Prep building ahead of sale to maximize value

By Jeff Johnson, Colorado Real Estate Journal – November 2016 Multifamily Properties Quarterly

Construction of new apartment buildings is leading metro Denver’s building boom, but many industry experts believe the multifamily market has reached its peak and it may be time for apartment owners to consider selling.

Despite the delivery of 2,971 new units during the third quarter, the vacancy rate declined to 5.1 percent from 5.4 percent in the second quarter. Average rents declined in the third quarter for the first time since 2013, dropping $3 to $1,368 a month.

Today’s market conditions make multifamily properties an attractive purchase for investors, who set a metro Denver record with apartment sales of $4.1 billion sold during 2015 and nearly $5.1 billion during the first nine months of 2016.

If you’re considering selling your apartment building, there are a few things you should do to maximize its value before listing the property. Because most apartment buildings that are sold are not new, these comments are directed to owners of older properties, mainly pre-1980s.

First, try to get a sense of who your likely buyer will be – institutional, private capital, 1031 exchange, etc. This will help you select your team of advisers and prepare accordingly.

Thoroughly reviewing your profit and loss statements and noting any nonrecurring expenses is important and can help a buyer (and lender) understand the property’s operations. Failure to share these details up front with a buyer usually will end up causing issues down the line with the buyer as well as the appraiser and lender.

Next, check your rent roll to ensure it matches what the leases actually say. Often, the rent roll will have lease expiration dates, rent rates and security deposit amounts that don’t match the actual leases. When a buyer finds these errors during the due diligence period, it may raise questions about what else is incorrect in the information you provided. New leases should support the pro forma lease rates shown in the marketing materials.

Even though investment real estate is “all about the numbers,” there is also an emotional component to the process. Properties that look nice sell for lower cap rates (higher prices).

Before unveiling your property to potential buyers, make sure it has curb appeal. For every person who calls me about a listing, there are probably 10 who will simply drive by the property. If the property doesn’t look good from the street, a potential buyer may not call and the opportunity to showcase the hidden potential of the building is lost. Simple things like paint and landscaping aren’t that expensive but can make all the difference.

It’s also important to be aware of any deferred maintenance. You don’t want to find out about significant issues during the buyer’s inspection. A little money spent on common area carpet and paint can completely change the feel of a property.

When it comes to the roof, be proactive. Buyers’ roof inspectors usually seem to conclude that the roof needs to be replaced. Find a reputable roof inspector to provide you with a true assessment of the roof before listing the property. You may want to consider obtaining a roof certification, roof warranty or roof maintenance contract, which can help streamline the inspection process and minimize price negotiations.

The same proactive approach should be taken for the heating, ventilation and air-conditioning systems. Having these inspected and repaired in advance can result in more dollars to your bottom line.

Sewer lines sometimes are “out of sight and out of mind” for sellers, but buyers often will have cameras run through them to look for breaks. If the line has not been cleaned out recently, the camera may not be able to push through to the main line, resulting in a frustrated buyer and a second inspection after the lines are cleaned – often at the seller’s expense. Getting sewer lines cleaned in advance is a low-cost way to provide the buyer with another example of how well maintained the property is.

Your electrical system may be working fine, but it is important to determine in advance whether any inspection issues are likely to arise. For example, insurance companies frown on some of the older electrical panels, such as Federal Pacific or Zinsco. These panels almost certainly will be called out by the buyer’s building inspector and may make it difficult for the buyer to obtain insurance on the property. The same is true if ground fault circuit interrupters are not installed to code. The cost to get your electrical service up to par can be significant and should be taken into consideration when negotiating a selling price.

It’s important to show potential buyers everything about the property up front, not just its positive attributes. If you show a buyer only the nicest units prior to going under contract, you can be assured he will push back on pricing after he had completed the unit-by-unit inspection.

Any environmental, survey, title or structural issues should be dealt with, or at least fully understood, before taking a property to market. It can take time to address these types of issues, which can easily be deal killers. Taking these issues into consideration will help set both the buyer’s and seller’s expectations correctly and avoid big problems during the inspection period.

Spending a little time and money up front to make sure your apartment building shows well, has accurate books and records, and no surprise issues will ensure a smooth process and a much higher selling price.

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