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.

Shop new & reduced price homes
Southeast Michigan Homes For Sale

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.

Shop new & reduced price homes
Southeast Michigan Homes For Sale

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.

Shop new & reduced price homes
Southeast Michigan Homes For Sale

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!

Tenant Leases

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 determing if the property will be attractive to buyers at your price point. This process will help you determine if an adjustment to your list price to better boost your numbers and offer more value to investors is needed.

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%.

Shop new & reduced price homes
Southeast Michigan Homes For Sale

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.

Holding Costs

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.

Shop Around

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.

Shop new & reduced price homes
Southeast Michigan Homes For Sale

My husband and I been investing in property since 2011 and have first hand experience in rehabbing distressed properties, estimating repair costs, estimating property values, working with contractors, vetting possible tenants, negotiations, buy and hold rentals, vacation rentals and more. You name it, we’ve done it and we love it!

Currently, we own and operate multiple units in three different states. If you’re interested in investing in Detroit Metro Area of Michigan (60 mile radius outside of Detroit) call us at 810-588-8543. We are happy to answer your questions.

You may also like...

12 Responses

  1. Emmanuel Buysse says:

    Great post and good info.

    Thede things are normally obvious to put as a red flag, but history showed us that people are keeping this mistakes and they need a guide to prevent that. 

    It is good you are the person who takes the time to write it, and you can save a lot of people because of that. 

    Well let us say, save their money and their future. 

    Thanks a lot for it! 

  2. Shira K says:

    It is important for everything to be disclosed. You need to know how costly it is to maintain a property, utilities, taxes, and repairs so the buyer can estimate a profit.

    it makes sense that lenders want a property to have tenants. It almost guarantees the owner will be able to pay back the mortgage.

    • admin says:

      Very true! I’m always amazed at how many landlords will let their leases run out believing the investment property would be more attractive when vacant. Crazy! There’s lots of bad advice out there, which is why I wrote this blog. Thanks!

  3. Gno says:

    Your article is very useful. These 5 “Red Flags” are very important. Investing in houses is not a good business for me, but I bought and built many properties for my companies (shops, warehouses, offices). 

    Many investors like to buy real estate to rent. This is a working project and if you are doing it well, you can be wealthy like you and your husband. I hope you more success and I am sure that your website will help others to reach the same success.

  4. Gracen says:

    Reading through your write up, I had no doubt that you are well versed in real estate, and the last paragraph of your write up confirmed that. You are quite right about investors wanting detailed information about the property they want to buy upfront. Potential homeowners might be interested on the state of the house but an investor will also be concerned about ROI and every other necessary information.From experience most people usually sell their property as a result of death in the family, job transfer, location etc like you rightly said.

  5. Bryan says:

    Thanks for the very informative article. One of my biggest problems is being very risk averse, and it has stopped me from doing many things in the past that perhaps I now regret.

    I guess one of my issues at the moment is more around the politics going on and how this may affect prices going forwards, with the best will in the world forecasters often get things wrong. I’m wondering if there are any other potential ways to forecast the future, at least in the long term? or perhaps if there is a better way to manage risk with some kind of insurance?

    • admin says:

      Real estate has historically been one of the best investment options out there. It doesn’t go up and down with the latest daily headlines. Sure there was the crash in 2005/06 but I cover that in my article so won’t rehash it here. Not sure what you’re referring to “insurance”. When acquiring income property, lenders will require that you also obtain property insurance. So, should anything happen to the property, you’re covered. A well-crafted lease will also add another layer of protection to your asset(s).  The idea is to build your net worth and grow your monthly income over time. If ever there’s an emergency, you can put one of your properties up for sale. It’s real property and it’s yours. 

  6. Susan says:

    Annette,

    Information here is something that I am interested in due to in a year or so I am planning on getting into the investment of buying distressed properties.  I am from Pennsylvania and the area right now I am looking at has numerous possibilities for some ROI with starting this business.

    I have bookmarked your website for when ready to begin this process not exactly sure if wanting to get into the rental end or just the flip end.  Have the work crew already lined-up and need to investigate more to see which is going to provide the best profit or ROI possible.

    Thank you,

    Susan

  7. Happy Saturdays says:

    The difference between buyers of property is really amazing. Investing in property may be something I decide to opt out of though this gives me a perspective on how selling to investors works. I definitely agree keeping numbers up and showing the investment is making money is necessary. As an investor have you sold property and later purchased it back? I was just curious because here our old property managers now manage the apartments again. 

    • admin says:

      Sold it and bought it back? Seems odd. No can’t say I have as that would be counterproductive to me.  Can you shed some light as to why they did that? How did it benefit them? What was the situation?

  8. Rob S. says:

    I never had investment property but my brother-in-law has up in Maine.He’s thinking of selling it and might be interested in your advice here.

    I just think it’s too much for him anymore and he’s tired of it.These are excellent tips to know when going to list your property.

    You can’t think of everything when it comes to selling your home like this but these are important to know for sure.I’m curious. Are tenant leases a huge problem?

    • admin says:

      I had my lease originally composed by an attorney back in 2011. It’s rock solid! Lol. Well worth the initial expense. I’ve used it ever since. When renting, use a 12-month lease (unless of course, you’re renting vacation property) to protect yourself, your property and the tenant.

Leave a Reply to admin Cancel reply

Your email address will not be published. Required fields are marked *

Thinking of making a move? Stay informed of latest tips, trends and strategies to buy and/or sell your property once a week.