To sell or not to sell?
Posted by markharrison on January 22, 2008
For some years, I’ve been an advocate of the “hold for life” method of property ownership, but a question I’m often asked is “why?”
Now clearly, there are some circumstances in which you’d need to sell – the classic being that you need a lot of cash for something else quickly, but what if you don’t need the cash?
Obviously, if you believe that the market will continue to rise, then it makes sense to hold.
The question is, really what do you do if you believe the market will decline?
One response is the one I’d always intended when I started out as a landlord – hold through the slump, don’t worry too much. It’ll all sort itself out.
Sure enough, even the slump of 1989-94 did so. Even those who bought at the peak in 1989 are still looking at properties worth far more than they were at that peak.
The advantages of holding
There are some big advantages of holding. The big two are costs and tax.
Buying or selling a property is expensive. If you’re selling, then you’re normally looking at about 1% of the price as estate agents fees (if you’re paying more, improve your negotiation technique, by the way!)… plus legal fees, and often the cost of carrying an empty property for a month or two (voids!)
As an aside – one handy tip – see whether your tenant would be interested in buying the property – if he or she is, then you can save the costs of voids, and estate agents fees, and your tenant will probably take it “as it is” thus saving you the costs of any refurb work you’d do to put it in top condition.
Selling a property also triggers tax – at least, it does if the property is worth more than you originally paid for it. (And unless you got caught buying off-plan in the last few years, it probably is.)
Capital gains tax starts at 40 per cent of the gain, but can come downwards. Obviously, you’ll need to pay it one day (if you sell), but it’s a tax that can be pushed 50 years into the future by a strategy of “hold for life” (touch wood.)
Aside: if you are selling, and want to work out the minimum tax you need to buy, have a look at the Tax Cafe product I used. For more info, click here
The advantages of selling
If you really, really, really believe that the market is going to crash, then have a look at the real costs.
On the one hand, you have the costs of selling. On the other you have the amount that the property might go down.
Now, the old mantra, buy low, sell high, is all very well, but property isn’t liquid.
That means that if you sell now, you won’t be able to buy that property back in a year’s time.
[More on liquidity in an article I wrote in October – the article is called “Below Market Value – Part I” and can be found here]
So, if you have a property that is particularly good for the area in terms of rentability, but wouldn’t particularly sell for a premium, then you may be setting up problems by selling.
What are these properties? Typically ones which you’ve refurbished to a high standard in “invisible” things aimed at reducing your long-term maintenance. No tenant cares that you’ve put in longer- lasting cabinet handles or will pay more, but the fact you don’t have to replace them every 5 years can help keep your long term costs down, since the cost of replacement is pretty much all in the labour, not the small difference in handle price.
But the advantage is clear if you believe that the market is going to go down 20% or more. In those circumstances, it would make sense to sell…
… and buy back at the bottom …
… of course, your belief that the market’s going to go down doesn’t make it true 🙂
A key point about a crash
One thing that many people miss about crashes (not just in property, but in all types of assets) is how crashes work.
The reason that estate agents hate crashes so much isn’t that they get smaller commissions – it’s that nothing moves.
Take my local estate agency – small office, two people there, typically selling 3-4 properties a week. When the 1989 crashed happened, then that figure went down to about 1 a month.
The reason that property crashed according to the figures wasn’t that everyone decided to sell for 20% less…. it was that one person sold for 20% less, and everyone else stayed put.
It’s only at the end of a crash that people start getting panicky, and sell out – at the end of a crash, when large numbers of properties start selling, that’s often a sign that the end is in sight, and it’s time to start buying again (if you can!)
The 1989 crash took almost 5 years – this isn’t like a stock market crash where markets can go down 40% in a day.
But during the so-called 1989 crash, it was actually quite hard to pick up bargains… because most vendors wouldn’t accept lower prices – they’d just stay still.
Of course, the techniques for finding motivated vendors have improved, but just because it’s easier to find the ones that are there, there’s no magic way of making more spring into life 🙂
So – Should you sell at the moment ?
Hard to say, really. Some people are selling – one person I know is selling his OWN HOUSE and moving into rented accomodation because he believes the market in his area will crash hard towards the end of 2008.
And that’s the key point – ignore averages – it’s the market in his area that’s important.
I’d look at one simple factor – how much has the market gone UP in 2007. The old saying, the bigger they are, the harder they fall is true – if the market round me had gone up 15% of more last year, I’d be nervous. Fortunately, around me, last year was pretty flat.
Tell me what you think
If you think I’ve got it wrong, or missed something important – let me know! Part of the reason I write this newsletter is for the feedback – which helps ME learn. I think it’s time that the feedback went public to benefit everyone, not just say in my inbox on Google Mail 🙂