Continued from the previous post:
Paying taxes is the worst. It’s the biggest chunk of the owner’s proceeds that gets subtracted from the bottom line. That makes it an important topic to discuss.
We want to find out if they have had a conversation with the CPA. If not let’s refer them to our CPA. Even if we know they want to execute a 1031 exchange, it is still a good idea to meet with a CPA. And yes also guide them to the 1031 exchange company. When an owner cashes out partially or wholly, it’s imperative to meet with a tax pro. There are many factors that determine the payout to Uncle Sam. Such as: capital gain tax, Medicare tax, and depreciation recapture which are based on income brackets and a handful of other key components.
There’s another such professional we like to recommend our clients talk to. A unique company like Cash Flow Structure Group LLC can address this concern about paying taxes upfront on a sale. They schedule “structured sale” payments over time to minimize tax consequences in the event of a partial or total cash-out.
As you’ll find out it’s not so cookie-cutter. Every client has a unique situation.
The better you understand their motives and plan, the better you can serve them. After all you will be getting paid lot of money to service their commercial real estate needs. The average agent doesn’t go thru this extensive information gathering exercise even though it takes literally an extra 30 minutes to ask the questions, but it can make all the difference in the world.
If your seller expects to have a buyer in contract in 2 weeks and close 30 days later you want to know that! It may be near impossible to accomplish a sale in her time frame if she doesn’t understand the market velocity (time on market) for her property type. Use may need to reset expectations or show a way the timeline can be accomplished. It’s really important to have them make that decision.
For example say to her, “would you rather sell at the higher market value with an estimated close 6-10 months from now, or would you rather drop your price to accommodate for your accelerated timeline?”
Before meeting face to face, ask over the phone her ideal timeline for closing the deal. Now you cannot be surprised in the presentation.
We mentioned this in #6, but do they know what a 1031 exchange is? A structured sale? Is their thought correct?
I know many clients have a false perception of the fundamental points of the 1031 exchange. One common misconception lies with “like kind”. Many investors believe that like kind means if they want to sell an apartment complex, they have to buy another apartment complex. Retail for retail. Homes for homes. The truth is it’s incorrect, yet many people believe it to be correct.
Link kind for real estate means real estate for investment can be exchanged for real estate for investment. Therefor Apartments for Retail, Apartments for Office, Houses for Retail, etc. what is not applicable is investment house for personal residence. Not acceptable Real estate for investment bonds, mutual funds for real estate, or house for a plane.
A brief overview of a structured sale: A structured sale can be used as a 1031 backup contingency plan or a vehicle to receive a set or sets of installment payments over time from a property sale. In lieu or receiving all your net proceeds in one large payment (which affects your tax rate for the given year) you can say “I want $xx.00 every month for 5 years, then starting the 6th year to year 10 I want $yy.00 every month” the options are limited by ones imagination and net proceeds. This can keep taxes lower and still serve investor’s objectives.
Will the property receive the target price the way it sits? If not the price needs to be reduced or work needs to be done to achieve the desired sale price/timeline. But don’t assume they know the deficiencies in their property!
Always get feedback from them first on how they perceive the property. They could say the property is a dump and you would agree. But if they feel the property is in good shape or are emotionally attached when it doesn’t look so to you, saying the property is a dump is a horrible approach. Either way you want to know their perspective.
Do a drive by the property or get someone to drive-by and see what it really looks like. Google Maps can be deceiving if the map view is old or outdated. You want to know as much as possible prior to meeting. That way you can have realistic numbers ready to go and you’re not questioned. This builds on your perceived competence in their eyes, and thus translates into actual competence!
This is not only helpful for a valuation perspective, but also for attracting your ideal buyer and when the time comes for due diligence.
From the buyer’s perspective does the condition of the property match the market? If the market expects a turn-key listing, a run-down property may not appeal to the buyer pool. Upgrades may be necessary to get the market value out the asset. If you’ve sold homes before you know that the home gets a better value if walls have neutral paint, everything is clean, curb appeal check, personal photos removed, and the house staged and ready to present. Buyer perspective for commercial is similar. Albeit they probably aren’t planning on living there but looks are powerful motivators or detractors.
On a due diligence side we want to know if there are going to be major issues. Again, surprises are not welcome in our business. We want to know about any items that can sneak up on us later down the road and bite us. This could be physical attributes or even paperwork. For example one item that comes up commonly with smaller apartment buildings is the lease agreements, or rather the lack of lease agreements. You may want to get these tenants into a bonafide written lease prior to going on market. When that’s not possible, start gathering estoppel certificates. Verify the important details before they come back to haunt you.
So there you have it. 10 questions/topics to discuss and discover on your next listing presentation. Asking great questions is the most important thing you can do on a listing presentation, other than not picking your nose!
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