Although selling a multifamily building is substantially more complex than other assets, the goal tends to remain the same: maximizing value. While there are several ways to achieve maximum value throughout an asset’s lifetime, minimizing leverage during the sale process will play a considerable role in preventing renegotiation of the sale price. Prior to going on the market, an owner can take the following steps to set the stage and prevent any sort of renegotiation. This leads to a smoother experience and a higher success rate of achieving the best terms and maximum value for their asset.
1. Increase Curb Appeal
This is one of the most important steps to take. Think of marketing your property the same way you would present yourself during a job interview. A clean and well-maintained exterior can set the tone for the way potential buyers view the rest of your property. On the other hand, a poorly kept exterior can give potential buyers the impression that you haven’t taken care of the rest of your property. There are several relatively inexpensive and simple solutions which will make a tremendous difference in enhancing your property’s curb appeal.
Give it a Good Power Wash – Dirt and rust stains make your property appear older than it really is and will give the illusion of neglect
Paint the Building – There’s no denying that a new paint job can make your property look fresh and even take a few years off its life
Declutter the Property – This could be a zero-cost effort that shows your property is clean and organized. Remove any trash or unnecessary items/furniture laying around the grounds. In an age of aerial drone footage, this includes the roof as well
Prune & Landscape – Not only do unkempt trees and bushes make your property look shabby, they can also block out sunlight, which can make units less desirable and promote mold growth
2. Do Your Research
Higher revenue = higher sales price. If you’re not doing the right research and staying up to date on the market rent for your property’s area, you are losing money.
- Match the market: Once you assess what market rent should be, if the property is not subject to rent stabilization you will want to raise the rents to match the market. If the property is subject to rent stabilization, issue month-to-month leases with the allocated percent increase allowed by the city. Within the City of Los Angeles, the allowed increase is 4%.
- Buy Tenants Out: If you own a rent-controlled property, there are still ways to get around low paying tenants. In the City of Los Angeles, many owners are implementing the Cash for Keys program. This program allows owners to offer tenants monetary compensation with the notion that, if accepted, the tenant will vacate the unit. Cash for Keys has helped owners increase revenue, in return maximizing the overall value of the property. Keep in mind it is important to understand the laws in your area and consult with a professional prior to utilizing the Cash for Keys program
- Leverage your Matthews™ agent: A professional can provide additional data and sub-market information
3. Address Deferred Maintenance
The majority of Matthews™ sells have some sort of deferred maintenance. Since this is a common theme, buyers usually anticipate that there will be some deferred maintenance for them to resolve. While deferred maintenance can be left to the buyer, we strongly encourage owners to address any kind of health and safety issues prior to marketing the property. Typically, health and safety issues can be taken care of quickly and are cost-efficient.
Physically Inspect the Building
Check for health and safety issues. Mold or bed bugs are the two biggest problems you want to look for and address immediately. This is also a great opportunity to experience a sense of how the buyer will view the property during a walk-through.
4. Clear and Marketable Title
In order to sell your property, you have to be able to deliver a clear and marketable title. This means that the chain of ownership of your property is clear and free of defects. Defects within a title could be a lien, mortgage or judgment. Since other parties can lay claim to the property or asset, the title cannot be legally transferred to another party until the defect has been cleared.
Make sure to take these steps to evade the mess a cloudy title can cause:
Get Ahead of the Problem – Request a preliminary title report. This is one of the first steps a Matthews™ agent will do for you prior to marketing your building. This way, if there is any cloud in the title, it can be cleared during our marketing campaign, prior to entering escrow.
Hire Help – If cloud is found in the title, work with the title company to get a clear picture as to what steps need to be taken to address the situation.
Be Aware – Evaluate the loans that are active on the title report and make sure you understand what the prepayment penalties are that may be incurred through the sale.
5. Review Your Books & Records
To a buyer, a complete set of books and records is a very important piece to the puzzle. Poorly kept books and records can limit the materials provided to a buyer. With limited books and records, a buyer will have to come up with their own numbers to underwrite, which tends to lead to inflated expense estimates and inaccurate totals. Evaluations with discrepancies usually result in a lower purchase price and it is common to see deals blow up due to this.
In order to avoid any disconnect, it’s important to do the following and have all documents on hand for buyers to inspect.
- Update the Rent Roll: The rent roll will specify tenant names, move-in dates, last rent increases, and deposit amounts. If all your rent increases are up-to-date, this will provide proof to the buyer that you have been maintaining market rents
- Review the Profit and Loss Statement (P&L): The P&L provides buyers with a clear snapshot on the overall operations of an asset. A buyer will typically request to view the last 12 to 24 months.
- Organize Paperwork: Make sure to have a copy of the rental agreements, rent increase notices, service contracts, on-site manager agreements, and any other written agreements in order to backup your P&L statement.
- Compile Bills: Gathering the past 6 months of utility bills will help outline definite expenses so that the buyer doesn’t have to guess and end up with inflated numbers
- Provide Insurance Policies: Providing a buyer with your current vendor(s) makes it fast and easy for a buyer to secure property insurance.
- Layout Property Tax Bills: Disclosing the property tax rate could allow buyers to forecast their future tax bill.
- Outline Inventory: Create a written inventory with all terms of personal property to prevent any sort of miscommunication at closing. Buyers will assume all property belongs to them unless otherwise stated.
- Round-Up Warranties: Supporting documentation on warranties will provide a lower risk for the buyer and help net a higher sales price.
6. Create a Plan for Your Proceeds
Make sure to have a plan set for your proceeds. If deciding to re-invest your money, it is important to act fast to acheive the maximum benefits. The Matthews™ 1031 Exchange Program utilizies the IRS 1031 Exchange Tax Code to defer capital gains instead of cashing out and allows your investment to grow tax deferred.
Implement a Plan – Special rules apply when it comes to a 1031 exchange, one of which is the tight 45-day timeframe given to identify three potential properties to trade into. It is important to work closely with an experienced agent to implement a plan that will satisfy your exchange.
Work with an Accountant – An accountant will help you understand your tax consequences in the event that you do not utilize a 1031 exchange.
7. Prep Onsite Management
When visiting a property, potential buyers will request to speak to the onsite manager. The onsite manager will be your biggest cheerleader. It is important for an owner to inform the manager that they plan to sell the building, prepping them for any questions that may come up during the sale process.
Address the Basics – Sit down and go through a list of what improvements have been made on the property so that the onsite manager can address them with potential buyers. This will help you both have a clear picture of how the building is running.
While each of these steps can help set you up for success, an expert will be able to an in-depth evaluation of your property and tailor the best solutions to suit your investment goals. With your goals in mind, a Matthews™ agent can provide the expertise to navigate any situation and execute the right plan for your property to help secure the maximum value for your asset.
For more information regarding your multifamily investments, please reach out to Daniel Withers | [email protected] | Direct: 818.923.6107