Selling real estate can be confusing, time-consuming and sometimes emotional. There are real dollars at play, so the stakes are high, but even so, it’s easy to overlook key considerations as you start the process.
Be sure to ask yourself these five critical questions before and in the middle of selling a real estate asset to smooth out the process and make sure you’re making a financially sound decision.
1. Why are you thinking about selling?
This is the most important item to consider. Be sure you have a good answer if you are heading down the path of selling a real estate holding.
- Is it because you need to provide liquidity for your financial situation?
- Is it because the holding has become difficult to manage or is becoming costly?
- Have you found a potentially better opportunity?
- Are you looking to simplify your overall financial picture?
- Are you one of the rare exceptions that have received an offer too good to pass up?
One or more of these may apply to your situation. In any case, you definitely need to have thought through these questions before you continue moving forward.
2. What are the tax consequences?
I can’t tell you how many times I’ve heard someone say, “Oh, I’m going to sell my property for $1 million” without having any idea what the tax consequences of that transaction may be or, more importantly, what – if any – proactive tax planning can be done to reduce and/or delay their tax liability. Is it best to sell and receive cash or do a 1031 exchange? Are there other tax planning strategies to consider?
This is why it is key that all of your financial professionals work together – whether it be your wealth advisor, your CPA, your attorney – to determine what is best for your situation.
3. Who are the potential buyers?
Once you have an idea on items No. 1 and 2, you need to spend some time thinking about who is going to purchase this property from you.
- Is it someone who is already a co-owner in the property with you?
- Is it a trusted partner or friend?
- Are you looking to sell to a family member?
- Or are you just looking for whatever party can provide the most value to you?
It’s important to think these things over, so you’re confident you’ve explored who all may be interested in your asset, rather than taking the first offer.
Don’t forget to consider a potential business partner or family dynamic at play in the scenario – is there anyone who would like “right of first refusal” before you sell the asset?
The answers to these questions sometimes get lost in the initial stages of selling real estate.
4. What are you going to do with the proceeds?
Often times, we get so focused on the transaction of the sale event that we don’t think about our situation after the fact.
- Will that money sit in the bank?
- Are you going to reinvest it in other real estate holdings?
- Are you going to use this sale as an opportunity to diversify your overall financial picture?
- Do you need the proceeds to provide you ongoing income, or are you more interested in long-term growth of the proceeds?
Your answer to these questions might be a combination of answers. That is OK. The key is that you have thought about your situation post-sale, so you’re prepared to take strategic action.
5. Have you communicated your plans with your family members, business partners or tenants?
This last consideration is often forgotten but, I believe, is paramount to an overall successful transaction. These people may be impacted by your decision currently or the future.
If you have tenants, have you communicated at an appropriate time what you’re doing and why, so they can make plans?
If you have people that do work for you on the asset, again have you communicated what your plans are and what potential impact it has on them?
Communicating your thoughts and decisions in regard to the sale of real estate helps to make the process an overall smoother transaction.
I hope considering these key questions before making your real estate decision provides greater benefits for you and your financial future.
To talk through these considerations with a financial advisor, click here to schedule an appointment.
