Though it may sound like a complex term, "disposition real estate" is just another way of saying liquidating real property. Whether doing it to scale your business or to increase the amount of cash you have on hand, this part of the investing process is inevitable.
We'll explain what real estate disposition is, how it works in the real estate industry, and what tips you can follow to ensure you can dispose of your asset as quickly as possible.
What is disposition in real estate?
In general, when you're talking about investing, disposition refers to the process of liquidating assets in order to have funds on hand. Typically, these funds are used either to fund another business venture or increase cash flow.
While you may have heard of the disposition of stocks or other assets, real estate disposition is no different. In this case, it refers to the process of selling (or disposing of) real property.
Real estate disposition is generally thought of as the last step in the process of investing in commercial real estate. Overall, it looks like this:
- Find your niche and market: Usually, a real estate investor will pick a niche, or property type, within the broader category of commercial real estate, such as retail shopping centers, office buildings, and apartments. However, you'll also want to pick a target market. While most investors stay within their local market, some have enjoyed the benefits of long-distance investing.
- Target the right investment opportunity: Once you've identified your target market and niche, the next step is to look for specific investment opportunities. Here, you'll want to search for available properties and then do your own due diligence when it comes to putting together pro forma projections and financial analysis.
- Follow through with real estate acquisition: After you've found an investment property that suits your needs, the next step is real estate acquisition. During this process, you will submit a letter of intent to the seller and, once all the points of negotiation are settled, you'll put everything in writing and proceed with the transaction, including acquiring financing.
- Manage the investment property: As soon as the loan has been funded, you'll be the proud owner of an investment property. During your ownership of the property, you'll be responsible for its upkeep and maintenance, as well as day-to-day operations. For some in the real estate industry, this step of the process warrants hiring a property management company. However, others like to stay more hands-on here.
- Liquidate your asset: Finally, when you're ready to unload your asset, that's where disposition comes in. Typically, you will be the seller and will work to find a buyer. If you're following a buy-and-hold strategy, it might be a long time before that happens. But, if you're following a fix-and-flip strategy, you'll likely be looking for a buyer sooner rather than later.
What are the different strategies for disposition?
Now that you have a better idea of how real estate transactions work when a commercial property is involved, the next step is to look at the different strategies for disposition. Generally, as an investor, you have three options available.
1. Sell the property in a traditional sale
For the most part, if your goal is to sell the property using traditional methods, you can expect to follow the steps outlined above fairly closely. In this case, you might hire a commercial broker, who will help you to determine the fair market value of the property and market it for sale. Notably, in this case, you'll be looking to work with a buyer who can get traditional financing from a bank or another financial institution.
2. Sell the property with owner financing
Another option: Sell the property using owner financing. In contrast to the way real estate assets typically are financed, an investor buying a property with owner financing doesn't rely on traditional financial institutions for a loan.
Instead, the seller acts as the lender in this scenario and allows the buyer to pay off the sale price of the home by making payments directly to them over time. If you're thinking of going this route, you'll still want to draw up a mortgage and a mortgage note to ensure the buyer is legally bound to fulfill their promise to pay you what you're owed.
3. Opt for a 1031 exchange
Once you've sold your initial investment property, if you're interested in deferring your tax liability, you can consider doing a 1031 exchange. This involves using the proceeds from the sale of your property to purchase a like-kind investment property. The theory behind this exchange is that since you won't actually receive any proceeds from the sale, there isn't any income to tax.
Keep in mind 1031 exchanges are subject to all kinds of rules and time frames. Just one example is that you'll only have 45 days to find your replacement property. If you're considering this route, talk to a local broker experienced with this kind of transaction.
Tips for disposing of a property as an investor
Typically, once investors get to the liquidating real property assets stage of the investment process, they want to dispose of these assets quickly. With that in mind, follow these tips to give yourself the best shot at finding an interested buyer right away.
Hire an experienced commercial broker
Unless you have your own broker's license, it might be a good idea to hire an experienced commercial broker to help with your disposition. They can help you take the temperature of your local market and decide on a fair sale price. They can also help you market the property to interested buyers and assist with any negotiation once you have an offer.
Have paperwork ready to go
Before you even put the property on the market, make sure you have all the transaction documents ready to go. In commercial real estate, it's considered standard procedure to provide a pro forma to any interested parties. If you have an existing tenant in the building or retail space, you will also need to provide a copy of the lease. Similarly, if there's an easement on the property, you'll want to provide that paperwork as well.
Respond quickly to any offers
Lastly, do your best to respond quickly to any offers. While it may be tempting to hold out in the hope a better offer might come in, playing hard to get with buyers very rarely works in the seller's favor. After all, there's a chance the interested party could decide to look elsewhere if you continually put off making a decision. And if your commercial real estate project is a joint venture, make sure all parties are available to have a decision-making meeting shortly after any letter of intent has been submitted.
The bottom line
Sooner or later, every property owner will want to liquidate an asset, whether it's to scale a business into something bigger or increase cash on hand. With that in mind, use this as your guide to how the disposition process works in commercial real estate. Armed with this knowledge, you should be able to decide what method of disposition makes the most sense for you.