Archive for the 'Selling A Duplex' Category
I’ve recently had to blow the dust off a conversation I used to have with Minneapolis and St Paul duplex sellers long ago.
The topic? Capital gains tax and depreciation recapture.
It’s a conversation I haven’t had since the market crashed in 2007.
Duplex owners, even those who owner occupy, must treat the rental portions of their properties like a business. As such, that portion of the building may be subject to taxes when the property is sold.
Is there a way around this?
Yes. Sellers may choose to do what’s known as a 1031 or Starker Exchange.
This allows you to trade the proceeds of your sale into another property. This may be another multifamily property, or it could also be something like farmland, or a single family rental property anywhere in the country.
Many people understand the principle of the exchange, but make the mistake of putting the proceeds of the sale in their bank account with the intention of buying something else with that money.
Unfortunately, doing an exchange that way is a taxable event.
In order to conform with the IRS’s guidelines, the money from the sale of your rental property must be placed in the hands of a qualified intermediary. That entity holds the money, then releases it to the title company where you close on the sale of your replacement property.
As you go through the process of preparing to put your duplex on the market, it’s as important to have a conversation with your tax professional as it is to have your leases in order.
Not doing so could cost you a lot of money.
When selling a duplex, Realtors are often asked to reduce the amount of commission we charge. And while a commission structure is always negotiable, the money you think you may be saving may actually cost you a lot.
When an agent takes a listing, almost half of the percentage she agrees to charge is usually shared with the Realtor and their brokerage who bring a buyer to the table. This commission is advertised on the Multiple Listing Service.
In other words, a reduced commission may result in that payout amount becoming less than what most of the other sellers are offering through their agents. And while that won’t usually be a deal breaker for buyer’s agents, they may choose to show your property after the one with more competitive compensation, or ask their buyers to pay the difference.
Often, in order for you property to remain competitive, your agent may choose to work for less than he’s willing to pay the buyer’s agent; which may mean he’s less likely to negotiate hard for you.
And quite often, he just met you. He agreed for his family to live on less within minutes of meeting a total stranger. This doesn’t speak well of his negotiating skills.
A reduced commission may also result in your Realtor cutting the amount of money he spends on marketing your property. The first place this usually happens is photography.
In today’s technology-driven world, recent National Association of Realtor’s studies show more than 90 percent of all buyers use the Internet to find property.
And the most important way to represent your duplex on the Internet is through photography.
Many discount agents use little more than their cell phone camera to communicate with all these prospective buyers. After all, hiring a professional photographer costs money.
This poor visual representation attracts fewer buyers. And we all know the more people you have who want to buy something, the more valuable it becomes.
Bad photos, also make it hard to create great-looking brochures and ads that entice the other 10 percent of the people in the market to come take a look at your property.
And of course, your Realtor won’t have money to spend on that advertising anyway.
As the saying goes, have you ever tried to save a little and had it end up costing you a lot?
By now, everybody knows it’s a great time to buy or sell a duplex.
That’s because interest rates are low and rents are high.
But what happens if interest rates rise even 1 percent, as they have over the last year?
Rates would still be very good. However, it’s important to remember one percent is the equivalent of several thousand dollars a year.
For example, on a $300,000 mortgage, payments would be $3000 higher for every year of the loan.
And for many duplex buyers, that amount is the difference between either an acceptable return on their investment, or affordability.
For duplex sellers, that means there may be less demand for their properties; for no other reason than people can no longer afford it.
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This morning, a duplex seller shared with me the “comps” another Realtor had given him for his duplex.
“Comps” are the comparable properties that have sold in the area in the last few months, which help establish the market value of the property.
In his cover letter, the Realtor suggested the seller compare the amount of finished square feet in each property to his own.
And in that note, he revealed how very little he knows about duplexes.
Duplexes are priced a couple of different ways. There are different methods because there are different kinds of duplexes.
Many duplexes always have been and always will be completely occupied by tenants. As such, their worth is dictated almost entirely by the amount of rent they generate every year, their expenses, and the remaining cash flow.
Other duplexes are one hundred percent owner occupied. Since the owner doesn’t usually pay rent, and often makes improvements to the property beyond the scope of what most landlords provide tenants, pricing is a bit more difficult and requires more art than science.
To determine the value of these properties, a Realtor will use a combined approach that includes both the amount of rent a tenant pays, and the ballpark value of single family homes that are comparable to the space in the property the owner occupies.
Neither of these valuation methods use the amount of square feet in a unit; except for how it contributes to the amount of rent the property generates.
In the case of my seller, calculating his duplex’s value according to the amount of square feet actually decreased his value by tens of thousands of dollars!
This again underscores the importance of hiring a Realtor who specializes in duplexes when it’s time to sell. Not doing so may cost you a fortune.
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If you want me to tell you what your duplex is worth, I will tell you the truth.
If you want a Realtor to tell you what you wish your duplex was worth, it isn’t me.
But there are plenty of agents who will.
The market determines the value of your duplex. Not you. Not me.
It isn’t worth the total of what you have in to it. Or what your friends tell you that you should be able to get based on what they’ve seen for sale in the neighborhood.
Single family home sales have little to nothing to do with duplex values.
And any Realtor who goes along with your hopes or friends opinions of value without market data to back it up is lying to you.
In the real estate industry, what they’re doing is called “buying a listing”. They’re telling you what you want to hear, knowing full well that at some point, you will finally realize through either a lack of showings or a sale that the property is simply overpriced.
And they hope at that point, you’ll see the light and agree to lower your price.
There wouldn’t be anything wrong with this if it weren’t for statistics from the National Association of Realtors that sellers who price their properties correctly from the start ultimately net more money thanks to immediate influx of buyers waiting for inventory to come on the market.
When a property is for sale for an abnormally long period of time, it leads buyers to believe there’s something wrong with it.
And, just like new technology at an electronics store, they will wait until it goes on sale to either look at it or buy it.
Ironically, had that new gadget come on the market near their price range to begin with, they would have looked at it and perhaps, even found a way to pay a little more. This is especially true if it was the only one on the market, with multiple buyers vying for it.
So, in the end, the Realtor who agreed to your price not only lacked integrity, but ultimately cost you money.
And wasn’t money the reason you listed with him in the first place?
If you’ve ever asked your Realtor to list your duplex for more than the market says it’s worth, you’ve asked her to lie.
We all have a price we’d like to get for our properties. And, as it’s human nature, most of the time that’s a number that’s much higher than other people would like to pay for it.
And what someone is willing to pay for it is what it’s actually worth; not how much we’d like to have for it, how much the neighbors say it’s worth, or how much you have in to the property.
Even if you happened to find a buyer who agrees the value of your duplex is much higher than data suggests, unless that person can pay cash, the property must appraise for the agreed upon value. An appraiser is hired by the bank to give them an independent, objective opinion of value, which is formulated by comparing your duplex to others in the area sold for.
Sometimes, Realtors will agree to list a property at a higher price just to get the listing. Their hope is somewhere down the line the seller will agree to lower the price so it can sell. In the real estate industry, this is called “buying a listing”.
And while it might make you feel good as a seller, it will not cause your property to sell. In fact, data from the National Association of Realtors indicates properties listed for too much money ultimately sell for less than they would have had they been priced correctly from the start.
Don’t worry. Properties rarely sell for less than what they’re worth. The market recognizes a great deal, and buyers will rush to a duplex they perceive as undervalued. As a result, the price rises to where it should have been all along.
If you’re a Minneapolis or St Paul duplex owner who wants to sell, chances are you’re thinking you’ll do so in the spring.
And yet, judging by the countless owner I’ve spoken with, everybody has the same strategy.
In Minnesota, while most of us consider spring to be the months of April and may, in real estate the spring housing market generally begins the week after the Super Bowl. In other words, Monday, February 3.
For the last year, the Twin Cities duplex market has suffered from an acute lack of inventory. Prices have risen largely due to two factors: low interest rates and abundant competition for the few properties on the market.
If interest rates rise, or, everyone who wants to sell their duplex lists it when the tulips bloom, there may actually be downward pressure on prices. After all, one of the most basic laws of economics is supply and demand.
If you’re thinking of selling your duplex, the best possible strategy to maximize value is to beat the competition to the market. And that means listing in February or early March.
If you’re considering selling, give me a call or send an email ([email protected]). I’d be happy to give you an opinion on value.
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You many not know this, but all homes and duplexes in Minnesota can have dangerous levels of Radon in them.
Radon comes from the soil. It is the result of natural decay and, since it’s a gas, can easily move into the air.
Radon is radioactive. As a result, long-term exposure can cause lung cancer. In fact, it is the leading cause of lung cancer in non-smokers. Estimates suggest it is responsible for approximately 21,000 deaths from lung cancer every year.
As a result, as of January 1, 2014, residential Minnesota real estate transactions are now required to include radon disclosures and education.
Prior to a sale, a seller must disclose in writing any knowledge he or she may have regarding radon in the building.
The disclosure must include:
- whether any radon tests have been done in the duplex
- the most current reports regarding radon concentrations in the property
- a description of any radon mitigation, remediation or concentrations
- information about any radon mitigation system if one has been installed in the building
- a radon warning statement
The age of your duplex has little to no impact on radon concentrations. It’s estimated that as many as 2 in 5 properties built before 2010 and 1 in 5 built since then have unacceptable levels of radon.
There are several kinds of radon tests available, which, in the event of a sale of the duplex, you should hire a Minnesota Department of Housing-listed professional for.
And if you have no interest in selling your home or duplex, there are over-the-counter tests available you can conduct yourself.
Radon is relatively inexpensive to mitigate compared to the emotional and financial costs of lung cancer. And it would probably be wise to know whether our homes or duplexes have put us or our tenants at risk.
Many investment property owners have the mistaken belief the holidays are a terrible time to sell a duplex.
Here are 10 reasons the holidays are actually a great time to sell:
- Properties tend to show better when they are decorated for the holidays. In fact, your tenants may have decorated and even picked up their units for family gatherings
- Winter buyers are more serious than their spring/summer counterparts. After all, if you didn’t absolutely have to be out in the snow and cold looking at property, would you be?
- Duplex, triplex and fourplex buyers get tremendous tax advantages buying at the end of the year.
- There is less inventory for buyers to chose from, therefore sellers have less competition.
- Less competition means higher prices.
- January is a big month for moving. With job transfers and school calendar breaks, many people focus on moving specifically in January, rather than over the course of a summer.
- When you sell your duplex over the winter, there will be more properties available to chose a replacement property from when the spring market begins.
- Your rental property is occupied. To investors, not having to find tenants over the winter may be a bonus.
- Showings can be restricted so as not to interfere with tenant’s family activities.
- Buyers can be more emotional over the holidays. While this may not be a factor if your property lends itself primarily to being 100 percent tenant occupied, it may be a significant one if your duplex is currently or is conducive to being owner occupied.
If you’ve been thinking about selling your duplex, but waiting until spring, thank carefully. Now might be the perfect time to beat the competition and net more for your property.
We’ve all heard of pent-up buyer demand.
It’s what economists talk about when economic conditions prevent consumers from buying what’s usually durable good due like a duplex, house, washer, dryer, or new car.
What we hear far less about is pent-up seller demand. And while most in the housing market use it in conjunction with home owners who would love to sell and buy something bigger, it’s a phenomenon I have begun to see in the duplex owner market as well.
Many Minneapolis and St Paul duplex owners purchased their investment properties seven or eight years ago. The market was at its peak, prices at a premium, and it seemed like values would go up forever.
Of course, that didn’t happen.
However, thanks to fewer people being able to qualify for mortgages, rental demand rose and so too did rents. This meant many properties that previously had negative cash flows were suddenly putting cash in their owners pockets every month.
This allowed many owners to hang on until values rose.
I actively prospect for both duplex sellers and buyers. If I had a dollar for every Twin Cities duplex owner who said in the last eight years they intended to “wait until the market came back” or to “ride this out”, I could retire.
I haven’t heard that as much the last six months.
You see, life has changed in the near decade since the boom busted; for all of us.
And what many duplex owners who were either single or newly married when they invested are telling me is that life is suddenly in the way of being a landlord.
Kids are in sports.
Work promotions mean more responsibility.
And aging parents require more care.
Time and again, I am hearing, “If I didn’t have to come to the closing table with money, I would sell now.” Or, “I plan to sell in the spring.”
A lot of people have been waiting it out; and many aren’t sure they can take much more. They just want to move on.
If you are a duplex owner who’s been considering selling, this should get your ears up. You are not alone, and if you “wait til spring”, you may have a lot of competition.
And when supply exceeds demand, prices decline.
What’s the solution?
Remember, the spring housing and duplex market begins the week after the Super Bowl. In other words, to beat the crowds, it may be wise to consider selling now.
Yes, duplexes sell in winter, and over the holidays. In fact, some of the most serious buyers of the year — who are buying due to job transfers, to lessen tax burdens, or because life has simply dictated a change — are oblivious to snow and the elements and actively shopping now.
For sellers, there’s less competition. And that’s always good for prices– meaning it’s a great time to sell.
I work during the winter too, so feel free to call or email so we can get you out before the post winter crowds.