Unsolicited offer on property, what to do?

Question

TL;DR: Received an unsolicited offer on my property for ~50% more than I paid ~2.5 years ago. What should I do?

Details:
-purchased prop about 2.5 years ago
-unsolicited offer for 50% more than I paid
-cost segregation done on property
-held in LLC

-my broker believes it will not appraise for that price, so we would need to build in contingencies to force the buyer to throw more cash into the deal so the bank will lend
-property just turned vacant, previous tenant did not renew due to consolidation
-we are seeing good potential tenant traction as well, so not desperate to sell -- vacate carry cost is manageable and we feel confident we can get it leased at fair market value
-I have a 5-4-3-2-1 penalty from the bank for prepayment

I think 50% increase is great. The problem is I'd want to 1031 it into something else and only if it makes sense. In other words, I don't want a NNN Starbucks location that has a 3.5% cap because the clock is winding down and I'm desperate. I don't want to sell and have nothing worthwhile to purchase.

Logically, I should sell. I mean 50% gains in 2.5 years plus rent I've collected is a great win. Even after fees, etc it's still a win. The issue is potentially rushing to find another property or two to 1031 into.

And, the largest issue is a new loan. Rates obviously are climbing and I would not be surprised if the rate wasn't a high 7 or 8%. So my borrowing cost will be much higher as well. I'd probably have to do a 3-5 year loan so I can hopefully refinance it if/when rates contract.

I assume credit is tightening as well, so it will be an even bigger PIA to secure a loan.

Things I should think about or consider? What would you do? Also, my investment philosophy is all about cashflow. I didn't get into real estate to flip properties. I want a good income stream. So this offer is kind of throwing me off a bit.

Jill F. · Answer

If you decide to sell, don't use their contract without a careful review by your attorney or Insist on a standard NAR real estate contract for residential in your area or modify a commercial contract you have used before, or have your attorney write the contract.

JD Martin · Answer

50% of what? If I paid $100k and I was offered $150 I wouldn't be too excited, but if I paid 1 million and was offered 1.5 I would be willing to listen.

Bottom line is what was your goal with the property when you bought, and does this figure into that goal? Without the carry over on a 1031 it doesn't sound like all that great a situation, and if values have gone up that much how does it compare to the rest of the neighborhood? Maybe you're on the precipice of even better profits if you hold.

G. Brian Davis · Answer

A 50% gain in 2.5 years is hard to ignore, but I wouldn’t let the offer make the decision for me. You said your goal is cash flow, so I’d start there.

What would the property produce if you keep it and get it leased at market rent? Then compare that with what the equity would produce in the next property after the 1031, higher interest rate, closing costs and everything else.

If you don’t have a replacement property you really like, I wouldn’t sell just because you have a great offer. A big gain is great, but there’s also a cost to selling a good cash-flowing asset and putting the money into something you like less.

Sometimes the best deal is the one you already own.

Dave Foster · Answer

@Bob Dole, once you've broken down the implications of keeping vs. selling the property, you can decide what makes the most sense long term. If you do decide to sell the property, the 1031 is really the only way to go with your depreciation recapture and large capital gain looming.

You're right that lending is what makes it tricky in this environment. But you are dealing with a bunch of cash coming from the sale. So, one option that a lot of our clients have taken is to use some of the cash from the sale and 1031 into a wholly owned building or two. This eliminates the worry about the rate. They then take the rest of the cash and purchase a good DST or two. You can find good ones and match up their debt ratios to what you need. So you don't have to worry about debt at all. But at the same time, you're getting the return off the cash in the DST. And you've got a property and two outside and debt-free to build further

And the best thing of all - those debt-free properties are just equity waiting to be accessed when rates come back down. So you can expand further..

Sometimes investors will make the purchase contingent on the sale of their property and put down a little earnest money to sweeten things up.

Henry Clark · Answer

OP without the exact hard numbers. To me this is a Hard sell it.

Correct me if I’m wrong.

Say a $3mm asset making say $100k net. That’s a bad asset if REI.

What is your COC. Did you put $500,000 down and now can make a gain of say $1mm plus get your $500k back? Sell.

If you put the full amount down, then definitely sell it.

How much did you do early depr, loan early pay penalties, sale commission? Etc. Etc.

$100k non refundable no matter what. Depending on type of asset and number of renters. 30 day DD, 30 day financing, 3day offer.

Bill B. · Answer

@Henry T.

Bill B totally thought you made up Bob Dole as an example. Bill B didn’t realize OP was named Bob Dole. Bill B found it amusing and thanks Henry T for the unintended laugh. Bill B remembered why….

https://share.google/aimode/zHLMJi0l9NCzD5tEx

Henry T. · Answer

Tell them something like...."Bob Dole does not usually accept unsolicited offers, but Bob Dole may consider your offer with a serious earnest money check to get started. Let Bob Dole know what terms you're looking for, and if these terms agree with Bob Dole, Bob Dole's attorney will get back to you with a Bob Dole sale agreement. "

Aaron Zimmerman · Answer

From a tax perspective, I'd try and calculate what the gain would be so you understand what would happen if you can't do a 1031 exchange.

I would also consider selling at the beginning of 2027 if possible so you could sell this property, purchase another and do a cost seg on that property instead of a 1031 exchange or if your 1031 exchange fails.

id consider evaluating other properties in your portfolio as well as looking at loss carryovers on form 8582 if you're not real estate professional.

Ashish Acharya · Answer

Bob, I think the biggest thing I’d avoid is letting the 1031 deadline dictate the investment decision. A 50% increase in value over 2.5 years is obviously worth taking seriously, but I’d first calculate the true net proceeds after selling costs, the 5 4 3 2 1 prepayment penalty, remaining debt, and the tax consequences.

One tax issue I would address before closing on a sale is the cost segregation study you already completed. Cost segregation can accelerate depreciation into shorter recovery periods, and some of those assets can fall under Section 1245. That means you need to model the potential depreciation recapture before assuming that a 1031 will defer all of the tax consequences. Certain Section 1245 recapture can still be recognized in a qualifying 1031 exchange. IRS That makes the cost segregation history particularly important in your situation. I’d have your CPA calculate exactly what was accelerated, what has already been depreciated, and what could be subject to recapture if you sell.

If you decide to sell, I’d then compare the after tax economics of several replacement properties. The replacement property does not have to be a trophy asset just because you have exchange proceeds available. A mediocre 3.5% NNN deal bought under pressure could create a worse long term outcome than waiting for something that actually fits your cash flow strategy. The financing deserves its own stress test too. If the replacement requires new debt at 7% or 8%, I’d want to know whether the property still produces the cash flow you’re looking for after debt service, taxes, insurance, reserves, and realistic operating expenses.

The real comparison here is hold versus sell versus sell and 1031, with the tax consequences of each modeled before making the decision. Feel free to DM me, I’d be happy to send over our Commercial Property Analyzer and a few resources that may help you compare the options.

Divin Kanyama · Answer

@Bob Dole A 50% increase in 2.5 years is worth taking seriously, but the decision should be based on net proceeds and replacement economics—not the headline gain alone. Model the sale after brokerage costs, the prepayment penalty, depreciation recapture from the cost segregation study, capital-gains tax, and any state taxes. Then compare that result with the property’s expected cash flow after re-leasing.

A 1031 exchange can preserve more equity, but it should not force a weaker acquisition simply to meet the deadline. Before accepting, identify realistic replacement properties, confirm financing terms, and consider negotiating a longer closing period or other flexibility. It may also be useful to compare a taxable sale, a 1031 exchange, and simply holding and re-leasing side by side.

Given the cash-flow objective and manageable vacancy, there is no need to sell solely because the offer is attractive. The strongest choice is the one that improves long-term income after taxes, debt costs, and reinvestment risk. A premium offer is valuable only if the next use of the capital is at least as compelling.

Unsolicited offer on property, what to do?

Unsolicited offer on property, what to do?

Most Popular Reply

15 Replies