Sometimes we, or our properties, fall into “the worst of times”, and our best option may be to sell. Let's briefly consider some of these unfortunate situations that may put us or our heirs in a position where selling our investment real estate is the best option.
You die. Your heirs want nothing to do with ownership or management. They want the money; estate taxes are due. In this situation, your properties are likely candidates for sale.
You become disabled and cannot operate the properties. You've established a transition plan, and your spouse, domestic partner, or some other capable person knows how to take over management of the properties. Your heir-apparent, however, wants nothing to do with the properties, and may choose to liquidate them. A second factor in the event of total disability concerns the kind of insurance you personally have. If you become disabled, hopefully you’ve purchased insurance to cover your personal expenses.
Health insurance helps defray the costs of medical care, long-term disability insurance replaces the income you receive from the occupation you actively perform, and long-term care insurance helps pay the high cost of nursing home care (about $60,000 per year in metropolitan Chicago at the time of this writing) or home health care. The financial burden of a disabling disease or injury could put you in the unfortunate position of having to sell your properties.
Property Valuation & Neighborhood Decline
You determine that your location is deteriorating and values are declining. You may recall, someone got angry at one of my tenants and burned down one of my Aurora properties. This thoughtless person could easily have killed ten people sleeping there at the time, plus killing or injuring the firefighters. I made a decision the next day to liquidate my property in that location over time, and re-deploy the monies to a better location.
The crime rate in Aurora bothered me, also. I'd had another situation there around six months earlier, where a local gang member got into a dispute with members of a rival gang and kicked in the kitchen door of an apartment in my building. He told my terrified tenants to duck, and then started firing shots at the other gang bangers. I had to replace the door and placate my tenants.
In my view, the location was getting worse, and I decided to sell and pay the long-term capital gains. The properties were profitable, but I didn't need the burden of worrying that someone in my building might meet a violent death. You should pay attention to your location.
Declining Cash Flows
Your property is losing money, and you see no hope for the future. Your best option is to sell. If you unfortunately find yourself in this position, be prepared to sell at a loss or at least a minimal gain. No one I know is such an angel that he or she goes out looking for “loser” properties to buy in order to fulfill his or her life's purpose of bailing out needy owners.
In this circumstance, you can only do the best you can. I know of owners who have sold free and clear buildings for a dollar. A friend’s dad owned a building in a deteriorating area in Chicago. One day an irate tenant complained about the lack of maintenance, and my friend’s dad told him if he thought he could do a better job running the property, he could have it for one dollar.
Sold American! The tenant lost the building about six months later; the negative cash flow ate up all the savings he had.
I would think twice about walking away from a building you cannot sell. If the property is foreclosed on by the lien holders, or is lost at a tax sale, this information will follow you whenever you try to get loans on new properties. With careful analysis, you won't be in a position of owning a permanent negative cash flow property.
Property Management Woes
You are tired of managing real estate and don't have confidence in management companies. Your way out of management is to liquidate as noted above, then sell and exchange into less management-intensive properties such as industrial properties or buying a Walgreen's.
Unfortunately, if you take the position, “I am tired of managing and must sell!”, you are putting yourself in a weak position. You may not get as high a price as you’d hoped for.
You are forced to sell for legal reasons. Regrettably, there are many such reasons:
- You declare bankruptcy and have to liquidate your assets.
- To settle a debt, you must liquidate an asset in order to raise money.
- You sell as part of a divorce settlement.
- Government building inspectors shut your building down, and you don't have the resources to bring the property into compliance.
- Foreclosure by your lender.
- Other legal reasons.
In the above situations, all you can do is to try to get the highest price you can. Under such circumstances, you sell, lick your wounds, and move on.
Business Partner Disputes
You don’t get along with your partners, so you sell to gain peace of mind.