Do Buyouts Increase Purchase Price?
Tenant Buyouts aka "Cash for Keys" are common voluntary agreements entered into between landlord and tenants for landlords to get possession of rental units. Simply- the landlord pays the tenant to move out. Buyouts come up often when a landlord is contemplating or has listed a building for sale. I get asked, will buying out my tenants increase the value of my building? My answer- it depends.
If you are thinking of listing a property for sale a good first step would be to get a broker's opinion of value. If you have ever owned any real estate then you've likely had a broker call you every week since the day you took title. The next broker to call may get lucky . A broker takes a look at your rent rolls and operating statements, runs them against comparable sales and provides an opinion as to what the property would be worth, sometimes broken down into a per unit price. And they do it for free.
If your property is under performing and the rents are low it impacts the value and the sale would be a "Value Add" opportunity. You can check out my video here on what that typically means. Simply put, the buyer is going to have to roll up their sleeves to get the property to cash flow.
Now you might think if you buyout your tenants then it will increase the sales price or per unit price. To be honest, that is maybe. Buying out tenants and selling with vacancies benefits sellers the most when its for 5 or less units. The reason being, those deals are typically bought by owner users with conventional lending. So the vacancies benefit them a few ways: (1) the buyer can move in at close, (2) the remaining vacancies will be filled with market rent tenants vetted by the buyer, and (3) both of those makes the bank feel better.
For larger buildings the buyout undertaking may increase the sales price a little, but is offset by the expense (legal fees for a properly drafted agreement), the buyout money paid, and the uncertainty of tenants willing to enter the agreement. Then the net of the increase sales price minus the costs will then be subject to a broker commission, taxes and/or being accounted for on a 1031 exchange. So all that effort could maybe move the needle a few thousand dollars. Further, if you have too many vacancies the buyer's bank might take issue.
If after you get an idea what your property might fetch on the open market you may decide against selling. In that case, revisiting buyouts is worthwhile. Income property is a business of cash flow. Sometimes you have to reinvest some money to get it back.
If you are looking to improve cash flow and have the means to do so then you should take the time to craft a plan. Take a look at listings in the area and what those units look like and what amenities they offer. You can ask around if you know real estate agents, property managers or other owners what a unit rehab may cost and what upgrades are usually done.
After that step up your vetting game. Get educated on what the usual rental criteria is (likely listed on the vacancies you researched). You should check out any trade associations as they typically of a myriad of videos and forms on just about all aspects of real estate. Lastly, make sure you have a good lease.
A vacancy is as fresh start so to speak. It is why buyers love then and owners pay to get them. Make sure you do yourself the service and try to make the best of it. I have a few videos in the pipeline going over rehabbing, vetting and leasing that will be up throughout October on Youtube.
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The information in this post is for general information purposes only. Nothing on this post should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.