Selling in the Current Market
Looking at the state of the economic climate, it may seem daunting to sell during such volatile times. Several sellers still believe that their properties are worth what they were at the market’s peak, but history has proven that this is not the case. Owners who have been considering selling their property may find that the current market conditions offer a unique opportunity to sell their property at a price that buyers are willing to pay.
Looking Back in Time
According to historical data, it takes 10 to 18 years to reach the next peak of a real estate cycle, a pattern that has been observed for the past 44 years. For instance, real estate values peaked in 1979, 1989, 2007, and 2021. Following each peak, a gradual decline in real estate values occurred, lasting approximately five to six years before bottoming out, and then the market began a slow climb upward.
So what does this mean for sellers in 2023? Since peaking in 2021, real estate values have been on the downturn and will likely trend lower within the next few years. Property values will only continue to decrease before bottoming out, so now is the time to sell unless owners are willing to wait another 10 years to reach their prime price.
Making the Most Out of a 2023 Sale
Sellers must understand the state of the market and pivot their selling goals. Even in a downturn market, there are benefits in the deposition of one’s investment property or portfolio. There are many reasons why investors decide to sell; maybe it’s a partnership dispute, death in the family, or simply getting out of real estate ownership. Over the last 12 months, Matthews™ has identified the three reasons driving transactions in today’s market: (1) Repositioning Equity, (2) Eliminating Management Responsibilities, (3) Rising Interest Rates:
Repositioning Equity
A large percentage of owners have accumulated years and years of built-up equity in their real estate holdings. Many clients are sitting on a two to three percent return on their current equity, especially investors who have owned for a long time. This equity is trapped in their current investment property and is not working to an investor’s advantage. Through the deposition of their investment property and repositioning equity into other investment opportunities, one can drastically change their overall investment outlook. An investor can defer capital gains by doing a 1031 Exchange and repositioning equity into an asset which would increase their monthly cash flow.
Eliminate Management Responsibilities
Several real estate investment properties require an extensive amount of hands-on property management. Many owners have spent their real estate careers managing their investments and being very hands-on. After these investors get to the tail end of their real estate career and no longer want to handle the day-to-day operations, a decision will need to be made as to the future direction of this investment. Owners would rather not turn their investments over to a third-party management company to oversee the day-to-day operations as they suspect an increase in operational costs, resulting in a lower monthly cash flow. These owners have specific orders and can reinvest their equity through the sale of their assets into a less management opportunity. Several of these investments include but aren’t limited to single tenant triple net or double net lease investments throughout the country. Allows for owners to still have real estate ownership while eliminating management responsibilities. Many investors and low-cap rate-driven investments can utilize these investments to free up management as well as increase their cash flow.
Rising Interest Rates
Over the last year, the Federal Reserve has taken a hard stance on increasing interest rates to combat the current high inflationary period. This rise in interest rates has put a lot of pressure on current owners who have loans coming due. Many of these owners struggled to grow their rents and increase their net operating income during the pandemic. These same owners who borrowed at a very low-interest rate (3-3.5 percent) are now in a position where interest rates are 5.5-6.5 percent and don’t have the net operating income growth needed to get the correct loan dollars from a lender. These owners must either bring capital to the closing table or sell their assets. Through a sale, owners can reposition equity into another investment opportunity.
What Are You Waiting For?
Understanding the real estate cycle is crucial for any investor aiming for long-term success. The different stages of the cycle bring about significant shifts in the real estate market, necessitating investors to remain vigilant and responsive to take advantage of opportunities as they arise. Based on history, now may be the best price sellers can get for their property now.
