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Many of the aspects of buying an income property are also important when selling one. One just views things from the other side of the transaction. We won't, in this lesson, try to deal with every issue from the other side because it should be obvious what the other side is of all issues discussed in the previous lessons, but we will discuss some of the more important ones.

Why Do It?

There are, in general, two possibilities. First, because you have to do it and second, because you want to do it. By "have to" we mean you need to sell because of health or some other reason that limits your ability to pick the market conditions in which to sell."Want to" covers all cases other than "have to" no matter what the reason, be it that you're tired of the business, want to retire with the freedom to travel, or want to utilize your equities to enjoy the lifestyle of the rich and famous. The major difference from "have to" is that you have more flexibility as to when you do it.

When To Do It

Like many other things in life, timing the disposal of your property is important. The time to dispose of property is when it's a seller's market, that is when the the demand is higher than the supply. Unfortunately, real estate investors must often dispose of property under less than ideal circumstances for reasons of health, divorce, or general financial condition. However, even when you "have to" dispose of property, following the correct procedures will help you realize the highest possible return.

How To Do It

You have several options regarding getting rid of a property. You can give it away, you can sell it, or you can trade (exchange) it. There are also two other ways. One is to stop paying your loan payment or your property taxes and have it taken away, but this option doesn't require instructions. The other is to die and leave it to your heirs, and, while no instruction is usually necessary for the dying part, proper estate planning is recommended.

Gift It

There are several reasons why you might consider giving it away. One would be to gift it to a family member or friend. Gifting to relatives or other individuals or entities (other than charities) can have an impact on overall estate planning Another would be to donate it to a charity. There are even ways to put a property into a charitable trust that allow you to retain control even as to future use long after your demise. All of these possibilities have tax consequences and require that you seek competence legal help. Timing of a gift can be important because the stepped up basis for the recipient is related to the value at the time that the gift is made. If gifting to a tax-exempt organization, timing has no tax consequence, but there could be other issues. LandlordAmerica's Buying & Selling Income Property e-Course has a discussion regarding charitable trusts.

Sell It

You can, of course sell the property, just as you can sell your personal residence. And, just as when selling your personal residence you want to maximize the sale price. However, selling income property is usually more complicated and can have significantly more tax consequences. Selling an income property involves many of the same issues as buying one, except from the other side of the fence, and having completed the previous lessons, you certainly realize that that buying can be a bit complicated. One of the most import tax consequences is that taxable gain will be based on sales price (less selling costs) less your basis at the time of sale. In other words you will pay tax on all the depreciation that you deducted during the years of ownership in addition to paying tax on the actual increased value. There are ways to somewhat cushion the tax blow, for example, by structuring the sale as an installment sale, but further details are a subject for a future e-course. Timing is obviously important for selling a property because you'd like to sell at the top of the market or at least not at the bottom. If in an increasing market, you might want to delay the sale if practical and add more dollars to your price, using that time to maximize rents and minimize expenses where ever possible.

Exchange It

Unless you want to get out of the landlord business, it will usually be advantageous to exchange your income property under Section 1031 of the Internal Revenue Code. The exchange also provides a means of trading your existing real estate portfolio for one that is less management intensive when you want to slow down, but not entirely retire from the rental business. While this is sometimes referred to as a "tax-free" exchange, it is in reality a "tax-deferred" exchange. The main advantage of a tax-deferred exchange is that it allows you trade up to larger property or higher quality property after your previous property has increased in equity in order to improve your leverage position, utilizing untaxed dollars to do so. As indicated by the word deferred, you will eventually have to pay the piper if you wish to cash out and retire from the landlord business. However, there are ways to cushion the blow, one being to die and leave it to your heirs.

Marketing

Many of same issues are important in selling the property as were important in buying it. Selecting an agent, maintaining control over the deal, setting the price, being careful about contingencies, etc. However, everything is from other side of the fence. If things are not to your advantage as the seller (maybe the buyer completed this e-course), try to change them in your counter offer. For example, try to get contingencies worded so that each one is approved if written disapproval is not given within the time period and make time periods as short as possible.

Using An Agent

Most of the same considerations, as were discussed in Lesson 3, apply when selling an income property as when buying one.

Selling It

Counter Offers

When you are selling your property it will be the buyer who will be writing the original contract terms and they will likely be written to his advantage. It is almost certain that no offer written by the buyer and/or his agent will be ready for the seller's signature. You should be particularly concerned about certain items and should try to change them to you own advantage or at least make them neutral. There are a number of general principles that you should follow when trying to modify contingencies in your counter offer.

• It is to the seller's advantage to that all contingencies are automatically approved if not disapproved in writing.
• As we recommended for you are the buyer, it is usually in your best interest as the seller to require the buyer bear the cost of inspections and then take that fact into account in deciding the minimum price your will accept. The reason for this is two-fold. First, it is usually better that the vendors to be hired as the agents of the buyer rather than of the seller for obvious reasons. Second, you want the buyer to be responsible for timely completion of inspections and not be at fault if a contingency is not met in a timely manner.
• Rather than wanting maximum time for contingency periods as you do as buyer, you want to be sure that the requested periods are not unreasonably long to avoid them being used to buy time for a non-performing buyer. If the buyer requests a time that is too short, that's his problem and you can always give him additional time if desired..
• To the degree possible, schedule inspections in order of importance relative to decision making in order to have the cancelled as soon as possible if there are problems.

Financing

Be sure that all specified terms including maximum interest rate, discount points, and other costs as well as the minimum number of years of the loan are realistic in terms of the current market, with room for probable changes.

Financial Records

The value of the property and the amount that a buyer will be willing to pay for it are entirely dependent upon the income and expenses so you should expect to provide sufficient financial documentation to enable the buyer to make his decision.

Lease Documentation

Provide good readable copies of all leases and other documents, including amendments, checklists, and house rules so that the buyer can provide copies to lenders rather than you having to make additional copies.

Physical Inspections

As stated elsewhere, you should have taken care of any deferred maintenance before putting the property on the market, so that physical inspections don't find serious defects that haven't been disclosed.

Survey

A boundary survey is seldom needed and if desired, should be buyer's responsibility and at his expense.

Environmental

Is the property in a super-fund site? If so, disclose it up-front and don't allow the fact to be a contingency.

Do you have a previous Phase One Report? If so, provide a copy and require the buyer to accept it without contingency.

For a residential property built before 1978, provide copies of executed lead-based paint disclosure forms for each tenant. Also, provide the buyer with the legally required lead paint pamphlet and disclosure form and any required related documentation.. This is in addition to providing him copies of the tenant-signed forms.

If you've had Radon testing and/or abatement done, provide the appropriate documentation.

Estoppel Certificates

Although it is for the buyer's benefit that estoppel certificates be required, they can also benefit the seller because they eliminate potential disputes by buyer or tenants as to rents, deposits, and other lease terms. You don't want a tenant arguing the terms of his lease or some other matter after close of escrow.

Other

Do not accept any contingencies that are impossible. For example, do not accept a contingency that all air conditioners be in operating condition when you know that some are not, unless you are prepared to repair them, in which case you should have done so before even putting the property on the market.

Escrow Length & Restrictions During Period

Be sure that the requested closing date is realistic based upon the time required to complete all contingencies including financing. Although you, as seller, want to close as soon as possible, it is extra hassle to grant extensions because the original date was unrealistic. You should not worry about restrictions regarding what you can do during the escrow period unless the buyer does. In the case he does, try to limit the restriction if possible, remembering that you don't want to limit your control more than necessary when there is never a guarantee that the deal will close.

Tenant Notification

Since you will want cooperation of tenants regarding buyer inspections and estoppel certificates, it is recommended that you notify tenants of the pending sale as soon as there is a fully executed purchase contract. You should explain that the buyer or his agent will be making inspections and thank them in advance for their cooperation. Keeping tenants in the loop and remaining on good terms with them may reduce the chance of them voicing complaints about the property to the buyer or his agent. Not only does this reduce the chance of defects becoming more important, but it also is best that the tenants appear to be happy.

Contingency Cooperation & Assistance

Although you might resent the need to assist in getting access for inspections, it is again to your advantage to cooperate and even assist in getting the contingencies out of the way as soon as possible and with the least amount of trouble. Again, your presence when the buyer or his agents are interfacing with tenants may reduce the chance of them voicing complaints about the property to the buyer. You might even want to be the one to get signatures on estopple certificates so that you can deal with any misunderstandings or disputes yourself rather than have the buyer or his agent involved.

Transfers & Terminations

Licenses, Permits & Taxes

Be sure that you inform the relevant governmental agencies that you have sold the property so that you don't end up being liable for the new owner's failure to pay fees or taxes.

Insurance

You will want to cancel insurance coverage after closing escrow. Pro-ration of insurance premiums are usually to the effective date of sale of the insured property rather than to the date when notice is given, so there is no reason to jump the gun and risk cancellation prior to the date of ownership transfer. Doing so could result in an uninsured loss resulting from either a physical loss or a liability claim because closing was delayed and the insurance agent didn't get the word that coverage needed to be continued beyond the previously scheduled closing date.

Utilities & Miscellaneous Services

While you don't want to discontinue utilities or other services prior to closing escrow, you do want to be sure to do so immediately thereafter. You should coordinate this with the buyer to avoid disruption of services to tenants and this issue might even be covered in your purchase contract. It's a good idea to follow up with phone calls after the discontinuance date to verify that it actually happened.

After Closing

Check the closing statement carefully. In particular check pro-rations of rents, property taxes, and interest and be sure that you are correctly debited for deposits and that the loan payoff amount is correct.

Send written notice to all tenants that escrow has closed and provide the name of the new owner and his address and phone number.

File the closing statement where you will be able to find it when it's time to prepare income tax returns for the year of sale.