Why Real Estate Property Owners Sell

The reasons why real estate property owners sell their owned property assets are far-ranging from distress to boredom.  Very often, the trigger point for listing income property for sale usually has little to do with the property itself and everything to do with ownership.  People often default to saying things like "we have to sell because" - (fill in blank space here).  Duress in real estate ownership falls into two primary categories; financial or operational.

Another default cause of selling is debt, the amount, terms, due date, reporting, and otherwise ongoing monotony of making a mortgage payment.  It makes people question who owns an asset; them or their bank.  Well, wasn't it ownership who selected that mortgage?

Mortgage Debt is the Number One Reason Why Real Estate Property Owners Sell

Mortgage debt is the number one reason people sell.  Every mortgage I have ever signed was not a life or death decision.  No one ever forced me to sign on for $X in debt.  Certainly, compulsion or feeling boxed in by the options can lead people to sign on for a mortgage that is not befitting their long-term objectives.  But they do it anyway. We are usually the one's talking ourselves into doing so - our own worst enemy - and offering ourselves plausible justification.

There is such a thing as too little debt.  With almost 40% of all single-family homes in the U.S being debt-free, the other side of the coin is that people still want to avoid a mortgage, they sell one free-and-clear property, and collect cash to purchase another property free-and-clear.

No debt or too little debt exposes an asset to thieves and grifters who seek out free-and-clear assets then attempt to place a mortgage on the property without the owner's knowledge. Talk to your attorney for methods to avoid this from happening to you.

Commercial debt, in terms of loan-to-value (LTV),  is lower now than a decade ago. At the tail end of the last recession, commercial real estate debt loan-to-value (LTV) was around 48%.  Now, it's closer to 40%, according to CBRE.

According to NCREIF, debt-to-market value is currently 41%, compared to an average of 48% in 2007. - CBRE

Commercial real estate investing is not a part-time business.  Sometimes people (owners) just get tired of the grind and decide to devote their time to other money-making endeavors.

Appreciation is a Gift and Not a Right

Price appreciation from inflation or rent growth (market-specific) is never a given.  Does that mean we never will?  Living through a downturn or two (as most of us have) gives people more appreciation for good times, even just stable times.

Another reason real estate property owners sell is when the national unemployment rate remains consistently high as this directly impacts collections and occupancy.  We sometimes forget that a high unemployment rate still means that nine out of ten people continue to be employed.   This fact brings no joy to real estate rental property owners accustom to 95% occupancy, now struggling to maintain 85% occupancy, notably if your mortgage and debt service is pegged to 95% occupancy to reach operational break-even.

Why real estate property owners sell financial or operational burnout, sometimes the seller is spurred by just not wanting to do it anymore, that daily grind of having the responsibility of running the business.  Sometimes selling is an economic imperative.  Then there's age, the age of the owners, or the age of the income property; there is just more work than energy, or money, to do it.

Here are four reasons why real estate property owners sell:

  • Distressed property
  • Distressed ownership
  • Both - distressed property and ownership
  • Neither- distressed property or ownership

In many instances, the reason people sell their income property has nothing to do with the property itself.  The death of a single owner within a group can be the trigger point for why real estate property owners list a  property for sale.  Again, this has nothing to do with the quality of assets or its operations; something has changed with ownership, and, this change is impacting the property's disposition.

In a distressed market, everyone wants to know the reason for selling, like knowing this information is the holy grail.  It is not.   This information is just one factor in the "buyer" decision-making process.  Note that most of the time, the information provided is for purposes of motivating the buyer.  Caveat Emptor rules!

Consider the psychological aspects of investing in the stock market.  Do investors buy or sell strictly based on the financial standing of a particular stock?  No- the nuance of information that surfaces about shares of stock can sometimes have more impact on value than reported numbers.  The same is true for multifamily assets.

Here is my key point:  the reason why real estate property owner sells has nothing whatsoever to do with why a buyer is buys.   This statement excludes any reference to "yes but."  There is no replacement for serious due diligence on the part of the buyer.   Serious due diligence considers the reason the seller is selling from the perspective of the buyer.  Why this is so hard to do, I don't know.

Example: GM Files for Bankruptcy.  Does that mean you make a run on the nearest GM dealership?  The same applies to sellers of real estate assets.  Just because a seller is distressed doesn't mean they are giving away the store.

More to the point:  Does GM's bankruptcy have anything to do with your need for a new vehicle?  Being in the market to acquire real estate assets has nothing to do with the motivations of a given seller.

Question:  if you know the reason the seller is selling- so what?  There are 123 other people with the same information.  This information is a single inflection point within the entire buying process.

Reading the tea leaves of why real estate property owners sell might be a fun hobby,  but there is seldom a single reason for selling.   Remember, at some price; you can buy anything.  The question is: then what?  (exploring buyer motivation is for a different post).

Granted, there are occasions where the speed of action is necessary based on the needs of the seller.  More importantly, it should be your due diligence cadence that drives a buying decision- not the needs or desires of the seller.  Remember, after closing, they go home, never to call or talk to your team again.

When it comes to determining why real estate owners sell, try to refrain from devoting time to conspiracy theories.  In the light of day and with proper due diligence, a buyer can identify outstanding litigation that would cloud title or overt issues undisclosed by an unscrupulous seller.

Reminder: there are no short cuts to quality due diligence and never a reason to close a deal without title insurance.  Most people are pretty straight forward.  This doesn’t mean they desire to share their deepest thoughts on the matter of why they are selling with you.

There are many reasons why real estate property owners sell.  For buyers, the focus should be on the reasoning behind the buying decision.

John Wilhoit is the author of the best selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW's Podcast here.

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