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Page 20 — Multifamily Properties Quarterly — April 2015
A h, the ritual of spring clean-
ing. That desire to sweep
away the dirt on the floor
of your garage leftover from
several snowstorms of ice
melting off your car. It is time to
open all of the windows and let the
warm spring breeze freshen the
stale air in all the corners of our
homes. It also can be a dreaded pro-
cedure with all that scrubbing and
cleaning, but the results are favor-
able.
Through the years we have talked
to thousands of apartment owners
who are contemplating either buy-
ing or selling a property. We have
watched countless sellers pour
money into a spring cleaning of
their apartment community with
the thought that they are improving
value, only to realize later that they
actually might have stubbed their
toe a bit in their desire to attract
buyers. And yet other owners seem
to select a small item or two, clean
it up or improve it, and somehow
their effort magically maximizes
property value. So, here are a few
benchmark concepts that might be
worth contemplating in your spring
cleaning if you are gearing up to sell
your community.
The myth about rents. You actually
don’t need to raise all of your rents
prior to selling. Most sellers think
that since they are selling they need
to push up their rents. While apart-
ment value is definitely based on
a multiplier of rents, sometimes
implementing a new rent structure
prior to selling can
backfire on sellers.
For example, let’s
say most of your
leases are month-
to-month tenancy.
You seldom raised
rents because
you have owned
the property for
10-plus years and
you would like to
keep it full and not
be hassled with
vacancies. Now
you have made the decision to sell
but your rents seem low, so you
send out a moderate rent increase
and sign new one-year leases with
your residents. This seems reason-
able from a seller’s viewpoint, but
you actually may diminish the
excitement of the buyer by locking
in one-year leases. Many buyers
would rather have a clean slate by
keeping their options open with low
rents on month-to-month leases.
Interestingly, many buyers would
rather pay a lower capitalization
rate and have more latitude to chart
their own course relative to rents.
The myth about rehabs. The typical
rehab of yesterday is not the same
one that many buyers plan on com-
pleting today. Often the new buyer
wants to do a much fancier facelift
to the interior than the old owner
ever contemplated. Many sellers
perceive they are doing a great job
when a vacant unit is improved
with new carpet, paint and resur-
faced countertops
with epoxy paint.
However, some
buyers in today’s
market plan to
spend even more.
Frequently, buyers’
budgets include
full removal of
kitchen cabinets,
an upgrade to
granite or quartz
countertops, new
light fixtures, and
wood or vinyl floor
coverings, along
with several other improvements.
Often a new owner will tell us that
they would have preferred it if the
previous owner didn’t do anything
to the units prior to a sale.
It gets harder to predict what to
do about dated building systems
like boilers, roofs, windows, hot
water tanks, stair rails and parking
lots. We have had buyers get mad
when a seller replaced flat roofs
and selected a contractor that did
a marginal job, perhaps without
doing a full tear off, and the buyer
was left with a marginal roof and a
limited warranty. Many times after
a seller completes roof repairs or
replacement they fully expect to be
rewarded for their costly efforts. Yet
from the buyer’s perspective, they
may be upset that the roof was not
completed up to his higher stan-
dards, and the warranty is ques-
tionable. There are similar issues
with boilers – the seller might
want to do an 80 percent efficiency
system when the buyer prefers a
90 percent efficiency system. Our
general rule is if you are contem-
plating selling and desire to make
an improvement to a system, make
sure it is well thought out. We sug-
gest you receive multiple opinions
from third-party vendors, and make
sure any work has a strong war-
ranty that is transferable to a new
buyer.
Our team sells a lot of vintage
properties with long-term owners.
In the current market, the bulk of
investors and sources of purchase-
money debt still seek a value-add
story. With the current competi-
tive bidding in the marketplace, we
suggest considering a strategy of
keeping your property as a value-
add offering. With this storyline
on your asset, buyers will be able
to craft their own vision with your
community. It somehow sounds
counterintuitive for a seller to hear,
but it might pay to consider leav-
ing items on the table for the next
owner to complete. There are not
many times in life when you can
be rewarded for your lack of effort,
however, in today’s extremely heat-
ed marketplace, that might just be
the case. If you are thinking of mak-
ing improvements to position your
asset for a sale, talk to a seasoned
apartment broker prior to investing
your hard-earned funds. Your best
investment might be to leave the
spring cleaning to the next owner.s
Multifamily Maintenance
John Blackshire
Associate broker,
Transwestern,
Denver
TomWanberg
Senior vice
president,
Transwestern,
Denver