When do you know that selling a commercial property is the right decision? Ask real estate mogul Sam Zell. He says, “Everyday you’re not selling, you’re buying.”
If Zell is right, then how do you make a decision about the right time to sell commercial real estate? Here are four points that answer that question:
Commercial real estate values are determined by how much you’re willing to accept and what someone is willing to pay. It’s the intersection of these two opinions called a “meeting of the minds” that determines the value of your investment property at that point in time. This is also known as fair market value.
Everyday you choose to own your commercial real estate investment, you agree to own it for its fair market value.
The value of your investment property fluctuates over time. Each day you choose to own it, you agree its value that day makes it worth owning and that you would buy it back for that price right now, whether that’s higher or lower than the day before.
Once you decide you’ll no longer pay the current price for your commercial real estate, you become an investment property seller.
Zell’s statement boils down to asking yourself whether your capital works harder in your current commercial real estate investment or somewhere else. If it’s better invested in your commercial real estate, keep your property. Don’t sell it.
On the other hand, if you see other investment opportunities that provide you with a better return or other acquisition opportunities where you increase your capital’s velocity above its current performance, you might want to reconsider holding on.
If Zell’s right — and I think his statement applies to both up and down markets, even flat ones — then everyday you hold that commercial real estate investment means you’re buying higher today and selling for less tomorrow.
Consequently, the right time to consider selling your commercial real estate is when you know your capital will work harder in an alternative investment and you wouldn’t invest in your investment property today. Your opportunity cost is too high to hold on and you’re better served moving to another investment.