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Page 16 — Multifamily Properties Quarterly — November 2016
C onstruction of new apart-
ment buildings is leading
metro Denver’s building
boom, but many industry
experts believe the multi-
family market has reached its peak
and it may be time for apartment
owners to consider selling.
Despite the delivery of 2,971 new
units during the third quarter, the
vacancy rate declined to 5.1 per-
cent from 5.4 percent in the second
quarter. Average rents declined in
the third quarter for the first time
since 2013, dropping $3 to $1,368 a
month.
Today’s market conditions make
multifamily properties an attractive
purchase for investors, who set a
metro Denver record with apart-
ment sales of $4.1 billion sold dur-
ing 2015 and nearly $5.1 billion dur-
ing the first nine months of 2016.
If you’re considering selling your
apartment building, there are a few
things you should do to maximize
its value before listing the property.
Because most apartment buildings
that are sold are not new, these
comments are directed to owners of
older properties, mainly pre-1980s.
First, try to get a sense of who
your likely buyer will be – insti-
tutional, private capital, 1031
exchange, etc. This will help you
select your team of advisers and
prepare accordingly.
Thoroughly reviewing your profit
and loss statements and noting any
nonrecurring expenses is important
and can help a buyer (and lender)
understand the property’s opera-
tions. Failure to share these details
up front with a buyer usually will
end up caus-
ing issues down
the line with the
buyer as well as
the appraiser and
lender.
Next, check your
rent roll to ensure
it matches what
the leases actu-
ally say. Often,
the rent roll will
have lease expira-
tion dates, rent
rates and security
deposit amounts that don’t match
the actual leases. When a buyer
finds these errors during the due
diligence period, it may raise ques-
tions about what else is incorrect in
the information you provided. New
leases should support the pro forma
lease rates shown in the marketing
materials.
Even though investment real
estate is “all about the numbers,”
there is also an emotional compo-
nent to the process. Properties that
look nice sell for lower cap rates
(higher prices).
Before unveiling your property to
potential buyers, make sure it has
curb appeal. For every person who
calls me about a listing, there are
probably 10 who will simply drive
by the property. If the property
doesn’t look good from the street,
a potential buyer may not call and
the opportunity to showcase the
hidden potential of the building is
lost. Simple things like paint and
landscaping aren’t that expensive
but can make all the difference.
It’s also important to be aware
of any deferred maintenance. You
don’t want to find out about sig-
nificant issues during the buyer’s
inspection. A little money spent
on common area carpet and paint
can completely change the feel of a
property.
When it comes to the roof, be
proactive. Buyers’ roof inspectors
usually seem to conclude that the
roof needs to be replaced. Find a
reputable roof inspector to provide
you with a true assessment of the
roof before listing the property. You
may want to consider obtaining a
roof certification, roof warranty or
roof maintenance contract, which
can help streamline the inspection
process and minimize price nego-
tiations.
The same proactive approach
should be taken for the heating,
ventilation and air-conditioning
systems. Having these inspected
and repaired in advance can result
in more dollars to your bottom line.
Sewer lines sometimes are “out
of sight and out of mind” for sell-
ers, but buyers often will have
cameras run through them to look
for breaks. If the line has not been
cleaned out recently, the camera
may not be able to push through to
the main line, resulting in a frus-
trated buyer and a second inspec-
tion after the lines are cleaned –
often at the seller’s expense. Getting
sewer lines cleaned in advance is a
low-cost way to provide the buyer
with another example of how well
maintained the property is.
Your electrical system may be
working fine, but it is important to
determine in advance whether any
inspection issues are likely to arise.
For example, insurance companies
frown on some of the older electri-
cal panels, such as Federal Pacific
or Zinsco. These panels almost
certainly will be called out by the
buyer’s building inspector and may
make it difficult for the buyer to
obtain insurance on the property.
The same is true if ground fault cir-
cuit interrupters are not installed to
code. The cost to get your electrical
service up to par can be significant
and should be taken into consid-
eration when negotiating a selling
price.
It’s important to show potential
buyers everything about the prop-
erty up front, not just its positive
attributes. If you show a buyer only
the nicest units prior to going under
contract, you can be assured he will
push back on pricing after he had
completed the unit-by-unit inspec-
tion.
Any environmental, survey, title
or structural issues should be dealt
with, or at least fully understood,
before taking a property to market.
It can take time to address these
types of issues, which can easily be
deal killers. Taking these issues into
consideration will help set both the
buyer’s and seller’s expectations
correctly and avoid big problems
during the inspection period.
Spending a little time and money
up front to make sure your apart-
ment building shows well, has
accurate books and records, and
no surprise issues will ensure a
smooth process and a much higher
selling price.s
Jeff Johnson
Principal, Pinnacle
Real Estate
Advisors, Denver
Broker Insights