Archive for the 'Selling A Duplex' Category
One of the questions I get most frequently from Minneapolis duplex sellers is whether or not they should have their property fully leased before making it available for sale. After all, wouldn’t it make sense for a buyer to not have the stress and worry of finding a tenant the moment they buy the property?
The answer is both yes and no.
On the one hand, if your property lends itself to an owner occupant, having it fully leased will prevent a buyer from moving in. How do you know if it’s that kind of duplex, triplex or fourplex? If you’ve lived there in the last decade, it’s most likely suited for an owner occupant.
Owner occupants typically are willing to pay more for a property than an investor, who is looking to maximize his or her return.
Most of those buyers use FHA, VA and American Dream financing. Those loans require the buyer to move in no later than 60 days after closing.
As these are the only loan programs available to buyers that do not require a 20 percent down payment. Leases follow the property. Therefore, if your duplex is fully occupied by tenants who have a valid lease for more than two months from closing, the buyer can’t move in, as they will be unable to obtain financing.
On the other hand, if your property has always been occupied by tenants, current and valid leases can help you net more for your duplex. However, it’s important to remember the amount of revenue your investment property generates is such a large part of its value, it is critical the amount of rent you’re charging is at or near market rates.
While none of us wants to see tenants leave as a result of rent increases, low rent locked into long term leases will result in your property selling for less. If you don’t want to contend with changing tenants, then it is best to leave them on a month to month basis.
This allows the new owner to raise rent after closing.
As of today, there are 209 active duplex, triplex and fourplex properties actively listed on the Minneapolis and St Paul MLS within the seven county metro area.
To put things in perspective, in the peak years of the market, there was at or above 1000 properties available for sale.
In other words, there is a severe shortage of investment properties available for buyers.
This shortage may be the result of several factors; high rents, low vacancy rates and the sudden, dramatic absence of distressed properties on the market.
In fact, for the week ending February 14, 2015, 100 percent of the 13 listed duplexes that either sold or whose sellers accepted offers did not involve negotiations with a bank whatsoever. This resulted in an average off-market list price of $210,823.
Last year, 16 properties went off the market during the same week. Just 62.5 percent of these belonged to traditional equity sellers. Oddly, the average sold price for these properties was $216,050; higher than this year’s pended price. It’s probably simply a result of the collection of properties that were available each week as opposed to an actual market reflection.
While the difference between the number of new listings coming on the mark was just one; 17 last year and 16 this, it’s interesting to note that 87.5 of this year’s are being sold by traditional sellers. Last year, 76.5 percent were, meaning banks were bigger contributors to inventory.
Over in the single family market, the number of New Listings was up 12.1 percent over last year. Pending sales were also up 15.6 percent. This meant the total amount of available inventory was down 3.7 percent.
If you’re thinking of selling, give me a call. You may not have a great deal of competition.
As the Minneapolis and St Paul duplex market heats up, some sellers may chose to be penny wise and pound foolish and sell their duplex themselves.
In a seller’s market, this appears as if it’s a smart idea. After all, if duplexes are in such high demand, some sellers think, why not save the commission?
On the surface, it seems like a prudent move. Six or seven percent of a sales price is a lot of money. And even if the seller pays a Realtor who brings a successful buyer, the seller still saves about 3 percent.
Here’s the irony. According to data from the National Association of Realtors, in 2014 the average For Sale By Owner property had an average sale price 13 percent lower than agent assisted home sales.
In 2014, the median sales price for a Realtor-assisted duplex sale on the local Multiple Listing Service (which includes the seven county metro area, as well as listings as far north as Duluth and south as Rochester and Mankato) was $168,000. In other words, half of the sold small investment properties sold for more, half for less.
Applying the same national statistic to our local market means, on average, duplex, triplex and four unit building sellers who chose not to employ the expertise of a Realtor realized a median sales price of $146,160. That figure is a whopping $21,840 less than the agent average.
Sure, that 13 percent includes a commission for both the listing agent and selling agent which probably totaled somewhere between 5 and 7 percent. However, as most For Sale By Owners are willing to pay a Realtor whose client buys the property somewhere around 3 percent of the sales price, the difference between selling on your own and with an agent is still 10 percent.
In other words, in an effort to save the 3 percent listing commission ($168,000 x .03) of $5040, the duplex owner who sold without an agent lost $16,800.
Sometimes trying to save a little really can end up costing a lot.
For the first time in years, many Minneapolis and St Paul duplex owners are asking themselves, “What are my tax consequences if I decide to sell?”
After all, an investment property’s increase in value may trigger capital gains tax, not to mention the challenge of depreciation recapture.
While everyone’s situation is different, and a consultation with your accountant is a critical step before selling, there are some basic options duplex sellers can take to help reduce potential tax obligations.
- Selling On A Contract For Deed (Land Contract) - In this case, the duplex seller basically acts as the bank for the buyer. Typically, the buyer gives the seller a down payment, who then carries the loan for a pre-determined amount of time (usually 2-5 years) at a higher interest rate than banks are charging. At the end of that time, the buyer agrees to refinance, paying the seller off in full. This helps duplex sellers spread their tax liability over several years and strategize on how best to reduce their tax obligations.
- 1031 or Starker Exchange - This allows for a property owner to sell one property and exchange it for another, provided the owner adheres to very specific and strict guidelines. The qualifying property may be another single family home or duplex, something larger, an oil well or the property owner may even exchange into something called an UPREIT, in which the owner joins forces with other investors, jointly owning other properties.
It’s important to note the duplex seller is only taxed on the cash they touch. Therefore, it’s crucial to know all of your options before you decide to sell.
Odds are you’ve seen a lot of headlines about “The Millenials” lately. And if you’re anything like me, you’ve wondered why they’re such a big deal.
Well, if you’re a Minneapolis or St. Paul duplex or rental property owner, they should be a very big deal. They’re about to change your cash flow.
According to an article in the Minneapolis StarTribune, they are the young adults born in the 1980′s and 1990′s, whose population in Hennepin County alone has risen almost 25 percent the last seven years.
The reason? One of the lowest unemployment rates in the nation.
Lured by the prospect of employment, these 20 and 30-somethings have helped drive Twin Cities rental vacancy rates down, and rent up nearly 40 percent over the same stretch.
High rents and low vacancy rates have made duplex and investment property owners who otherwise may have moved on reluctant to sell. This has in turn, caused low inventory levels in the duplex, triplex and fourplex market; at a time when low interest rates have inspired many to buy.
When high demand meets low supply, prices go up. It’s been the best possible scenario for rental property owners.
However, according to a number of economoists those tenants are about to become homebuyers. In fact, acfcording to Realtor.com’s 2015 Housing Forecast, 42 percent of millenials say they want to buy a home in the next five years. In other words, they’re expected to drive two-thirds of the housing activity over that span of time.
Until now, millenials have largely stayed away from buying due to economic pressures, tighter lending standards, and a general desire to postpone major life changes like marriage and families.
With millennial family growth rising and an improving economy, the forecast is for more of them to become homebuyers.
And what this means to duplex owners is a rise in vacancy rates, rent decreases, and changes in resale value.
In other words, the days of ever escalating rent may be coming to an end, and we may once again be headed for promotional give aways (first month free, free cable, etc.) to attract tenants.
If you’ve been even remotely thinking about selling your Minneapolis or St. Paul duplex, this should set off alarm bells in your head.
Right now, Twin Cities investment property sellers don’t have a lot of competition in the marketplace. That means duplex sellers are getting premium prices, because buyers don’t have many choices.
That means it’s a great time to sell.
Is the Realtor who tells you the highest price for your duplex the best agent for the job of selling it?
When it comes to getting a listing, some Realtors will tell you what you want to hear. They’s say your property is worth thousands of dollars more than the other agents, just to get the listing.
Then, when it sits on the market month after month, they will ask you for a price reduction. And by that time, the biggest wave of qualified buyers who are already in the market looking for property will have passed.
When it comes to selling your duplex, it’s important to remember Realtors do not determine the value of your property; the market does. A Realtor’s job is to help you interpret market data in order to price your duplex competitively.
That price will not be based on what you need or would like to have in your bank account after the sale is closed. It is based on comparable properties in your area that have recently sold.
Incidentally, these are the same sales an appraiser will use to substantiate or refute value when your buyer asks for a loan.
In other words, you and your Realtor are going to have to prove, scientifically, the property is worth what you think it is. And the only way to substantiate that is with data.
With news that the real estate market recovering, you may be considering selling your Minneapolis duplex in the spring.
And because you’re not the only one who’s heard the news, you’re likely facing a lot of competition. That’s because there are a whole lot of duplex owners who’ve been waiting to sell when the market got better.
In other words, you’re probably going to have competition.
So what can you do to make sure your duplex stands out and wins?
Of course, the most obvious answer would be to sell now. Fueled by a drop in interest rates, there are a lot of buyers currently in the marketplace who are frustrated by a lack of quality inventory.
If there’s absolutely no way for you to achieve that, however, then you should remember the spring housing market (in years when it isn’t 50 degrees below zero) starts the week after the Super Bowl.
By the time the grass is showing through the snow, everyone else will be ready to sell too.
So what can you do to get an edge now?
- Freshen up paint throughout the duplex.
- Purge the basement of any belongings either left behind by tenants or that you don’t need on a regular basis.
- If you can, increase rent where possible.
- If you renew any leases, be sure to include a clause that allows an owner occupant to take possession of a unit within 60 days of closing. This will ensure you don’t eliminate owner occupants from your pool of potential buyers.
- If you have any open permits with the city, get them closed.
- If it’s required in your community, get your Truth In Sale of Housing report completed. The inspector may find items that are required repairs, and your property will fare better if you’ve completed those items before it hits the market.
- Of course, it’s virtually impossible to do anything with the landscaping at this time of year, but you can make sure all walkways and the driveway are free of ice and snow.
And finally, give me a call for an opinion on what else you may be able to do in order to maximize the value of your duplex.
Chances are if you’re a Minneapolis or St Paul duplex owner who’s been wanting to sell once the market rebounded, recent good news has you thinking about doing just that.
And odds are if you’re like almost every duplex and homeowner I’ve ever met, you’re thinking about waiting until spring.
That’s a problem.
After all, if everyone’s thinking about it, won’t you have a lot of competition?
Right now, there’s little to none.
Last year, there were 128 new duplex, triplex and fourplex listings that came on the market in the month of October.
This year, there were just 91. That’s a 29 percent decline in new listings.
Meanwhile, falling interest rates once again have inspired many buyers to jump back in the market. Once again, they’re doing so and finding very little to buy.
There are a number of advantages to selling your duplex in the fall. The biggest, especially this year, are:
- Less Competition - with the number of active listings on the market dwindling, your property will stand out to buyers vs. being lost in the crowd.
- Buyers Are Serious - Think about it. If you’re out looking for property in the fall and winter, would it be fair to say you’re very determined to buy?
- Tax Advantages of Buying At Year’s End - Even if an investor closes on a duplex purchase on December 31, he or she may depreciate it for the entire year. If a buyer is looking for strategies to reduce tax obligations, real estate investment is one of her options.
- Less Competition May Mean Higher Prices - If there are 100 buyers looking for a great duplex, and only one on the market, wouldn’t those buyers do everything they could to secure it? Compare this to the spring and summer months, when buyers are lulled into a bit of complacency. After all, they believe another one will come along.
- If You’re Doing A 1031 Exchange, You’ll Have More To Choose From - time it right and you’ll close in the winter market, but be looking for your replacement property in the spring market.
- Properties Look Better During The Holidays - With the holidays being a time for gathering family and friends, tenants are more likely pick up and decorate. This creates a more favorable impression for buyers.
If you’re thinking of selling, please reach out to me. Not only do I have a long list of buyers waiting for your property to appear on the market, odds are so do a lot of other Realtors.
If you’re even kinda sorta thinking about selling your Minneapolis or St Paul duplex, I sure could use your help.
I currently have two sets of buyers facing rapidly approaching deadlines to buy a duplex.
The first, David and Gale, are empty nesters who are downsizing from the family home. They are looking for something with at least one three bedroom unit, or a two bedroom unit and either a mother-in-law apartment (non-conforming is ok) or a space they could finish. She works from home, and needs a space to set up shop.
They are looking anywhere from the western suburbs to Cathedral Hill. As they’ve had a more suburban lifestyle due to children, they are now seeking a more walkable location. They are not opposed to some work, but would prefer a property that’s had essential maintenance done.
While like everyone they would prefer to spend less, for the right property they’re willing to go to the mid $400′s. And yes, we’ve seen everything currently on the market.
My second buyer is a seasoned investor who is selling a portion of his portfolio in order to own properties a little closer to home. Home is the south metro, so anything from the Mississippi River to St. Louis Park will do. In the next six weeks he needs to find between four and eight replacement duplexes, triplexes or apartment buildings to do a 1031 exchange into.
You don’t have to be either completely ready or decided to sell. We can do a “One Time Showing Contract”, which means you’d sell if a specific individual wanted to buy your property at a pre-determined price. If that doesn’t happen, life goes on, just as it did before.
Call or email me at the number at the top right of the page. It could be the easiest property sale you’ve ever made!
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.