Selling your Multi-Family Property

Selling a Multi-Family (or single family rental) property requires some specific considerations and special handling.  There are a number of contingencies that allow a prospective purchaser to walk away from the deal and have their earnest money returned in full.  The main contingencies are:

• Buyers walk-thru
• Structural Inspection
• Books and Records Review
• Financing

To close a Real Estate transaction, each of the above tests must pass.  While occasionally the buyers walk-thru and structural inspection take place at the same time, most buyers want to perform a walk-thru prior to hiring an inspector.  It is important to remember that once a contract is entered into, it is really a ‘buyer’s option to purchase’.  Because of the number of contingencies, the seller is obligated to sell to the buyer if the conditions are satisfied, but the buyer can easily walk away.  Once this ‘option to purchase’ is agreed upon, the property is essentially off the market.  So in addition to passing or satisfying the various contingencies, we want to minimized the duration of time while these contingencies are being satisfied.

This process of inspections is often the biggest concern to most sellers of multi-family or investment property.  Disturbances to tenants, the risks to the landlord and often the personal relationship between the landlord and his tenants all can be strained.   Landlords do want to keep a good relationship with their tenants and do not want disturbances to cause vacancies.  Most properties are easier to sell and finance when fully occupied and should fetch a higher price.

So how do we deal with this first and foremost problem and what is our goal?

Minimize the number of inspections!

Ideally the first walk-thru will be the last, the prospect will end up being the buyer and the deal will close. So how do we accomplish this?

Truthful disclosure and proper pricing are important elements of the marketing plan. Any property will sell given the right price.  Nevertheless, if a property is competitively priced because it needs work, this fact should be disclosed up front to the buyer and his agent. Suppose we have a 4-plex that appears to be priced $60K below market but each unit needs $20k in upgrades.  While we may not specifically state the extent or monetary estimate of required repairs, we should make it clear that repairs are needed and hence the aggressive pricing.

Another method which is extremely helpful is for the listing agent to preview the interior of all units and to include interior photos and notes regarding each unit. While this is not always practical, it is one method to help ensure that only serious purchasers write offers. If the units are immaculate, it can also help to get a higher price!  I build custom web pages for my listings so that I can include as many photos, as much text and as many exhibits as necessary to create a successful marketing package. I want the buyer to see the inside before we disturb the tenants.

Pre-qualifying the purchaser prior to entering into a contract is another solid method to help minimize the disturbances to the occupants.   When I represent a seller, I insist on a pre-approval letter from a reputable lender.  With letter in hand, I make personal contact with the lender to verify that statements made are indeed truthful and how far the lender has taken the pre-approval process. Only after it appears that the purchaser will get funding, will I recommend entering into a contract.

Books and records review is a second contingency that can free a buyer to walk away.  A simple disapproval form is all that is needed.  Sellers should work to have these documents readily available for prospective purchasers.  A summary of the numbers is typically prepared by the agent as part of the marketing package.  For larger properties a detailed breakdown is often prepared.  The goals here are truthful disclosure and minimizing timeframes.  Truthful disclosure means that the marketing information should closely align with actual numbers that are reviewed by the buyer. We do not want to enter into a contract only to surprise the buyer with numbers that do not reflect the marketing material.  Because the clock starts ticking once the books and records are presented to the buyer, it is important to have a package prepared when the property is first placed on the market or shortly thereafter.  If the books and records review is 5 days, and it takes 7 days to get the materials together and present them to the buyer, the property is essentially off the market for 12 days!  We always want to minimize time off-market.  For specifics on typical books and records review see Preparing Books and Records.

The financing contingency is the toughest issue with the sale of most properties and it is one that the agents have the least control over.  Pre-approval letters from lenders are essentially meaningless.  Personal contact with the lender can help to substantiate the pre-approval however there are never any guarantees that funding will be provided.  There are a few key questions that can be asked of the lender to determine the efficacy of the pre-approval letter.

• Has a credit check been done
• Has employment been verified
• Have down payment funds been verified

Lenders do strive to maintain credibility and when they provide a pre-approval or pre-qualification letter, they should be striving to maintain their credibility (or at least attempting to preserve it).   Typically problems seem to be more prevalent under the following conditions:

• The buyer is offering a very low down payment
• The buyer’s lender is geographically remote from the property transaction

Both of these conditions raise red flags immediately.

Recent revisions in the financing addendum for residential purchase and sale contracts define specific time deadlines for reviewing the status of the loan application process and monitoring the results.  NWMLS form 22A contains specific provisions and timeframes for when the formal loan application must be completed, and when the seller can request updates on the status of the loan.  The revisions allow the seller to request that the financing contingency be waived or that the deal is terminated if it appears that progress towards final loan approval is not proceeding as expected.  Once again these provisions can help minimize the time-off-market if it appears that the purchasers financing is likely to fail.  If the buyer waives his financing contingency and fails to get the loan, the contract calls for forfeiture of earnest money.

A final concern regarding financing is the appraisal.  Financing contingencies contain a clause regarding appraisal less than sales price.  If a purchaser agrees to pay $600,000 for a property, but the lender appraises the value at $550,000, the purchaser is free to walk or re-negotiate the price. While there is some margin for error in both the Realtor’s estimate of value and the lender’s appraiser, pricing a property substantially beyond its value can result in a contract that fails because of an appraisal less than the selling price.  It is worth noting that when a buyer is well qualified financially and has a generous down payment, the appraisal is more likely to be at or above the selling price than a weak buyer with a low down payment.   The lender's assessment of risk is lower with a strong buyer and they are more likely to fund the loan.

Conclusion

It is important when marketing an investment property to provide truthful disclosures so that contracts are not entered into that fall apart due to contingencies that are deemed unsatisfactory by the purchaser.  It is equally important to consider the time-frames used on these contracts to minimize off-market time.  Purchase and sale contracts are for the most part ‘options to purchase’ and very much favor the buyer.   The timeframes for the various contingencies do overlap and one must think about the ‘net number of days’.  A 5 day inspection contingency with a 10 day books and records review is a 10 day option to buy.  The financing contingency helps to protect the seller from a long off-market time if it appears that funding will fail.

The listing agent should have 4 primary goals.

• Market the property so that the seller gets the highest possible price based on market conditions

• Only enter into contracts that are likely to close

• Make certain that the terms of the contract are favorable to the seller

• Monitor progress of the closing and advise the seller of problems

It is important to choose a knowledgeable and ethical agent who understands these goals and how to achieve them.   I hope that you found this information informative and consider calling me to represent your interests when selling your multi-family or investment property.