Thought exercise - Sell a property IF I'm offered great price?

Question

Thought exercise here.As you can see in my other post, I was inquiring about commissions worked for leasing a commercial property.  We've had some inquiries about renting, but surprisingly we've gotten more inquiries about selling the property.  In this particular area, there aren't a lot of properties available for sale.  We paid ~$2.2m for the property, and the most recent comps indicate this property could potentially go for $3.3m to $2.7m.  At $3.3m it would be matching a record high $/foot in the area.  And honestly, I think $3.3m would be a bit of a pipe dream.BUT weirder things have happened.  So I want to at least ponder this.  What would you do if you got an "unbelievable" offer?  We've owned this property for ~1.5 years.  My goal is to buy, hold and have great cashflow.  Buying and selling was never my intention.  But if I could net around $900k, it may be worth it!We could then 1031 exchange the profits into other properties.  Of course we'd need to be able to find good replacement properties as well.  What would you do?  I think logically I'd be a fool not to take the profit flip it into something else.  What else do I need to consider?  EDIT:Just did some quick math as well.  Looked at what the property would be worth if I used a cap rate of 7%, 6.5%, and 6% just to see what that would look like.  Surprisingly $3m, $3.2m, and $3.5m respectively.  So the math isn't too far.  Of course that's based on our asking rental rate (which we believe is market).

Dave Foster · Answer

@Bob Dole, From the sounds of it, you're more of an opportunistic investor than one who likes to stick with one model (commercial rentals, or whatever).  It's the deal in front of you that speaks.  So, eliminate everything else - You've got a potential deal in front of you to make a 30-35% return in 1.5 years.  And your tax would be at the LT capital gains rate (I know - still a heap in CA).  But would that be a good deal?  If so, then I'm right there with @G. Brian Davis, it can be worth it to deploy all that equity and 1031 into one or multiple investment properties and structure a solid portfolio if the numbers make sense. But you certainly dont want to make bad investment decisions just for the sake of deferring the tax.

Establishing a strategy that aligns with what you want in your RE investment career and knowing your why is gonna help.  But each deal also has to speak for itself. @Henry Clark provided a solid list of questions to juggle with. If you decide to sell the property and do a 1031, there are ways to be proactive and make for a smooth exchange, despite the intimidating time frames. In your price range, they're really not that big of a deal.  And your Qi (Qualified Intermediary) will be there to guide you through the process, just like the other professionals you would work with on a sale and purchase.

Ryan Stomel · Answer

The 1031 clock is real pressure but the bigger thing I'd think about is lease status. Vacant commercial at $2.2M in is a very different animal than tenanted — if you're still unleaseed when someone waves $3M at you, the math changes a lot because that buyer is pricing in their own lease-up risk. The way I handle this with my retail/industrial portfolio: I don't entertain sale conversations until I have at least one signed LOI in hand from a tenant, because that's the moment cap rate compression actually works in your favor. Without it, buyers will cap you at 7.5-8% on projected income, not actual — and your $3M becomes $2.6M real fast once they run their own numbers. On the 1031 side, the 45-day ID window is brutal right now with inventory tight. I'd want a clear replacement pipeline identified before I even got serious about taking a sale offer — you don't want to end up boot-trapped into a deal you don't love just to hit the deadline.

Henry Clark · Answer

OP would break down the discussion as follows:  Don't answer.

1. What type of renters?  How long and type of leases?

2.  How easy is it to lease up again? How is the location compared to similar properties?  How do your numbers look if vacant for a year?  Or if you have to retro for $300,000 as an example for the next renter.

3.  How do you have financed?  All your money?  25% down on the $2.2mm? What are your terms?  5 year balloon with 20 year amortization, with 1.5% max increase to prime, etc.

4.  What is the return after "Everything"?  Expenses, Capex set aside, P/I?

5.  What Capex is needed or coming up?

6.  What would you do with the Aftertax profits if you sold outright?

7.  What can you 1031 into with similar returns or potential?

8.  You can list with a timeframe and not sell.  If it hits a magic number, then you sell.

9.  Risk assessment.  What is your view of the economy?  How stable is your overall financial portfolio?  If this is vacant for a year or leases again with 20% less rate, are you comfortable? Do you have other similar size assets that you can leverage this with a down cycle?  Are you property/stock market rich, but cash poor?  etc.

10.  Can you increase OI on the property?

Just some thoughts to assist your decision process.

Henry Clark · Answer

OP another thought.

If you 1031 understand the time pressures.  Also if you 1031 for say $3mm almost impossible you find a property for

That same amount.  So you will either need to kick in say $300,000 for a $3.3 mm deal.  Or if you do a $2.7mm deal then the $300k difference is 100% profit and taxable.

Bon Appetite

Henry Clark · Answer

OP sale and enjoy the profits.

G. Brian Davis · Answer

Hi @Bob Dole, If you get an unbelievable offer, it’s worth seriously considering not because you planned to sell, but because the market is giving you an outsized return in a short time. That’s hard to ignore.The real question isn’t “should I sell,” it’s “can I replace this deal with something equal or better.” If you can redeploy that equity into assets with stronger cash flow, better upside, or less risk, it makes sense. If not, you may just be trading a solid position for uncertainty.Also think about execution risk. A 1031 only works if you can actually find and close on good replacements within the timeline. In this market, that’s not always easy.

Thought exercise - Sell a property IF I'm offered great price?

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