One of the truisms of investing is that you should always sell high — in other words, when the market is at its peak. With values for commercial properties approaching, and in some cases surpassing, “all time highs,” one might argue for aggressive selling. Not so fast! Pause, take a breath, and consider the following decision pathway:
1. A primary consideration should be “What will you do with the money from the sale?” In this market, virtually all asset classes are very expensive, and cash is yielding close to nothing. This leads to question #2…
2. If the current property is financially sound and producing a good return, why replace it for another? Unless…
3. If the current property is not performing well, no longer meets your objectives, has changed fundamentally, or has fulfilled the objectives for which it was purchased, it may be time to sell.
4. Are the potential buyer’s reasons for owning it greater than your reasons for selling it? If the buyer is more highly motivated — let’s say he owns the adjacent property and needs yours to execute a plan or an assemblage — and you have no compelling reason to sell, then you are likely to receive more than the property is really worth, based on reasonable underwriting.
5. Is the property “generic?” In other words, is it a basic commercial strip or is there something special about it or the location?
6. What are the tax implications? Sales of properties held for a long time and highly depreciated will result in considerable gain and tax. Tax deferred exchanges are helpful, but our experience is that investors overpay for the replacement properties and often take on additional risk. Sooner or later the tax will be due. Be wary of tenancy in commons in which you own an undivided interest with other investors. Fractional ownership diminishes value considerably
7. Are there alternatives to selling such as gifting to family members or non-profits?
8. What estate planning issues might come into play? Is the property easy to manage? Can your heirs handle that or do they want that responsibility? Is it time to just sell, pay the tax, and take the cash?
The temptation is to “just sell” in a market like this, but as you can see, there are factors that might make this the wrong thing to do and/or the wrong time to do it.