This article by Kimberly Yeh, BENA Capital - Managing Director, was originally published via Forbes
Just as important as acquiring a real estate investment is knowing how you are going to exit. Selling a property takes a great amount of knowledge and coordination, and it can take months to prepare and execute. The smartest investors map out an exit strategy for each property they acquire prior to closing on a sale. The sale may be years in the future, and the plan will be reassessed often to take into account the latest market trends, economic health and demand generators, but it is key to know the end game.
Once you decide to sell a property, these are the five most important areas you’ll need to consider to ensure the sales process goes smoothly.
1. Asset Condition: Whether you are doing the work yourself or working with a property management team, make sure the asset is in attractive physical condition. To maximize investment returns, you will want to keep work and expenses to a minimum, but there are several basic items that go quite a long way in attracting buyers. Enhance the property’s curb appeal by landscaping, adding lighting and cleaning all areas. You'll also want to touch up paint; repair any holes, tears or stains in the flooring; and remove clutter and unused inventory. All of these will make for a good first impression during open houses and buyer walkthroughs, especially if you are not planning to stage the property.
2. Stop CapEx: Capital expenditures are designed to produce a future benefit by adding value to an existing asset. This type of work includes new roofing, installing heating or air conditioning units, and purchasing major appliances, for example. As soon as you have decided it is time to sell your investment, you'll want to review all capital expenditures. With the exception of some rare cases, you don’t want to initiate any new capital projects, because you won’t be owning the property long enough to recoup the benefits of investment.
3. The 3 C’s — Codes, Certifications And Contracts: In order for you to sell the property and transfer ownership to your buyer, you’ll need to ensure that the asset is in good standing with the city. Some cities require inspections prior to a sale; others may require rental certificates that must be periodically renewed. Make sure that your property is up to code and has all necessary certificates, as any violations could delay closing. Contracts are legal obligations that, in some cases, may be assigned to the new owner. As such, any existing contracts associated with your asset must be reviewed and presented to the buyer. It is important to plan ahead because in the event your buyer does not want to assume an existing contract, you will need to buy out or terminate the agreement prior to closing.
4. Employees: If you employ a management company or other employees at the property, you will want to be as transparent as possible with them about selling. The sale of your asset could cause the current group to lose their contract. By proactively addressing the sale with your employees or contractors, you control the messaging. Keep them informed of the timeline, and assuming that you've had a good relationship with them, make sure they understand that you would contract with them again should you acquire a new property in the area, and that you would not hesitate to recommend them to the buyer and others in your network. It will help to maintain the relationship and facilitate a smoother transition.
5. Taxes, Taxes, Taxes: Good news: You’ve made a sizable profit, and now you’re ready to cash out. Bad news: Selling your investment property could lead to a significant tax hit. When preparing to sell, engage a tax professional to talk through all your options for offsetting your tax burdens. Depending on your investment goals, income bracket and hold time, strategies may include tax-loss harvesting to deduct losses from capital gains or leveraging a 1031 exchange to defer taxes into the future. Developing a game plan before you sell will help you understand what you can do to maximize your investment profits.
You will need to consider each of these areas prior to selling an investment asset. Use this as a tool to create your own checklist of important action items and issues that need to be addressed. It's important to remember that selling your property is a complicated process, but with the right preparation and mindset, you'll be well-equipped to take on and overcome whatever roadblocks come your way.