Step-by-Step Process for Sellers
Here's the step-by-step methodology and process Realty Yield encourages all sellers to follow before listing a property for sale.
Let’s take a look at an example of a typical 30-unit apartment building.
Note: the data/fact-set closely aligns with an actual 2012
sale (the numbers have just been rounded off)
Example: Typical 30-unit apartment building
Current rents average $700 per unit which equals $252,000 in annual rent income.
Current other income (late fees -
$600, laundry - $2,400, parking - $0, storage - $0, tenant utilities
reimbursement - $0, all other - $0) equals $3,000 annually.
Current operating expenses (taxes, insurance, utilities,
maintenance, professional management, all other) equals $120,000
Hence, current Net Operating Income = $135,000 ($252,000 + $3,000 (-) $120,000)
Assuming a market capitalization rate of 6.75%, this equates to a current value of ~$2,000,000
So why am I going through all this?
Because my experience has shown over many years that very few owners (even highly experienced private owner-investors) truly understand the impact of even a “few thousand dollars” of supported Net Operating Income on income-property valuation at selling time. Let's take the above example and apply the step-by-step methodology and process I encourage all sellers to go through before "launching" a property for-sale.
Step 1 (Pre-sale Assessment and Analysis of Subject Property + Report/Recommendation to Owner)
This includes both the financial and physical components.
The financial factors include: current rents versus market/full rents, current other income versus potential, the current operating expense load versus optimal and any “easy/near-term” added-value opportunities that could be implemented before sale.
The physical components would include all “lower cost” aesthetic items (paint, landscaping, minor repairs, signage, lighting (exterior), litter & debris (exterior) and all/most minor unit deficiencies (worn out floor coverings, failing appliances, paint, etc.).
More often than not (unless the owner is a full-time professional investor and active asset manager), there is a list of both “financial” and “physical” items that a prudent owner should address PRIOR to advertising on the open market. Furthermore, many of these items often can take months to correct/implement.
Continuing with our 30-unit example case study above, Realty Yield’s assessment and analysis has determined:
- Rents can easily be bumped to average $725 per unit, which equates to $261,000 in annual rent income (+$9,000 over current)
- New “other income” can be generated by charging for extra parking spaces (10 spaces x $25 monthly = $3,000 annually) and implementing a utility bill-back program to have tenants contribute to raising utility costs = $5,500 annually). Total increase estimated @ +$8,500 annually.
- Operating expenses can be reduced in the following areas:
- Utilities (garbage) by reducing number of receptacles from 3 to 2. Savings = -$1,800 annually
- Repairs & Maintenance by utilizing third party subcontractors versus property management company personnel. Savings = -$5,700 annually
- Minor physical deficiencies appear to negatively impact the number of drive-by inquires and application of quality new tenants. Additionally, existing tenant perception is that owner is not maintaining property adequately.
The financial ramifications of the above, to a selling owner, cannot be overstated. The projected increase in likely sale price by acting on the above is/was as follows:
- Projected rental income: $261,000
- Projected “other income”: $8,500
- Projected operating expenses: <$112,500>
- Projected NET OPERATING INCOME: $157,000 (up from $135,000)
Assuming the same market capitalization rate of 6.75%, this equates to a new/projected value of ~$2,325,925. Most owners would make the choice of waiting a few months before selling if this eye-opening analysis was simply communicated by a seller's adviser/listing broker.
Unfortunately, too many sellers don't get the benefit of an analysis such as the above before they decide to sell.
Step 2 (Pre-sale Strategy + Action Plan Including Timeline)
The reality is that initiating a rent bump, implementing a utility bill-back program, collecting parking space income, transitioning to third party R&M vendors and fixing a laundry list of repairs is going to take some period of time before the improved financial results are reflected on an operating statement.
Realty Yield will work with you to draft a written plan and timeline as well as participate in the execution and management of this process. We do it all the time.
I am not one of those brokers that will hurry you to market just to close a sale and make a commission. In fact, in many cases I strongly recommend just the opposite. Ask my clients directly -- they will confirm this is true.
Step 3 (Pricing and Preparation of Property Offering Memorandum)
In order to price a property properly we will compile a list of like-kind comparable sales, perform our own valuation analysis, review recent appraisals of similar properties, review current for-sale competition and factor any value-add/upside opportunities, which the subject property would afford a buyer.
Pricing should be done right from the get-go. We don’t "buy" listings; in other words we won’t tell you your property is worth more than it really is just to get a listing, then later ask you to lower the price because the “market has changed.”
You will get an honest opinion-of-value for your property from the beginning. We encourage sellers to think like buyers. If you wouldn’t buy your own property based on what is being presented, why would someone else? Again, top-of-market but realistic initial pricing is required if you want to work with us.
Realty Yield will then prepare the Offering Memorandum (marketing packages). Our marketing materials are the culmination of many years of experience in knowing what gets results for our sellers and what doesn’t. But again, don’t take our word for it. According to the analytics from LoopNet (the #1 commercial-investment real estate listing site on the Internet), our listings are consistently in the top 5% of most accessed (clicked-on). The numbers don’t lie.
Our materials work because we don’t rely on generic, regurgitated data points. The emphasis is on the numbers (likely investment returns for a new owner/buyer). After all, isn’t the bottom-line about making money? Yes, we also appropriately feature a representative sample of quality photos, rent comparables, sales comparables, market/sub-market and demographic information, maps, etc.
Our marketing packages are very focused on clearly differentiating your property (why a buyer should invest in it) supported by objective, compelling financial/investment return metrics.
All sellers should ask to see samples of a broker’s marketing materials before retaining them. I look forward to sharing mine with you. Contact Mike Carlson at Realty Yield to begin our discussion.
Step 4 (Marketing and Advertising)
There is no downside to maximizing exposure. Obviously, the more qualified prospective buyers the offering gets in front of, the better. We utilize all the following channels:
- Commercial property listing websites (LoopNet, Showcase/Co-Star, CIMLS, Commercial Source, VerticalEmail, RMLS, Apartments For Sale, more…)
- The broker community
- Outreach to principal owners of other investment real estate
- Current Realty Yield clients
- Mid-high net worth individuals reallocating capital from other asset classes
Step 5 (Putting a Deal Together)
Not all buyers/investors are created equal. Circumstances, motivation, buyer experience, and selling broker's expertise all factor in on “selecting” the right buyer. Our experience will pay big dividends here and all but eliminate false starts.
Negotiating/maintaining a final agreed upon sale price, which is at/close to the full listing price is much easier when the groundwork has been properly laid. Since we support our listings and pricing with objective, verifiable data, big price concessions are not something our clients/sellers have to deal with.
Having said that, negotiations are part of every deal. I have directly brokered more than $200,000,000 worth of investment real estate deals. There is no substitute for experience. I know all brokers/sales people say they are expert negotiators, but if you ask my clients they will confirm that claim with their real world results.
One other key added-value component we bring to our listing agent services is that we also broker commercial mortgages (the financing most buyers need/want). Deals fail for financing reasons more than anything else. This won’t happen with us. We know without a doubt what loans are available, what amounts can be borrowed and which buyers will be able to secure financing. In the many cases in which we end up doing the financing for the buyer, it turns out to be a win-win for everybody.
The bottom line is that our experience results in very few sale-fails once a property is put into contract.