Is now the right time to sell your rental property? We may be in a seller’s market, but that doesn’t mean you’ll get the most bang for your rental property buck.
Q: As always, you give us a lot of good real estate information in your columns. Here’s a question regarding my rental home in Orlando, which I purchased new in 1989.
My current tenant of five years just renewed her lease for another year. With the seller’s market in full swing, and the value of my property and related comps back up to a level roughly the same as they were at the top of the market before the crash, and the prolonged decline in asset values, I’m giving some serious thought of selling, and taking my significant gain before another disastrous economic blow strikes the housing market.
I checked with my property manager, and she has seen an elevated number of her owner/clients selling. I will not be interested in a 1031 exchange, choosing instead to accept the tax hit, and keep the resulting six-figure gain in a “high-yield” money market account. By then, these accounts will probably be yielding 2 percent or better.
After doing some number-crunching the cash investment should net out almost as much as the net rental income after taxes, property insurance, property management commission, interest on the mortgage, and maintenance. And, I’ll get rid of the ongoing risk posed by continuing to hold the property. A long time ago, I sold a townhouse with the assistance of a FSBO fee-based broker, and saved about $3,000, and I will probably utilize the same approach the next time.
What do you think of my proposed planning for this property?
A: Being a landlord isn’t for everyone. And, for some people, who have had a tough run, as you have, getting out whole (or with a profit) isn’t to be trifled with.
If you no longer want to be a landlord and figure that the housing market has hit a point where you will make money, then by all means sell the property, take your gains and run. If you can earn money in that replacement investment that puts you about where you were with the condo rental, and that will make you happy, that’s a good way to wind things up.
While you may not have the upside potential if the real estate market continues to go up, you also won’t have the management and expense risk in case the market tanks again. You’ll also enjoy a certain satisfaction that you finally make money on this property after so many years.
If you decide to sell, know that you may have a problem selling if the property is rented and buyers in your area are looking to buy and live in a home. If the market is pretty hot in your neighborhood, selling by owner could be a good option for you or you could go with a reduced or fixed commission broker like you have done previously.
But these alternate selling mechanisms are not for everyone. Some people don’t like to show their own homes. They may be terrible sales people or may talk too much. Others may feel uncomfortable taking the time to do it or may not have the time to show their properties if they are working. Still others find the whole ordeal of selling a home is only doable with the assistance of a full service broker.
There’s no one right answer, but selling by owner or with a discount broker could save you thousands of dollars in commissions.
Say you are planning to sell the property for $200,000 and the typical commission in your area is 6 percent. In this situation you’ll be paying about $12,000 to the listing broker in commission. If you sell it on your own and there is no broker at all and the buyer does not use a broker, you may save the entire $12,000. If the buyer comes in with a broker and you agree to pay that broker 2 percent to 3 percent, you still have a savings of about $6,000 to $8,000.
Sometimes full-service real estate agents can generate enough excitement that a higher listing price is in order. And depending on the neighborhood these days, a bidding war might even break out. You just never know.
Can you sell to your own tenant? Why not ask. If your tenant declines to make an offer, then you should start the process by researching the market to have a better understanding of what your unit is worth. You should ask several good brokers that work in your development and have a great reputation to walk your property and give you their opinion on how your property looks, how they would market the property, what they would list the property for and what they think the property would sell for.
With all this information, you should be on a good path to decide whether to sell or continue to rent and whether you should go the route of using a broker or a hybrid form of listing and selling the property. Good luck.
Since her current tenant seems to really like the property, the first thing I would do is ask the tenant if they are interested in buying… and point out the savings from not having to move!