Episode Transcript

00:02

Welcome to Episode 6 of Season 5 of the growing Empire Show. Today is our famous Question and Answer segment. So stay tuned.

00:10

Welcome to Growing Empires — hosted by real estate entrepreneur and trusted investment advisor Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments. For those who want to build and manage a more profitable real estate portfolio.

0:28

We are back with our question and answer segment. So I’m going to jump right in- first question: I want to sell my investment property but I have a problem tenant. What should I do? This is always a very challenging situation and it’s not necessarily a one size fits all answer, because it really depends on what the challenges are with the tenant. If your challenge is that the tenant is just a mess, and they are untidy, I would suggest requiring them to clean up their property. We have also in the past told tenants that we are going to send a cleaner in to organize their property if they could not do it and then we would charge them back because as a part of their lease, they’re required to keep the property and their unit in a well kept condition. But if the problem with the tenant are things like non- payment of rent, or noise, or they have pets that they’re not supposed to have, I think you really need to consider getting rid of that tenant before you sell the property. Here’s why. No investor really wants your problems. If you’re showing the property to a potential investor, and the tenant is home during the time of the showing, I can assure you that the buyer is going to ask the tenant about their experience about the property. And if you don’t have a good relationship, for one reason or another, or this tenant is just a problem tenant,. they are not going to help you. They will definitely negatively talk about you. They will talk about your property, and that’s going to give the buyer the wrong impression. We all know that not every tenant is perfect. If you’re already having conflict with a tenant, they likely are going to be more of a roadblock for you in selling and less likely as a cooperative occupant during the time of sale. So if you’re having problems that are related to money, pets they’re not supposed to have, noise violations or anything else, I would suggest that you likely get rid of that tenant first, before you actually sell your property or put your property on the market. Depending on how many units in the property, you could consider just skipping their unit when selling your property. If you only have a two unit property, and you constantly only show one unit, the buyer is going to wonder why won’t you show the other one. Keep in mind, even if you can get away with not showing the unit during showing time, you’re still going to need to show the property to the buyers home inspector if they do Home Inspections or any kind of inspections. And if it wasn’t a problem during showings, and then they see it’s a problem during inspections, they’re likely going to terminate the contract anyway. So you’re always best to try to just deal with the issue first versus showing the potential buyer or investor this problem tenant. Next question is is it better to sell vacant or with tenants? Again, that’s a really great question and it really depends on what you’re selling. I would suggest that if you are going to be basing the price of your property on income, you need to have the property occupied. If your property is going to be most likely valued based on other comparable buildings in the area using a sales comparison approach or something similar, then it’s okay to have a vacant unit. If what the person is buying or what the investor is buying is your rent roll, you need to have a steady rent roll to get the most amount of money. So in that case, I would suggest that you always have a tenant in place. Sometimes people think that it’s easier to show when the property is vacant. While that is true, nobody wants to buy based on what they can make your property. So if your property is vacant, they are not going to buy based on what you think market rates are going to be. Because you’re likely going to think that market rates are much higher than a buyer’s going to think they are. They’re not going to buy based on your perceived value of the property they’re going to buy based on what is today. The value of your property is also based on what is today if an appraiser came out to the property. It is very likely that it’s going to be far more valuable to you to have tenants in place, but you do need to have cooperative tenants so it’s definitely a gentle balance when we’re talking about selling an investment property with tenants in place. I had suggested in an earlier episode to make your tenants a part of the sale, get their buy in and work with them.

05:00

There are so many way to get cooperation. You don’t necessarily have to make your property and open house all the time. You can strategize with your tenants on a schedule, that would be the best for everybody involved, which allows you to get cooperation from your tenant and get the buyer or the investor in and out. It also gives them some respect in the sense that, you know, it still is their home, and we want their cooperation, so you don’t want to be invasive to them. So a couple of things to think about are, how are you selling your property? If it’s based truly on income, you really should have your property occupied? If you’re not selling it based strictly on income, and you’re basing it on other comparable properties, it would be okay to have your property empty for the sale. Next question. I heard that month to month leases are bad when you sell a property, should I renew all my leases for a year before I put my property on the market? Another great question. My answer to that is going to be, it depends on what your leases are. Now, if you are far below market value, you definitely do not want to lock a new buyer in for a period of a year, they may not even want your tenants and your tenants may not be able to afford market rate. I assure you that the number one thing that a buyer is looking to do or an investor is looking to do is increase the income on the property. The first way that they do that is they increase rents. Let’s just say they are paying $600 a month for rent, but market is $900. If you lock them in for a year at $650, or even $700, you have just defeated the ability of the buyer to really capitalize on market rates and increase the value of the property and that’s going to be a deterrent. That will likely cause them to not want to buy your property.

06:50

However, if you have great tenants, and you are at market rate, and you’re selling a property that’s a little bit more stabilized, you definitely would want to have your leases all renewed, because it’s going to show stability for the property. So if what you’re selling is a stable investment opportunity, meaning that you are already at or very close to market rates and you’ve got great paying tenants that keep the place clean and have been stellar occupants for you, you’re going to want to have yearly leases because that’s going to show more stability and be more appealing to a buyer. If your property has rents that are far below market or your property is less desirable in condition and not quite to the point of stabilized then you’re going to want to stay with a month to month leases because that will allow the new investor or buyer to make changes that are necessary to create more cash flow on the property. That’s where that value add proposition comes in that is so attractive to buyers in this marketplace.

07:55

The episode will continue in just a moment.

07:59

To make the most out of your investment property sale, you will need a team that understands the market fluctuations and how to capitalize on that demand. Knowing the market trends and forecasting economic changes is critical to your success. Having an expert by your side to help you buy low and sell high is the only way to create true wealth. When you need help analyzing your portfolio to maximize your return on investment. There’s only one person you need to call and that’s me, I will help you analyze your portfolio and increase your profitability year over year and that’s my guarantee! Schedule a call with me today at growing empires. com. That’s g-r-o-w-i-n-g-e-m-p-i-r-e-s.com. And I’ll help you create the life that you desire with passive real estate investing.

08:42

Last question is as a seller, what terms of a contract should I stay away from or be leery of? This is a really great question. So let’s talk about the terms of a contract. Okay, we have obviously the price, which is everybody’s hot button or hot topic. Everybody wants to get the best price for the property, genuinely and that makes a lot of sense. As a seller you want the most for your property and as a buyer you want to buy the best discount. But there’s so many other things to consider when it comes to accepting a contract on your property. Let’s first talk about escrow deposit and this really goes for any size property. It doesn’t matter what the size of the property is. You want to think about what the offer is and the escrow deposit that’s in place. Now Pennsylvania is a little weird in how they handle escrow deposits. It’s really impossible for a seller to ever retrieve the escrow deposit in the event of a default. However, an escrow deposit regardless of whether the seller will ever get that money, gives you a really clear indication of how serious the buyer is to buy your property. If you get an offer where they’re putting $1,000 or $2,000 down, I can assure you that they’re likely not very serious.

10:00

There is mortgage in the world that’s going to be $1,000 or $2,000 down. It’s going to be much higher than that. You can assume that a buyers closing costs at a minimum are going to range somewhere between 5% and 6%. So let’s say that the offer on the property is $500,000 and they’re using typical bank financing 25% down, that’s going to require them to put $125,000 down on the property as their skin in the game. Before we talk about closing costs. So if somebody is offering $500,000 on the property, and they’re not willing to put down a minimum of 2 – 2 1/2 percent, they likely are not a serious buyer. As a seller, you want to see more money in the pot, because the more money they’re putting up, the more money they’re technically putting at risk and that shows you that they’re serious about the property if they’re willing to risk more money. Since we talked a little bit about financing, let’s just jump right into that piece of the puzzle. You need to keep in mind that all banks are not created equal. If you are in Pennsylvania, and the bank that is funding your property is located in New York, or New Jersey, or another state, that can potentially be a really big problem. Pennsylvania is a time is of the essence state and there’s not too many states that are. What that means is that in Pennsylvania, everything has to be done by a specific date in the contract. If either party does not perform by that date in the contract, the contract can be essentially null and void. So let’s just say we have this lender, and we’re in Pennsylvania and they’re in New Jersey whihc is not a time is of the essence state, meaning that their contract times are very different, very, very different, even from their attorney review period, to their inspection periods, everything is very different. So you want to make sure as a seller that that bank is familiar with your contract terms, they’re familiar with the state that you’re in, and they’re going to be able to perform in a time period that is expected of the contract. Otherwise, as a seller, you’re going to tend to get very frustrated when you have to extend that contract. When you’re looking at finance deals, I assure you that they are going to take a minimum of 30 days, and that is really quick. They typically take 45 to 60 days to close and sometimes a little bit longer depending on the size of the property and depending on if you’re going to need any type of zoning or approvals. So if you have bank financing as a term of the deal, and your contract to close date is not 45 days apart, or even 60 days apart, you should consider negotiating that term and making sure that everybody’s on the same page because you want to make sure that everybody performs by the deadline in the contract. Let’s also talk about whether the buyer or investor has viewed your property before they offered on the property. In a hot market, there is no shortage of tricks by buyers. One of the most common tricks that people use is they offer high on a property. They build in a due diligence period and then they use that due diligence period to re-trade the property. Yes, I said it, I actually uncovered a common deceitful trick that people use when negotiating investment properties. Anybody can put a fake sticker price on property, and any buyer could agree to that same fake sticker price. But unless they’re intending to purchase that property and get all the way to closing at that sales price, you’re going to lose as the seller. If that buyer or investor is not seeing your property first, you may want to consider telling them that you will not accept their offer until they’ve seen the property and signed off. You may want to just upfront talk about negotiations on inspections. You may want to tell them that you have no intention to negotiate the price. So if their intentions are to negotiate price or terms after they’ve done their inspections that they’re likely barking up the wrong tree. However you handle it as a seller, you just want to make sure that you’re the most informed and you want to make sure that you protect yourself.

15:00

You want to look at the length of the due diligence period, if this is a one to four family investment property, and somebody is asking for more than two weeks worth of due diligence period, they are wasting your time. They are potentially putting you at risk, because let’s say they asked for a month, and on the 30th day, they terminate the contract within the rights and they get their escrow money back, where are you as the seller, you’re putting your property back on the market after it’s been off the market for 30 days. Now the buyers are all going to ask what happened. Full disclosure, you’re going to have to tell them that it was because of inspections, you’re going to have to tell them that somebody terminated a contract, and that is not going to look favorable on you. It’s certainly not going to help you get another great offer. We want to try to make the first contract that you accept to be the only contract that you accept. It’s kind of like divorce, we don’t want to divorce with our first buyer, because the second one may not be any better, we want to stick it out. We want to try to make things work. So before you accept a contract, I would just urge you to make sure that this buyer is the one that you feel that you want to do business with, that the terms that they presented are fair to you and equal to both parties, and their due diligence period is not too long. Make sure that they’re not going to try to take advantage of you and give you a fake sticker price or a fake price up front and then try to renegotiate or re-trade the property down the road when you will be more vulnerable. You want to really think about the bank that they are using to make sure that they are a lender that commonly does business in your local area and are familiar with the subject property and have the tools to get you to closing on time. The last thing that you want to think of as far as contract terms is, what are the other contingencies? Does the buyer have a 1031 exchange to complete first. If so, that’s going to be another layer of contingencies that you need to think about. Usually in a 1031 exchange, the property has to go to settlement before the next purchase takes place. As a seller, on the receiving side of that you don’t really have control over that other deal. So just keep that in mind that if there’s a contingency, like a sale and settlement or a settlement contingency that you don’t have a lot of control, and that could be somewhat risky. However, also keep in mind that somebody completing a 1031 exchange likely really needs to complete that full process and is going to be more aggressive at moving forward so that they can defer those capital gains. If you’re in this situation, you may want to ask things like is this the only property you’ve contracted for? Is this going to satisfy your exchange requirements, because that’ll give you some insight onto what the buyers intentions are. Sometimes in a 1031 exchange, buyers will contract for multiple properties because they can identify up to a certain amount of properties and a certain price point. In many cases the intention is to back out of one or more contracts before due diligence is over if one property satisfies the exchange requirements. Keep that in mind that if you’ve got any kind of contingencies built into your contract, all of those are opportunities for the buyer to walk away with no questions asked. Are there any kind of municipal requirements that you need to be mindful of? Is there a certificate of occupancy requirement? And how is that built into the contract? Is there any sewer lateral inspections, sidewalk inspections, or anything else unique to your municipality that would be subject to the sale? Are there any kind of fire code inspections that are required. You’re going to want to make sure that that is outlined in the contract appropriately and that both parties know exactly what is going to happen. Then you want to look at any other contingencies like zoning contingencies, or survey contingencies, stuff like that, and just make sure that they align with your local market and make sense to the property and the deal that you’re actually selling. Well, I hope today was really helpful and insightful. We had a lot of great questions, and I hope that you got a lot of the answers to these questions. I hope that the sale of your next investment property is a very successful one. Until next time, take care.

19:09

For more information about how Jennifer can help you plan, develop, and manage a strong real estate investment portfolio, visit growingempires.com