Posted by David Butler on January 15, 2010 at 15:03:48:
In Reply to: Cashing out a property... posted by Rick Shepard on January 14, 2010 at 13:11:53:
Hello Rick,
Congratulations on moving the property, and having the deal work out well so far. Always nice, and better in a market like this.
Couple of questions for you here. You indicate you SOLD the property to the occupant. Does that mean that the occupant has indeed actually exercised the option, and is now on title? If so, what are the rate and terms of the financing you are carrying for the current property owner/payor?
If that is not the case,
1) what is the nature of the current arrangement, and
2) what exactly is it that you want to sell?Two things to be aware of... in general. Note buyers prefer to purchase notes generating monthly cash flows.
Real estate investors prefer to purchase real estate generating cash flows and/or expected future appreciation, equity build-up, and tax sheltering effects.Each of these types of investors will have slightly different parameters as to what and how they want to structure a purchase offer.
In either event, whether selling a note, or selling the property - you will be selling at a discount. How much of a discount? That will depend on several factors, including what asset type you are selling (note or real estate) and the financial particulars of the deal. One issue in play here is that it is a relatively small dollar deal by today's standards, which generally, will lead to a steeper discount, simply for the fact of making the transaction worth the investor's time and effort. That of course, is a function of Investment Value, i.e. what a given investment is worth to a particular investor.
In my case, with a transaction this size, I would be looking at a minimum 50% discount, regardless of any yield calculation. I would also deduct estimated closing costs for both the front and back end, from the amount I would be willing to pay. Finally, I would factor in at least one year's property taxes and insurance costs, and deduct those from the offering price, as they will be costs to me in event of any default, and the deal is small enough where these costs would have a much higher negative impact on my cost ratios. These costs would be a bit higher if a property transaction is occurring, as opposed to a note transaction. Other investors might be willing to pay more, basing it simply on a yield rate calculation.
Things become a bit more complicated if you are trying to sell a property that is subject to an existing lease-option... for several reasons. Some of these reasons will be related to the specific language in the existing option agreement. An important factor may also be a psychological issue, in terms of what might occur with regard to the occupant's perspective, most particularly in relation to the discount being put into play. One way around this of course is to first check with the Payor to see what they would pay to cash you out today. In a well-written lease and/or option agreement (from the Payor's side of the deal), a first right-of-refusal is often included, making such an inquiry mandatory at the outset. But that's always a good place to start anyway, if for no other reason that if they can cash you out, they often will pay more than an investor.
With regard to suggestions... determine exactly what it is you are trying to sell, and put it into a clear and concise presentation that an investor can look at in 10 minutes or less to quickly determine whether they have an interest. Anything less results in make-believe deals, which subsequently only results in make-believe offers.
Have a preconceived notion of what you would like to receive for the asset being sold. Also have at the back of your mind, a realistic view point of what it might actually sell for (my input above gives you a relative view of what that price might be).
Then investigate through local investment groups, note brokers, real estate brokers, and classified ads (local throwaways like Pennysaver; local weeklies, especially those that have cross marketing agreements with other local weeklies in your county; and, if your budget can stand it, your local primary daily newspaper).
Again, the best way to get offers on what you are offering is to be perfectly clear on what you are selling, EXACTLY. Once you start getting some offers, you will quickly get some idea as to what the market value of your asset is. Of course, if all the offers are extremely close, that pretty much tells you what you need to know.
Hope that helps, and Happy Hunting!
David P. Butler
Nascent Equity &
Hotspur Investment