8 Step Process For Selling Your Apartment Community
You’ve acquired a new asset, completed your value-add business plan and have been distributing higher than projected returns to your satisfied investors – or if you’re just an apartment investor, to yourself – for the past few months.
You think your investors are satisfied now? Well, they are going to be ecstatic when they receive that massive distribution upon sale! So, when and how do you sell your apartment community?
One of your responsibilities as an asset manager is to evaluate the market in which your property is located on an ongoing basis. Once you’ve stabilized the asset, completing all of the value-add projects, estimate the property value at least a few times a year. Find the current market cap rate and, using the net operating income, calculate the value of the asset.
Even if your business plan is to sell in five years, don’t wait until then to evaluate your asset. You may be able to provide your investors with a sizable return if you sold, or refinanced, before the end of your initial business plan.
If you get to the end of your business plan and the market conditions are not such that you can sell the asset and meet your investors return expectations, don’t be afraid to hold onto the property longer.
When the market conditions are right, here is the 8-step process to sell your apartment community:
1 – Be Mindful of The Sale
As you are approaching the end of your business plan, or when you determine that it makes financial sense to sell earlier, be mindful of the sale. The value of the asset is dependent on the market cap rate (which is outside of your control) and the net operating income. In order to maximize the value, you want to maximize the net operating income, which means maximizing the income and minimizing the expenses.
Once you’ve made the decision to sell, don’t start certain projects if the payback period extends past the sale’s date. For example, if you plan on selling in three months, it doesn’t make sense to renovate a unit for $5,000 to get a $100 rental premium.
Consider spending a little bit more money on marketing to increase occupancy. Offer more concessions than you usually would to increase rental revenue. Pursue collections a little harder than usual.
Overall, look at your profit and loss statement and see which income and expense line items can be improved in the months prior to listing the asset for sale.
2 – Send Your Lender a Notification of Disposition
When you decide to sell, you will need to notify your lender. To do so, you need to send them an official notification of disposition. This is typically two months prior to listing the apartment for sale to the public. Work with your experienced attorney to draft the notification and send it to your lender.
Depending on the loan program you used, you may have a prepayment penalty. Keep that in mind when deciding to sell, because a large prepayment penalty will drastically reduce your sales proceeds.
3 – Request a Broker’s Opinion of Value
Based on your evaluations of the market, if you are confident that you can sell your apartment at the price you need in order to get the returns you want, the next step is to find a listing broker. It’s easy to write down a value that makes you happy, so you’ll want to get a relatively unbiased second opinion without having to shell out a few thousand dollars for a full appraisal.
You want to find a broker who is the best fit to sell the property. Loyalty is important in this business, so I recommend using the same broker who represented you when you purchased the asset. But, there might be reasons why you want to go with someone else. If that is the case, reach out to two or three of the best brokers in the market and ask them for a Broker’s Opinion of Value (BOV). Send them whatever information they request (T12, rent roll, etc.).
When you receive their opinion of value, ask them a few follow-up questions. You need to be confident that they can sell the property at that value. Ask them questions like:
- What valuation approach did you use?
- What types of buyers do you typically sell to? What size and price range do they invest in?
- Why do you feel confident that those buyers will purchase this asset at this price?
- Have you sold similar assets recently?
Based on the value and follow-up questions, select a broker to list the property.
4 – Start a Bidding War
Over the next six weeks or so, your broker is going to create the offering memorandum and market the apartment to the public to whip up a whole lot of interest. Interested parties will come visit the property and follow the same approach that you did when you purchased the property – talk to the property manager, tour units, inspect the exteriors, analyze rent comps, run the numbers, and submit an offer. The goal is for your broker to create a bidding war in order to push up the offer price and get you the highest offer price possible.
5 – Screen Out Newbies with a Best and Final Call
Once you stop accepting offers, you will review the submissions and have a best and final call with the top offer or offers to qualify the buyers.
You want to know about their track record, funding capabilities and proposed business plan to gauge their ability to close. Ideally, you sell to a sponsor with a large track record. You don’t want a newbie that has to back out of the deal during the due diligence phase because they cannot fund the deal, did poor underwriting, etc.
6 – Negotiate a Purchase Sales Agreement
Select the best offer and negotiate a purchase sales agreement (PSA). Have your experienced attorney draft a PSA. Don’t let the buyer draft the PSA, because you want to start the negotiation with terms closest to where you need them to be, and not the other way around. Send them the PSA for their attorney to review. You’ll likely go back and forth to negotiate the terms of the contract, with the end resulting hopefully being reflective of what was in their letter of intent.
This negotiation process typically takes about a week. Sometimes longer, but usually not shorter.
7 – Fulfill Obligations During Due Diligence
When the negotiations have concluded and both you and the buyer have signed the PSA, the due diligence period begins. The buyer will be required to adhere to the schedule agreed upon in the PSA (i.e. they have X number of days to perform due diligence, Y number of days close, etc.). And you owe them whatever it is you agreed to in the PSA (i.e. they can come to the property with 24 hours’ notice, they can look at your bank statements, financials, leases, marketing material, etc.).
Best case scenario is that nothing comes up during the due diligence period and you sell the property at the price and terms defined in the PSA. If something does come up, there may be additional negotiations back and forth with the seller on either the terms, purchase price or both.
Once the due diligence is completed, the buyer will work with the lender and title company to finalize things in preparation of closing.
8 – Close and Distribute Sales Proceeds
A few days prior to the officially closing date, you will sign the hundreds of execution documents. Then, on the day of closing, you will be wired the sales proceeds.
Distribute the sales proceeds to your investors according to what you and your investors agreed to. They will then go from satisfied to ecstatic and will be ready to start the process all over again!
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.