How to Execute the Exit Strategy and Sell the Property
Many of my post are lengthier responses to a client’s question. If I get repeat questions I understand that many people out there do not know the answer so today I would like to clarify things for those who do not have much experience in how to execute the exit strategy. Whatever your exit strategy was when you bought your investment property, you are most likely at the point of now selling it. This is typically the time where you have finished riding the wave of economic prosperity while owning the investment property and now it is time to move on.
You received plenty of cash flow and you realized plenty of equity growth. Perhaps the expensive items like the roof and AC are approaching the end of their life expectancy and you want to sell before you are forced to put out a large capital improvement. Perhaps the market you bought in has transitioned into a balanced one and soon to be sellers’ market.
The Sales Process
You now have a choice where you can sell the property yourself or you can hire a Realtor to sell for you. Which is best for you?
For sale by owner:
You can sell the property yourself if you live near the property you choose to sell. The upside is you save the cost of the real estate commission. The downside is you attract bargain shoppers hoping to save the same money that you are hoping to save, the cost of the commission. Another item to consider is many home buyers do not understand the purchase process and therefore will not venture into buying a for sale by owner as they want the assistance of an experienced professional. Most equity buyers are expecting to use a Realtor in the purchase.
Hire a Real Estate Broker:
To get top dollar for a property you want to attract the largest pool of buyers. Because most buyers want the assistance of a professional, they tend to work with a Realtor.
They understand a Realtor has a code of ethics they subscribe to and that Realtors are aware of all the fair housing and RESPA laws, plus all the details that need to be addressed to bring a property from the "for sale" stage to the "closed" stage.
The sale process:
- List the house and promote it to the public. If a Realtor is involved they will add this to the multiple listing service. This essentially allows any realtor in the state the property is located in to bring prospective buyers (by appointment) to view and promote your property.
- Negotiate an offer. The end result here is to create a win win. To get a property closed, both buyer and seller have to feel they have a deal they are comfortable with. A contract that is negotiated where one party feels that they got a bad deal will rarely consummate. Price and often any prospective work that an inspector finds may be negotiated at this time.
- Open escrow: After negotiations and once a meeting of the minds have been established, the buyer will present the seller’s side with an escrow check (often called the deposit) the amount of this deposit is typically negotiated along with the purchase price (1% of the purchase price is a common rule of thumb). To keep things fair, these funds are deposited into a trust account held by a third party. Typically either an attorney or, in most states, a title company will handle the closing process. They are the third party who has a trust account which is closely governed by the housing authorities. Once they accept the deposit and enter it into a trust account, they are not allowed to do anything with these funds without written consent from both buyer and seller. Typically this deposit will be brought to the closing table at time of closing and will be applied to the total purchase price.
- Inspections are complete. Inspections are done at the buyer’s expense. Buyers are always encouraged to have an independent non-interested third party inspect the property. The inspector's focus is to look for health and welfare concerns and to insure everything is functioning as it was intended to be. Any problems that this inspector finds will be placed on a report, along with pictures identifying the concerns. Buyer and seller can then discuss this (typically through their respective Realtors). An amicable solution needs to be met to address any of these concerns and in most case the sale will proceed. On the rare occasion the buyer decides not to proceed with the sale, the buyer and seller will both need to sign a release of contract instructing the attorney or title company to release the deposit back to the buyer.
- Financing. If the buyer is purchasing with financing, the lender will be busy in the background working to approve the loan. This process will typically take about 45 days. The Realtors are trained to keep in communications with all the players from the buyer, seller, title companies and lenders.
- Title companies. While lenders are processing the loan, the title company (or closing attorney) will be busy doing a title search on the property. This process shows the new buyer the chain of ownership from the beginning of time when the purchased property was originally platted until today, and that no one else has any vested interest in this property other than the person who is selling it. It also searches for any liens to the property so that the homebuyer is not surprised with a big outstanding bill later.
- Closing or Consummation. After all the above is completed, the title company or closing attorney will perform the final task of transacting the property. They will provide you with a settlement statement ( a drafted template outline from HUD) that shows buyers and sellers the exact cost, line item by line item, of every expense involved in the closing of the property. Buyers will bring their funds needed to close, lenders, if any, will also deliver their funds (most funds need to be made by way of wire transfers). After completion of all the paperwork and signing by buyers and sellers, the buyer receives the keys to the property (I always recommend changing locks as no one knows who may have keys such as landscapers or maids). The sellers will typically receive a check or a wire into their accounts at this time. In some cases these funds may not be received until the next business day. Your title company will be able to inform you of this in advance.
For most transactions this will complete the sale.
For some investors who wish to re-position their investments, they can do what is referred to as a 1031 exchange. This essentially allows you to sell your property and instead of being taxed on the capital gains, which is customary when selling investment property, you can simply transfer your gains into the next property and avoid having to pay the capital gains tax at this time. This is a common practice with savvy investors. There are certain rules that need to be followed and, if you opt to do this, it must be disclosed when you market the property for sale. This is another great value proposition from your Realtor if they have experience with these 1031 exchanges and can guide you through the process. Read more about 1031 exchanges
These only apply to foreigners who are selling property with a value over $300,000. Essentially this states that you must disclose that you are a foreigner selling property and you are putting a buyer on notice that the buyer is responsible to hold 10% of the purchase price until such time that the seller can prove to the IRS that the seller does not owe any taxes in the U.S. These funds are held in the escrow account and distributed back to the seller once instructed to by mutual agreement between the IRS and the seller. Read more of FIRPTA here.
As you can see there are a number of details involved in the sale process. The proceeds are highly governed to insure consumer protection. These are all items that your Realtor will take care of for you along with all the other business professionals such as lenders, title companies, etc.