CREJ - Multifamily Properties Quarterly - April 2015
Ah, the ritual of spring cleaning. 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 procedure with all that scrubbing and cleaning, but the results are favorable. Through the years we have talked to thousands of apartment owners who are contemplating either buying 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 apartment 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 reasonable 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 completing 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 resurfaced 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 standards, and the warranty is questionable. 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 contemplating selling and desire to make an improvement to a system, make sure it is well thought out. We suggest you receive multiple opinions from third-party vendors, and make sure any work has a strong warranty 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 competitive bidding in the marketplace, we suggest considering a strategy of keeping your property as a valueadd 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 leaving 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 heated marketplace, that might just be the case. If you are thinking of making 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.