Investments in commercial real estate are at an all-time high, especially in the Southern California and Los Angeles submarkets. Southern California has always attracted investors willing to pay higher prices, and receive initial lower CAP rates as this market has substantially outperformed the national average for rental and property value appreciation. This is no different in the current market, with prices remaining high, properties that are priced right are selling almost immediately. This is primarily due to the demand from new investors and lower inventory, as well as easily accessible and low cost debt. Many owners are looking to capitalize off of this up market and sell their properties; however, there are at least three things to consider first.
I like to use a picture of a pyramid as an example of how to price a property right, with the pyramid representing the entire pool of buyers. The base would represent a property being offered for sale at a ridiculously low price, of course everyone would be interested in the property. As the price increases, the pool of buyers will decrease, and eventually the price will be so high that no one will be interested in the property. We see this every day, with properties that have been on the market for many months, without ever receiving an offer. The idea would be to price the property as close to the top of the pyramid as possible, while still capturing the interests of enough buyers to sell the property. I am also a firm believer in that the market tells you the price, if a property is overpriced, no one will inquire, or offer to buy the property, but if it is at market, or just below, it will get enough interest to create a buzz and possibly multiple offers – a mini auction so to speak.
2. Your Agent
The best way to get a good understanding of the market conditions and pricing before placing your property for sale is to engage a knowledgeable and good agent. Your agent should work with you to accomplish your goals, not just be looking for a quick sale. No one has a crystal ball, if we did, we’d all be in Vegas; however, a good agent will understand which key metrics buyers are looking for and be able to use these to create value and a fairly good idea of what you can expect your property to sell for. In addition, an agent should work to create the “buzz” surrounding a property. I’ve spoken about passive agents, those that just put a property on the market and hope that other agents will bring their buyers to the table. A good agent will be active in selling your property. In addition to marketing it to other agents and buyers, they should also be targeting potential buyers, particularly people that already own property in the area, or people that are actively buying properties in the area. A good agent will have the tools to identify who these individuals are and the resources to get in contact with them.
3. Replacement Properties
Now that you’ve sold your property, what will you be doing with the funds? If you are like most people, you don’t want to pay capital gains taxes on your gain/appreciation. Due to the time constraints of a 1031 exchange vehicle, you also do not want to wait until the last minute to start looking for a replacement property. Your agent should be able to direct you to a good accommodator prior to the closing, and also be able to offer alternative investments (different asset classes) and investment strategies (perhaps a reverse 1031 exchange, or a Delaware Statutory Trust). In addition, your agent should be able to also understand the tax ramifications, the benefits of depreciation, your return on equity, reinvesting in another property, and be able to discuss and work with your tax advisor to accomplish your goals. Remember, plan ahead so that you can mitigate the risks, and not be caught with unexpected taxes.
As selling a property is a great undertaking, the entire process needs to be given serious thought. You need to consider pricing, quality of agent and replacement properties when selling your investment property. While these are only three factors, I believe that these are the most important items to consider.