Timing is everything…especially in a fast approaching bear market

The stock market has been volatile with the growing concerns over the conditions of the economy. The Fed is raising interest rates, turning stocks on a downward slope as public companies cut back, reduce return estimates and go into layoff mode to cut losses. We are entering a bear market, where prices start falling to encourage selling. So what is a bear market one might ask… A bear market is when a market experiences prolonged price declines. Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period.

For a real estate investor, your property values have gone up drastically in the last year, but may be flatlining over the coming months and reducing in value. Entering a bear market is causing many investors to assess their portfolios for properties they wish to sell. A bear market combined with rising interest rates is a volatile climate for moving properties into or out of your portfolio but with the right planning, you can still succeed- it’s not too late to make a move.

If you were in a position to purchase a new property for your portfolio, what are some of the things you’d be concerned with? If you’re leveraging existing properties or have cash on hand and you want to take advantage of purchasing new properties for your portfolio, be cautious about pricing and valuations. Determine the health of your tenancies as well as how leveraged you are with the current properties you own to make sure you’ll be able to weather the bear market and pending recession.

However, if you have an opportunity to sell a property that you’ve been wanting to offload from your portfolio, depending on the valuation, now may be the best time to test the waters of the buyers’ market to see what remains as buyers become more and more cautious with the current changes in the market. Here are some reminders of what you’ll need if you are in the position to sell one or more of your properties.

Be ready—you’ll need the right documentation

The first thing that you need to do is gather all the pertinent documentation. Nothing is more frustrating to a potential buyer than to see a property listed on the open market without the state required disclosures and proper supporting financial documents. Financials are, obviously, one of the biggest factors in whether or not a buyer will be interested in the property you are selling. You’ll also need proof of income and cash flow as well as any major capital investments you’ve made to the property over the duration of your ownership.

You will need a rent roll, offering memorandum, T12, security deposit detail report, the required state seller’s disclosure and lead paint addendum as well as any other environmental documentation that you might have. In addition you will want to document any recent improvements to the property including capital improvements. Here is a more thorough description of what each of these are:

• Rent Roll — A rent roll is an itemization of each tenant’s current rent, the lease beginning and ending term, bedroom/bathroom count, late count and total outstanding debt (if any) due to you currently.

• Security Deposit Detail Report — This is a list of all security deposits being held in escrow for each lease including any pet fees or associated charges. This amount will be turned over to the new landlord once you sell unless you have proper documentation stating otherwise. Keep in mind, it is illegal in PA to use the security deposit for anything during the term of the lease and you are required to keep the security in an escrow account separate from all other funds (personal or property related).

• T12 — This stands for trailing 12 months of history for your investment property. This details all income and expenses on the property for the last year and helps show the property stability or lack of stability.

• Operating Memorandum (OM) — The OM is approximately 15 to 20 pages of information — it serves as a detailed analysis combining all of the information and can essentially be described as a marketing piece. This showpiece will have professionally shot photos and give information about the demographic area including the population, density, and median income levels. The OM will likely include a proposed financing arrangement, rent roll, unit counts and occupancy status. Additional information may include proforma rents and expenses if the property is not fully stabilized.

• Capital Improvements — Prepare a list of any recent capital improvements that you've made to the property. If any of your capital improvements come with a warranty, you will want to make sure that you provide that information. If you just replaced the roof or a heating system, you likely have a warranty in place. These warranties can be transferred over to the new buyer so don’t forget to include this information.

There is marketability in the value-add— buyers likely want to add something of value in hopes of appreciating the property further, even if it takes years to do so because of the economic climate. Showing the differences between where it is now and what it could be will be beneficial because it gives them a reason to want to buy the property.

Licenses and COs

You’ll need all pertinent licenses and certificates of occupancy for your property. Here are a few reminders:

• Are there any licenses that you have to apply for every year — business licenses, rental licenses?

• Are you in a condo association or HOA? What are the capital contributions?

• Do you need a fire inspection? Most commercial properties do.

• Is there a requirement for a rental inspection or pre-sale inspection? Most contracts give the opportunity, no matter what state you're in, for negotiation on this topic. But as the seller, waiting to order the pre-sale inspection until the property goes under contract might not be the best course of action. You don't have to correct any violations, but it would be very beneficial for you to have the report ready, prior to an offer so you can negotiate this at time of contract.

What kinds of disclosure will help your sale?

There are two different types of disclosures that are used. The more organized you appear when presenting your documentation to a potential buyer, the more confident they’ll be that you are an experienced investor who has taken the time to track, record and document important aspects about the property.

• Seller's Property Disclosure — This is typically used for one to four units. This disclosure is going to identify all of the material defects in a property that could potentially cause an investor to decide to buy or not buy your property. For example:

  • Type of plumbing in the property - (PVC, PEX, Copper, Lead)

  • What type of water heaters do you have and the age of each

  • What type of heat is in the property

  • What is the age of the roof — And any repairs or maintenance to the roof over the last couple of years

  • Do you know of any leaks on the property, causes of dampness, or have had any recent flooding to the property

  • Recent fire damage or storm damage

  • Included in the property are — appliances, smoke detectors, keyless entry systems and alarm systems

  • Radon testing or lead based paint testing on the property (very important for Lehigh Valley real estate)

• Commercial Property Information Sheet — This is used primarily for commercial investment properties, or anything that's above five units. The sale of land, a business, offices, or any property over 5 units must use this form. This sheet will ask you similar seller's disclosure information, but also will prompt you to answer questions such as:

  • Are there any environmental concerns/soil conditions that should be noted

  • Did you have a Phase 1, Phase 2 or recent environmental survey?

  • In the case of a business sale, is the equipment being sold with a property

  • Are there site improvements to the land

These examples are just some of the information that is required for disclosure. Property disclosures are all about the history of the property and are important to include as much detail as possible.

Gathering these various documents will help you present more confidently to a buyer and help you get to closing faster, which can save you money, time, and frustration. Take the time to get this information to your agent and be as knowledgeable about the property you’re selling as you can if you’re considering taking advantage of what’s left of this current seller’s market.

Note: This article’s information should not be used as a substitute for legal advice. Please consult your attorney for legal advice relating to preparing your investment property for sale on the open market.››