once you get to a certain point in time (usually mortgage renewal) either party can make an offer to purchase the other party's interest. The offeree then has the option of accepting the offer or purchasing the offeror's interest on the same terms.



This very seldom happens in smaller JVs where one party is the real estate expert and the other is the money partner... usually the money partner doesn't want an operating role.

 

[ChrisDavies]

And I, probably incorrectly, use the term to refer to the pre-agreed end of the venture, unless we both agree to renew/extend.

 

[bizaro86]

[quote user=ChrisDavies]And I, probably incorrectly, use the term to refer to the pre-agreed end of the venture, unless we both agree to renew/extend.



If your partner doesn't have the right to buy you out at the same price, how do you determine what price you buy them out at? What if they don't want to sell it to you at that price?



Regards,



Michael

 

[Thomas Beyer]

[quote user=bizaro86]how do you determine what price you buy them out at? What if they don't want to sell it to you at that price?
Usually a fair appraisal is what you would use [as opposed to one that is intentionally low or high].



A shotgun clause means you offer to buy them out at X .. and if they find this too low they must buy you out for X ! This prevents intentional low balling.



Another technique is to

b) use an arbitrator

c) sell the asset to another investor or investor group [that may include you, i.e. you switch JV partners]

d) sell the asset in the market and move on

 

[bizaro86]

[quote user=ThomasBeyer]Usually a fair appraisal is what you would use [as opposed to one that is intentionally low or high].



A shotgun clause means you offer to buy them out at X .. and if they find this too low they must buy you out for X ! This prevents intentional low balling.



Another technique is to

b) use an arbitrator

c) sell the asset to another investor or investor group [that may include you, i.e. you switch JV partners]

d) sell the asset in the market and move on


The problem with an appraisal/arbitrator is your fair appraisal might be his low appraisal. Who's to say?



A shotgun clause has the advantage of you being able to say, "if the price is too low, then feel free to buy it at that price." Selling to the public market (ie on mls) has the advantage of being arms length. Anything else seems potentially fraught with problems and likely to generate ill-will.

 

[2ndstory]

[quote user=ChrisDavies] I mean 25% gross appreciation. Buy at $200k means sell at $250k. There's a common clause in many JV agreements now for something similar.





Are there others who implement this sort of strategy? Thomas, I am curious if this is something you do.



Nik

 

[ChrisDavies]

I work on current comps. That's easy since I'm a Realtor, but you should have an agent pulling comps for you at least once a year, and/or have a search set up for when comps in the same complex/community/zone sell. That's what we use to trigger the 'we should think about selling' process.



Remember, it costs you nothing to list a property. Commissions are only payable if the property sells. Except for incidental costs and potential nuisance to your tenant you can throw all of your properties on the market right now and see what types of offers you get. If the offers don't clear your threshold (e.g. $250k) then don't accept them and let the listing expire.

 

[housingrental]

Now is a good time to sell



[quote user=2ndstory] Just curious about how investors decide whether it is time to sell a property. What are the factors that determine sell rather than hold? I have a tenant who needs to move. I could liquidate the property or I could find another tenant. I didn't have plans to sell, but it could be an opportunity to sell if I wanted to.



Nik

 

[housingrental]

This is a bad idea - why sell and chop off upside at a certain point?

Good idea to sell when future doesn't look too great - expenses increasing faster than rents, minimal reason for upside in valuations, lots of reason for downside



[quote user=2ndstory][quote user=ChrisDavies] I mean 25% gross appreciation. Buy at $200k means sell at $250k. There's a common clause in many JV agreements now for something similar.





Are there others who implement this sort of strategy? Thomas, I am curious if this is something you do.



Nik

 

[housingrental]

Hi Nik

What conditions need to be in place for you to feel the market has peaked?

Would you rather sell now and "leave something on the table" or TRY to sell at a lower price in future?



[quote user=2ndstory] [quote user=ThomasBeyer]I talked about this last night at the Calgary REIN meeting, to be repeated tonight in Edmonton. You sell for a variety of reasons, such as you need cash, your investor partner needs/wants out, if the market is very hot, if you have negative cash-flow or if you have repair bills coming up (say a new $20,000 roof) that exceed your reserves.




I would say that the only one of those that really stands out is that the market is strong. I don't think Winnipeg has peaked though, which makes holding onto it probably the best thing to do.



Nik