Selling Investment Property? Avoid These 5 Red Flags
Selling investment property is not the same as selling a simple single family home. The buyers you’re looking for are largely investors not homeowners. It’s a different kettle of fish entirely and understanding what they are looking for and what motivates them to buy is to your advantage.
Unlike homebuyers, investors are not interested in living in your investment property. As such, they are more willing to consider properties that provide the basics and better yet, are fully tenanted and income producing.
The biggest hurdles you need to overcome is to show the investor that the property has been maintained well maintained (unless distressed property) and that the numbers work.
Even with distressed property, reducing the number of big-ticket items that another investor has to spend on, always helps. For instance, if the roof will need replacing, then make sure there’s no big plumbing or electrical issue on top of that. Check that the foundation is solid and that crawl spaces are dry or properly sealed. Spend a little is okay to seal the deal. A Realtor who has hands-on experience rehabbing properties would be able to direct you in this regard without having to spend a small fortune.
Unlike the last 12 months where inventory of homes for sale was well below the norms, going into 2019 we starting to see a shift in real estate. More properties are hitting the market this year which gives buyers and dare I say, investors, more choices as we head further into the year. Take a look at my well researched 2019 Forecast: Fact vs Fiction blog.
Reasons For Selling
Major Life Event – A death in the family, job transfer or relocation, layoff, medical needs, etc.
Tired of Managing Property – Believe it or not, the large majority of landlords manage their own properties. It’s really not very difficult to do. As you get older your attitudes about work and life change over time.
Moving Up – Often times property owners will sell small SF and MF Duplexes to finance the purchase of larger commercial type income properties 8+ units or switch over to vacation rentals.
Listing It For Sale
Too many real estate agents would look at an investment property and list it just as they would a regular residential family listing providing far less information than is needed for these types of properties.
That’s a big mistake. Investors want more information UPFRONT. So provide them with what they are looking for. Here are some red flags you should avoid in your listings:
Red Flag #1 Non-Disclosure: One such pet peeve of mine that I often see in these types of listings, is the unwillingness to provide Seller Disclosures. Instead, they opt out by stating that they did not live in the property and that somehow excuses them from filling out a Sellers disclosure. If the landlord cannot provide information regarding the property’s maintenance and history, then who? Providing as much information on improvement, repairs helps to build value in the buyer’s eyes.
Sorry, it doesn’t work that way. Landlords are the primary source of information regarding the property’s maintenance, history, repairs, upgrades, tenants (if any) and more. The less information provided by sellers of investment property, the greater the suspicions in the mind of potential investors.
Red Flag #2 Lack of Documentation: Keep all your permits. Make sure you provide permits and warranties for windows, appliances, roof repair, etc. Many of these warranties are transferrable and adds additional value to the buyer.
Red Flag #3 Vacant Property: Getting rid of your tenants prior to selling is not a good strategy. Investors are attracted to properties that are income producing.
Many investors use private lenders to finance their purchases. More often than not, these lenders will require that a property be fully tenanted or at least 50% tenanted.
TIP: In fact, many private lenders that work with investors will not finance a vacant property. So, do not get rid of your tenants!
Have copies of the leases ready to provide to buyers. Not providing basic information in regards to leases, again signals a red flag. You can give your Realtor permission to give the basics such as lease expiration dates and terms up front. Then you can offer to provide actual copies of leases once the property is under contract.
When selling investment property, it’s safe to say that less, is definitely not more! If the property has been tenanted, then provide that information. How much rent does each unit pull in per month? What size is the unit? Provide square footage, number of beds and baths for each.
Do you have a Section 8 tenant? Investors like these tenants because it equates to guaranteed rent every month since a large portion is paid by the government.
Red Flag #4 No P&L Statement: Have a Profit & Loss statement ready for potential buyers. This is basically a list of all of the expenses related to the property vs the gross income produced monthly and yearly. Subtracting total expenses from gross income equals net income. Investors use the Net Income figure and divide it by the purchase price to determine Return on Investment (ROI).
Investors are interested in ROI and properties that have been well maintained and are income producing. The right agent can help you put this together. Investors need to know all the holding costs, utilities (paid by tenant and landlord) taxes, repairs, etc. What’s it going to cost them to purchase and hold the property?
Going through this process is worthwhile in
If for instance, monthly net income is only $200, chances are that investors will not be interested. There are some exceptions to this depending on your initial investment total. However, many investors are looking for properties that can offer ROI of 8% or higher depending on your location. Here in parts of Michigan (outside of Detroit & Flint) it’s not unusual to find ROI as high as 18-24%.
If you’re interested in how we calculate ROI to determine investment income potential, I give a more detailed real-life example, click here to read.
Realtors can simply upload documents into the MLS so that it is easily accessible to other cooperating Realtors. Providing these figures upfront goes a long way in securing an investor provided the numbers are good.
Red Flag #5 What’s It Cost?: A big part in determining Return On Investment (ROI) takes into account the property’s holding costs. In other words, the cost of owning the property. This should be part of your Profit & Loss Statement.
You’ll want to include utilities, property taxes, HOA fees, insurance, garbage pickup, lawn maintenance and snow clearing (if applicable). If it’s paid for by you monthly, quarterly or yearly, then include it.
Find a Realtor who has extensive experience as an investor and who can help guide you into writing up a Profit & Loss statement and direct you on how best to present your property to attrack investors.
A Realtor who has hands on experience rehabbing property, holding and managing rentals is the best one to also help you negotiate with potential investors. They speak the same language.
My husband and I been investing in property since 2011 and have
Currently, we own and operate multiple units in three different states. If you’re interested in investing in Detroit Metro Area of Michigan (