Cashing In - How To Sell A Property

The bit that no one talks about

Given that you make most of your money from capital growth rather than net rental income, it’s bizzare that property experts rarely talk about the art of selling a property - why is that?

Uncharitably, you would say this is because most on-line property gurus are trying to marshal us all towards their sales funnel: a course or mentorship that you must complete before buying a property they recommend. By the time you come to sell the property that you were coached into buying you will be older, wiser and likely remember how you wasted your money at the start with a course, mentorship or property tip and do not want to repeat the mistake. We are in a privileged position in this blog, there’s nothing to sell or buy here. You have no idea who I even am. We can just talk about what I consider to be of most value. Today, that is how to sell a property.

Luckily there’s a section of the property industry that think about selling like their business depends on it, because it does. Property developers and housebuilders derive their only cashflow from selling. They are unable to plan the time of a sale and therefore take the most risks with moves in the market which could enrich or bankrupt them. Whilst their timescales can be shorter than ours as investors, typically they plant their money for only 1-3 years in a project, should we be looking at what they do and copying them? Our timescale for a successful property investment is more like a 5-8 year hold, that really is not that much different after all.

Let’s get into the mindset of a developer and see if we can learn from how they plan a sale, a process that begins even before you buy it.

Step 1 - Determine The Future Value

Property developers and builders try to guess the value of their projects once they are finished and put to the market. For the big house builders this becomes something of a science and they bank huge plots of land ready to release at the optimum point. For the smaller developers, this is more a flip of the coin. The smaller guys get permission on a site, get a funding line in place and hope for the best. Eventually the coin flips do not work out which is why so many smaller developers go broke within one property cycle.

As investors we have somewhat of an advantage here, we do not have large land banks but actual banks with money ready to deploy. Should we do as the big house builders and plan the future value of an investment when we should sell it? Mindfully or not, every time you buy an asset like an investment property you are doing just that and making a call on its future value at some point. You are judging that the value gain will be higher for this property than one in another street, city or region or indeed an asset in a different class all together. After all, that’s why you are buying this exact property at this exact time, it will in your judgement perform the best of all the options available to you. Every time you buy a property you are estimating the future value using some logic and also guessing roughly at what point you would crystallise that gain. This is why you are buying it after all - why else would you buy any asset?

This next bit seems such an obvious point seeing as we are all making a call on the future price of the property before we buy it. Why doesn’t any investor I have ever met take a minute to write that future estimated value down somewhere, just to remind them of why they bought it in the first place and of course the point at which they will sell it? I have come to the conclusion that this is because the process of objectively coming up with a future value and a narrative around why it will reach that price requires a degree of thought and travel to different locations to ensure you are hunting in the right area and making the very best deal. Far easier just to buy a property on the basis of a hunch or gut feeling, most likely one that happens to be near where you live and hope for the best. A bit like the coin flip of the small developer. As serious investors, we need to take a leaf out of the big housebuilder’s book and think about the sales price right at the start and let this drive the investment hold period and time of disposal.

Live Example

At this point I think we need a live example and let’s choose Newcastle as a location we recently highlighted being interesting for investment. Newcastle is not a market I know well but a quick desktop search gives this option:

Newcastle Centre - 3 Bed - £180,000

With a rental prospect of around £1,100 - £1250 pcm this freehold property will give a reasonable gross yield of 8.7% if negotiated to £165,000.

Before zeroing down on just this property to buy, you would look at other locations in UK to determine if this yield offers good value for the quality of property. Let’s assume it does. You would then look to other asset classes to see if higher returns are possible. Currently, the stock market is very volatile but we could plant our funds in a money market fund for example to get around 4%. The net yield in Newcastle should still be comfortably above this and leverage will be available at 75% LTV so it still looks good. We could look further afield to other asset classes or international property but for the sake of this exercise let’s be happy with Newcastle.

Finally, we need to set a sales target price for this property. This usually requires a bit of detailed knowledge of the area but just from the desktop research we can look at price per sqm of sales in this area over the last 20 years. The area seems to still be around the levels reached at the 2007 GFC level, this property actually last sold in 2007 for exactly £180,000 (ie it looks like the owner of 18 years just wants their money back). With rents and wages so much higher now than in 2007 there does seem to be scope for this property to catch up and experience at least some of the growth seen in the rest of the UK since 2007 (around 60%). With some more research you could assert that this property could reach around £300,000 within a 5-8 year time-frame. This would require a catch up with the rest of the country and should be supported by a gradual increase in wages and rent levels over that period. This is the figure we would then commit to paper and review frequently as the hold period progresses.

So, that’s step 1 complete and we have a property in the portfolio - what next in selling a property?

Step 2 - Manage the Property

We can’t copy the developers here because they don’t have this faff. The period you hold a property is just a nuisance really, in an ideal world you would just buy a property, wrap it in cling film for a period of time then unwrap it when it is time to sell. After all, this is what you effectively do with other assets like stocks, bonds and gold. In the case of gold, this asset is literally dug up somewhere, weighed, sold to you and then you bury it again in your back garden. Genius. Sadly property is different and this is the worst part of investing in this asset.

The main snag is that owning a property is expensive, there’s maintenance and a mortgage to pay while we wait for our pay day. However for this problem we of course recruit the services of a tenant. They move in, hopefully look after the place and will cheerfully cover all our costs and with luck some extra every month. Tenants truly are the unsung heroes in the story. But even in this management phase of the investment, there are still activities we can do with the eventual sale in mind.

Refurbishments

Plan upgrades like kitchen and bathroom refurbishments as your investment hold period goes on. These upgrades could be done 3 years or so before you put the place up for sale and will ensure you get the best rents for this final period of your hold and they will still look good when you put it on the sales market. In the best case, the refurbishment can be done around a current tenant, perhaps when they are on holiday, so not during a void period.

Entering the Sales Funnel

It’s usually a bad idea to sell with a sitting tenant, the place may not look its best and you tend to only get interest from other investors who will want a bargain. Best is to present the property vacant and looking its best. This can be expensive of course as a sale may take 6-8 months to all go through and that is a long void period. Additionally, the Renter’s Rights Bill means that it will take longer to get possession of a property and you cannot re-let it or even put on Airbnb for 12 months if you fail to sell it. The best approach is to decide every time that a tenancy is coming to a natural end if you are likely to hit your sales figure in the next 1-2 years. If so, and the property is suited to it, put the property on a short term use like Airbnb or monthly lets. This will give you control over voiding the property to allow for sales viewings when the time comes, ensure the property looks its very best to potential buyers and gives you an income during the sale period. Having an income also will reduce the temptation to take a low offer from a buyer just to get it away.

Step 3 - Actually Selling The Property

At last, the end of the annoying renting out the property bit and time to make some proper money. This was the whole point of the investment, time to cash in. Your property value is coming within range of the target disposal value you set right back at the start and you need to get your skates on. Values have been going up in your area but this process takes time and you don’t want to miss the boat. If we stick to the Newcastle example above, we would be monitoring comparable sales on Rightmove and checking the valuation with tools like Bricks and Logic on a monthly basis. We set a sales figure of £300,000 so when the sales values of comparables got above say £250,000 we would be paying very close attention and ensuring that the property can be offered without a tenant in situ, perhaps short or monthly let and hopefully the mortgage finance does not have too steep a redemption figure.

Once you get as near to your sales figure as you dare and feel market conditions are sufficiently good then it is time to put on the market. I always judge a good time as it being very likely that we will get competing offers in a short-ish marketing period (4-6 weeks). You can get a feel for this likelihood from speaking with estate agents or actually booking a viewing yourself on a similar property and judging demand. If you are part of a block viewing and there are 10 of you lined up to shuffle around the property then this is a great sign.

Finally, it is just down to you to choose how to market. There are various sites that give performance data for estate agents in your area like Get Agent. With these sites you get information such as commission levels, average time they take to STTC etc. When it comes to agents valuations, they often quote a higher price to get your business so avoid that by fully researching the local market for recent sales comparators and ask them to set your own price level to avoid your property sticking on the market.

We have experience in agency so often go down the DIY route to get on Rightmove, with site like Visum getting you exposure from around £80 per month and we do the viewings and negotiation. This takes time and a degree of expertise, but by doing so we get more control over the process and increase the chances of a sale actually completing.

The best bit of selling the property is seeing that ‘telephone number’ sum of money land in your account. This is your pay day and recognition of the work you did to get a deposit together, do all the research and take the risk that you did. The painful bit is the HMRC now take their slice of capital gains tax within 30 days of the sale (24% for higher-rate tax payers) but the rest is yours to replant within new assets with more growth potential.