NUTS & BOLTS
EXIT STRATEGY
Hold ’Em— or Fold ’Em?
HERE ARE SEVEN SIGNS IT COULD BE TIME FOR AN INVESTOR TO CUT HIS OR HER LOSSES.
by Teresa Bitler
EVEN THE MOST EXPERIENCED and successful investors occasionally purchase properties that lose money or hold on to properties when they should sell them. Since the ultimate goal of investing in real estate is to build wealth, knowing when to sell the properties that are no longer
sisted, but they would have lost even more money trying to make the deal work. “If it’s not there, it’s not there,” Chandler says. “Don’t throw good money after bad.” You can find yourself in the same position with renovations. If you find out it’s going to cost more to renovate a property than expected, the project may no longer make sense. Step back and evaluate it objectively. You may be better off selling for a small loss than taking a big hit further down the road. YOU’VE BOUGHT IN A BAD MARKET OR NEIGHBORHOOD. At some point, most investors buy into a bad neighborhood or market. For exam- ple, one highly successful investor I know once made the mistake of buying in Boise, Idaho, when she started investing in real estate. Boise had only one major employer at the time, which made finding good tenants difficult. Ultimately, she (or “that investor”) decided to cut her losses Chandler isn’t necessarily losing money on his rental units in the Wash- ington, D.C., metro area—in fact, they look good on paper—but he describes the neighborhood where they’re located as one you wouldn’t go into at night. (“There are bullets flying at night,” he explains.) As the leases come up on the worst of them, he is phasing them out in favor of other properties. “You shouldn’t own properties you are afraid to visit,” he says.
1 2 serving your best interests is critical. We’ve compiled seven scenarios where you’re probably better off cutting your losses on one property and moving on to the next. YOU’RE LOSING MONEY. Obviously, if you’re losing money, it’s time to sell, but it’s not always easy for investors to admit to themselves their property is on a downward trajectory. I’ve faced this situation several times myself. The rent covered the mortgage and other expenses for several of my properties, but frequent vacancies due to poor location put them in the red. As soon as I found reliable tenants, I told myself, the proper- ties would be good. I should have cut my losses and sold sooner.
4 after another. If he continued work on the property, he would have ended up spending more than he could sell the property for after renovations. “He decided to cut his losses and sell,” she says.
YOU REALIZE YOU’RE NOT A VERY GOOD LANDLORD. Not everyone is cut out to be a land- lord. Some people don’t have the time to show vacant properties. They don’t know how to thoroughly screen tenants or conduct a walk-through of the property. And once they have a tenant in place, they allow late payments because the tenant claims to be going through a tough time. Landlords like these usually lose money, so it’s obvious they should sell. “We buy from people like this all the time,” Chandler says. “They watch a late night infomercial or spend a lot of money for poor advice, and they get in over their heads. The numbers don’t work. The properties don’t cash-flow.” Davis sees this all the time, too. You need to treat investing in real estate like a business, he says, which means you have to be willing to serve a notice on the day the rent becomes late or evict if the tenant still doesn’t pay. If you can’t do that, you should sell and either find a different way to invest
3 Brian Davis, director of education with SparkRental, recommends trying to stay ahead of a market or neighbor- hood decline. If the market appears overinflated, for example, you risk a drop in property values and rent. Or, if there are high vacancy rates and stagnant growth, you may have trouble renting your property. Sell before the neighborhood or market turns. YOU FACE AN OVERWHELMING PROBLEM. After investing in real estate for a while, you learn to expect the unexpected, whether it’s a slab leak, damage caused by a tenant, or worse. Some problems are easy to address and others not. Some you simply can’t afford to fix without losing money on your investment. Tracey Hampson, a real estate agent at Century 21 Troop Real Estate in Valencia, California, had a client who got to that point. After starting a renovation, he found one problem
5 in real estate, such as a real estate investment trust, or get out of real estate altogether. You could always hire a property man- ager, according to broker Sep Niakan, who founded the Miami condo search portal CondoBlackBook.com, but even working with a property manager takes some effort. YOUR PERSONAL OR PROFESSION- AL LIFE IS SUFFERING. Chandler believes that in addition to the financial cost of investing in real estate, there’s also a personal price to pay, and if you can’t pay that price, it may be time to sell. He gives the example of an investor who talks his wife into investing in real estate because it’s going to make them rich. When the tenant suddenly moves out, the investor is forced to make the $1,000-per-month mortgage payment and take time off work to deal with the mess left behind. Now, both his wife and his boss are complaining. At some point, it becomes too much, according to Chan- dler. The investor has to walk away for the
While not uncommon, this scenario really boils down to whether it makes sense financially to continue with the project. Other times, Hampson says, the situation is so complex or overwhelm- ing, it’s simpler and more cost-effective to just sell. An agent friend of hers once rented to a tenant who turned out to be a hoarder. The mess was so bad, the agent decided to cut her losses by tear- ing the home down and selling the land. Hampson had another client whose tenants all complained of a “presence” in the house. The vacancies were so fre- quent that the client finally gave up and decided to sell. It’s not something that you’re likely to come across, but if you do, you can either face vacancy after vacancy or sell like her client did.
The principle can also apply to devel- opment and renovation projects as Brad Chandler, founder of Express Homebuy- ers USA, learned in 2005 when he and his business partner purchased a property in Arlington, Virginia. Initially, they were told they could demolish the existing building, subdivide the plot and build two houses in its place, but after financially committing, they learned they couldn’t subdivide after all. They could have per-
76 | think realty magazine may :: june 2017
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