Treatise on selling investments. [very long] - Posted by Ronald * Starr
Posted by Ronald * Starr on July 24, 2001 at 20:45:24:
You are asking perhaps the most difficult question in investing. “Do I sell out this investment now?”
People ask it when prices are going up and they worry that the bottom will drop out, so they are thinking of selling while the market is hot. People ask it when prices are going down and they want to preseve as much of the value as they can before it goes down still more.
I’m not sure I have an answer for you. But I will try to think out loud here and hope that I can do something that will benefit you.
I think one has to ask the question “what is my alternative?” What will you do with the money that you take out of the properties you sell? What are the prospects for the alternative(s)? And, what are the prospects for the real estate you are holding? How do those prospects compare?
Finding it hard to forecast the future? Welcome to cloudy crystal ball land. We all do. I like helping people, and I’d like to help you. I don’t have a very good handle on the future either. I do know that real estate markets cycle up and down, up an down. That is a given.
One way you might resolve this issue is to ask yourself “What is my investment strategy?” For instance, my strategy is to own until I die. So I would just sit on things. I might sell some specific property for some individual reason, but I would exchange that into some other property to hold forever.
If your strategy is to buy when the market is cold and sell when the market is hot, then you might want to be selling now. How do you know when to sell? Do you have some way to decide? Maybe when the price gets up to some percent of the purchase price? Or when the market seems to be “topping out?” Do you have indicators for that? See my discussion toward the end on that.
How will you feel if you sell out of something and then see the property go up in value later? Take your feelings into account. Of course, you also have to imagine how you will feel if you hold on to the properties and they drop down in price.
I bought some houses for appreciation and tax benefits, paying about market value and having big loans on them. Of course, I paid with properties which I had picked up at a discount at tax sales. The houses went up in value for a while and I enjoyed the tax benefits. Then the market went down. I just held on the properties, since my “exit strategy” is death and I was not dead yet. The properties were probably worth less than the loans against them. But they had break-even cash flow. The market did a strong turn around and the properties have gone up in value again. My strategy worked in an up and down market environment. “Hold until you drop.” That worked for me.
What is the benefit for which you bought the properties? Cash flow? Appreciation? Tax benefits? If the last, you should probably continue to hold them unless the tax benefits have gone away. Which, it sounds from your post, is not the case. If you bought for cash flow, how are you doing? If not too well, you might want to sell and get something with better cashflow. What is that? This is what I meant about the prospects for the investment and alternative investments.
If you bought for appreciation, was it “instant appreciation” or “forced appreciation?” You bought bargains or fixers which have been fixed? From your post, it sounds like this might be your approach. If that is your reason for buying the properties, it seems to me that you should have sold them as soon as you could when you had the appreciation in hand. You should not have held them long enough to be reaping the rewards of natural appreciation. But you have. Lucky you. If this was your aim, I would think selling right away makes a lot of sense. I could see, however, holding for awhile and carefully watching for signs of a peaking out of the market.
This would be watching the multiple listing service statistics. Looking for signs of lengthened days on market, building up of unsold inventory, selling for lower percents of asking price than previously, and more dropping of prices.
Some people sell a portion and hold a portion. Kind of trying to average their results, I guess you might say. You might try this, if you feel it would make you feel comfortable.
If you are in CA or have no personal liability on loans secured by the properties, you might refinance to pull as much money out of the properties as you can. Then, if they go up in value, no big deal. If they go down in value and you have no equity left, you get out of the properties as well as you can. Deed them to somebody who needs tax write-offs, or somebody who will be an owner occupant and appreciates getting in with little or no money down, or deed them to the lender. You will have perserved most of your equity in the cash you pulled out and you won’t have much to lose in the downturn.
Don’t try this with homes if you have personal liability.
Remember, most investors are wrong most of the time. This is the view of the contrarian investor. It is very difficult to be a contrarian investor, but it sounds as though you have some experience, buying when there were a lot of owners who were anxious to sell. Can you think things through carefully and figure out what the average investor or owner is doing now? Then figuring out what you should do to be a contrarian? There is at least one book on being a contrarian investor. You might want to look for other information on contrarian investing.
Well, I feel badly that I can not really give you a clearcut answer to your question. I just hope that what I have said will stimulate you to figure out something that works for you.
I think that the most important point is how you will feel in the future about what you do now. If you try to do what is the best for you, your “future self” will not be able to critize you too harshly. Nobody can see the future very well. As far as I know. If some can, I don’t know how to spot them. If you can spot them, follow them. And send me their names and telephone numbers.
Good Investing and Good Thinking*******Ron Starr********