Investment in property offers a number of exit strategies, and you should have decided which one you’re going to employ before you ever made the first purchase. We’ll talk about some factors to think about whether and how to sell your property in this blog.
Some investors prefer to “purchase and hold.” They intend to purchase a home, keep it forever, and let the tenants take care of the mortgage. Such investors will eventually amass a portfolio of properties they own free and clear, and they will be able to support themselves off the positive cash flow such properties produce.
This strategy has the benefit of saving the investor from any selling-related transaction fees.
Since real estate is less liquid than stocks or bonds, selling entails (a) terminating a tenant’s lease, (b) waiting for them to vacate, (c) paying for a make-ready to prepare the house for sale, (d) listing the house for sale, and (e) closing the deal. Aside from the annoyance and the work, depending on how quickly the home sells, the sale often requires one to three months of vacancy as well as closing costs. The investor avoids all of it by buying and holding.
This strategy’s possible drawback is an increase in maintenance expenses as homes get older. The Key Performance Indicator (KPI) to watch if you’re considering a buy-and-hold strategy is: Are expenses increasing more quickly than rents? If your rent is increasing by 2.5% annually, for example, from INR 1,00,000 per month to INR 1,02,500 per month, but your costs are rising by 5% annually, your cash flow will eventually become constrained. If your goal is to maximize cash flow, it’s time to think about selling the property if you keep track of your expenses year after year and notice that they are rising more quickly than rents.
One of the problems with condos and homeowners association (HOA) dues is, incidentally, that. Your cash flow will be restricted as the HOA dues rise more quickly than rent as the complex ages.
On the other side, you could prefer to keep the property if appreciation rather than cash flow is your goal. In the previous example, even if expenses are rising faster than rents, it can make sense to keep the property if it is increasing in value by 10% annually. The compression in your cash flow will be countered by the benefit from the appreciation. Holding makes sense in general when the market is rising.
The Right Time To Sell
As previously noted, a solid general rule of thumb for market timing is to buy when it’s a buyer’s market and sell when it’s a seller’s market. Let’s examine that in more detail.
Market appreciation is not constant. Prices continue to rise, but at some point they become unaffordable for the majority of residents, causing them to stagnate and possibly even drop.
A home buyer can typically qualify for a loan for a house that costs three times their annual gross income. For example, if their family income is INR 5,00,000, they can acquire a loan for an INR15,00,000 home. You are aware that prices are not expected to rise much above INR15,00,000 if your property is located in a zip code where the median household income is INR 5,00,000. It may be time to exit that market and sell if you purchased the house for INR 10,00,000 and current comps indicate a value of roughly INR 14,00,000.
A common error made by investors in this situation is to try to hold on until the very end in order to sell the property at the precise peak of the market in order to generate the greatest monetary gain.
Whom to Sell
There are normally three buyers for an investment property: your tenant, another investor, or an owner-occupant who intends to live there. Both are good and bad.
The simplest course of action is to sell to your tenant. The property is better known to your renter than to anybody else, so selling to him won’t require you to give him notice, wait for him to vacate, and then spend money preparing the house for sale. Although you might not obtain the highest price this way, the time and money savings make it a desirable choice.
Selling to another investor is also not too difficult, and the presence of a tenant with a solid track record makes the property more appealing to potential investors. Again, you could not get top dollar since the investor will try to drive a hard bargain and only consider the property in terms of rupees.
On the other hand, an owner-occupant intends to live there, making it somewhat of an emotional choice. It will be necessary for you to give notice to your tenant and then invest time and money in new paint, carpets, and whatever else the property needs to command top dollar if she likes the house and the neighborhood. If she does, she will pay the market rate or even above the market rate to purchase the house.
Talk about your alternatives with your listing agent; she will be knowledgeable about the neighborhood market and able to suggest the best course of action.
After deciding to sell, the first step is to select the best listing agent, who will list your home on property portals and assist you in finding purchasers. In particular, if you intend to sell to another investor, the turnkey provider from whom you originally bought the property will be able to sell the property for you. You’ll need to locate an agent if not.
How to Find a Reliable Broker
Referrals from friends, relatives, or other investors are a common source of agents, but this does not necessarily imply that the agent is the best fit for the position. Screen such recommendations, in the same manner, as you would any other service provider.
Searching for properties similar to yours on real estate websites is my recommended method of locating an agent. The most active agent in your region and in your asset class is who you should be looking for. Find out which agents have the most listings for high-end properties in the region if you’re selling a high-end home in a prestigious neighborhood. They will have a buyer pool for your particular sort of home.
You could visit one of the open houses in the market and act as a phantom customer after you’ve narrowed down your list of possible brokers. Inquire about the state of the local market, the DOM (days on market) your property is expected to stay on if you list with the broker, and the number of multiple offers that are being made by the real estate agent. Do you like the agent and do you believe you could get along with her? If so, take her card and get back to her later.
What you should know about your potential agent:
- How long has he / she been a full-time employee of this neighborhood market? (Some new agents work part-time at first until their business picks up. Your best option is not them.)
- Has she consistently outsold everyone in her office, in both strong and weak markets?
- Does she have a sense of the market right now? What characteristics, for instance, might help the house sell quickly? Which additions, fixtures, and amenities are worthwhile investing in, and which ones aren’t? Or is it worthwhile to invest the cash in home staging (i.e., placing hired designer furniture, wall paintings, towels, etc.) to help potential buyers picture the property as their home and speed up the sale process?
- Does he / she have an investor‘s mentality? How many of her clients are buyers of homes as opposed to investors? Is she her own investor?
- She employs open houses, video tours, or web advertising to promote her listings. Does she work in a place where there are numerous agents who could recommend homebuyers?
- She advises you to list the house, but at what price and why? Some agents lure naive sellers with inflated prices (“Sure, I can get you that price,” etc.) and then let them down. A good realtor would research the prices at which comparable properties are selling, market the property at that price, and then ignite a bidding battle to drive the price higher. (Note: She shouldn’t have to look up the answers to these queries and reply to you; she ought to be aware of what is effective and unsuccessful in her market.)
- She prefers to communicate in what ways? Call, text, or email? Will she respond to you right away or will it take her a few days?
- How long is her contract? The seller and agent must enter into a six-month contract, which is the industry norm. The seller is allowed to work with another agent if the agent is unable to sell the home within six months. We believe that this is too lengthy for an investment. The process of selling the house shouldn’t take more than three months, particularly if you’re in a competitive market. Check to see whether you can shorten the contract’s term. The implication of this is to question “What is the ninety-day sale price” rather than “At what price should we offer the property.” —that is, how much should we ask for it if we want it to sell in 90 days or less? Money is time.
- His / Her commission, what is it? The industry norm, which is typically acceptable, is for both the seller’s agent and the buyer’s agent to get 1 – 2 % of the transaction price. If you have to sell at a difficult period, such as a seller’s market when there are many properties available and few purchasers that might be an exception. The commission schedule could then be changed by you and your agent if it makes sense. Your agent might be willing to accept a reduced commission if she may now sell the house in a month as opposed to six. Her time is worth money as well!
You need to clean the carpets, touch up the paint, and even replace the appliances and fixtures before you put your house on the market. “Make-ready” is the name of this procedure.
Choosing your spending limit
Depending on who your ultimate buyer is will determine how much money you should invest in the renovation. It might not make sense to include “extras” like granite countertops, gold plated fittings, or Miele appliances in the kitchen if you intend to sell it to another investor who will use it as a rental. These extras will be more expensive and prevent the investor–buyer from significantly or even at all raising his rents.
Both your property management and your realtor ought to have a group of qualified professionals on hand to assist in getting your house ready for the market. You’re in for difficulty if you find yourself in a circumstance where you have to recruit contractors on your own.
Sellers have often worked with landscapers who had little knowledge of landscaping and floor tile installers who lacked basic skills. Many contractors will state anything in order to receive the bid and then attempt to figure it out later. That strategy might have been successful for them in the past, but it won’t be successful with you if you are ready and prepared. If a guy is learning on the job, you don’t want to be the test subject!
Some contractors will receive your deposit, but they won’t do the work or even call to say they won’t be there. It turns out that he received another work over the weekend; hence, he attended that one first. He will stop by your property whenever he has time. Surprisingly often, this occurs.
Another significant issue with contractors is fraud. Even though the patterns conflict with the backsplashes and the color isn’t what you wanted, the contractor decides to use some leftover countertops from a prior work instead of the gorgeous granite countertop and backsplashes that your interior designer may have chosen. He believed he could simply use the old counters, keep the cash you gave him for counters, and no one would notice because he had no sense of aesthetics.
Bottom line: Selling a property at the right price at the right time takes a good amount of effort. It’s wise to be aware of local real estate market conditions before selling your property. Has the price trend changed over the past year? You can negotiate pricing according to your terms with the help of market conditions.
Recognize how the supply and demand for property in your area are doing. What is the buyer’s profile? It’s advisable to maintain the price competitive if a buyer has a lot of options in your area because further negotiation is impossible.
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