Disclaimer: I am not an attorney and this article is not intended as a substitute for advice from the appropriate legal, zoning, financial, construction and/or tax professionals. This information is provided for educational purposes only and is made without warranties or representations
Inheritance is one of the main ways people come into properties, both in terms of large commercial properties, smaller commercial properties, and residential properties. Every time it happens, the same questions come up. The big one – do you keep it and rent it, or sell it? – is something I’ve covered before.
Today, I’m assuming you’ve decided to sell the property. You’ve done the analysis, and you’ve decided that keeping it just doesn’t fit with your current needs. Managing, renting, and maintaining a property isn’t part of your intended life path, or it would just be too much work or too expensive before the income kicks in, or maybe there are even roadblocks to getting it up and running in a profitable way. Or maybe you even just have other ideas for where that money could go, and liquidating the property would help you fund other investments.
Whatever the case is, now you’ve reached another decision point. Do you sell the property as-is, or do you renovate, repair, and improve it before you sell it?
As with any question in real estate, there’s no simple answer here. It comes down to what your goal is, what your resources are, and what benefit you would get out of it.
The first question you need to answer is what your timeline is for dealing with the property.
If you’re in a time-sensitive position, selling the property as-is will probably be your best option. Whatever the time pressure comes from, if you need the money ASAP, getting it ASAP is only possible if you are doing as little as you can to repair or renovate the property. Renovations take time, after all.
On the other hand, if you have all the time in the world to do with the property as you wish, the only constraint is the ongoing expenses you’ll have to pay. After all, chances are you’re going to be paying things like property taxes, utility costs, and basic maintenance for the grounds, all of which can add up if you aren’t getting income from the property. Repairs and renovations also cost money, making the property a potentially significant money sink if you aren’t careful. But, if you balance it right, the added investment can boost the eventual sale value of the property significantly.
Generally, you can divide the timeline into three different possibilities.
It’s up to you which of these is more appealing.
Some people inherit property, and it’s the single biggest windfall they’ll receive in their lives. Cashing out immediately and putting that money towards self-improvements, funding retirement, or paying off debts and expenses can be a huge boon, and getting that money can be a life-changing event.
Other people might have stable and comfortable lives, and selling the property, while a windfall, isn’t going to be life-changing. It’s less like winning the lottery and more like getting a solid raise + bonus at work.
This all depends on the life you live, as well as the kind of property you inherited. A cheap rural home in need of repairs is a significantly smaller windfall than a piece of prime retail property in the middle of a growing city.
You’re basically balancing an equation. Which is more important to you? Some amount of money now, or more amount of money later?
Of course, if you’ve decided to sell, chances are that the short-term money is winning out – since a long-held investment is likely to grow and be more valuable over time than a sale now – but there’s still the choice to be made here.
Inherited properties come in all types. Maybe your parent or guardian had put a lot of love and care into the property, it was an active part of their portfolio, the income it generated was reasonable, and it had been kept up to date. Repairs and renovations might just mean a new coat of paint, some fresh landscaping, and maybe a little deferred maintenance to bring it up to pristine condition for sale.
On the other hand, maybe it’s a run-down building they lived in for decades without the skills, funds, or abilities necessary to maintain it. It has a roof that needed replacing a decade ago, fixtures that are failing, paint that is more chip than paint, or even worse issues like interior mold, decades of infused smoker’s tar, and other nastiness. Maybe it has structural damage, water damage, or fire damage.
Again, you can usually divide properties into a few categories.
The more work a property needs, the less chance it’s worthwhile for you to do before selling it. An as-is sale might face troubles since most people also won’t want to deal with it, but the land value might be such that it’s still worth doing.
Remember, too, that looks can be deceiving. A property that looks fine might have code violations and structural issues that would cost a fortune to fix; meanwhile, a property that looks terrible might be structurally sound and just need a fresh coat of paint to look great.
One thing that may be worth mentioning is this: Is this solely your decision to make? Even if you inherited the property from your parent, if you have siblings or step-siblings, they may want to challenge your claim on it. This can be a tedious and expensive process that ends in terrible outcomes for everyone, but many people want to get their piece of any pie that they feel should be partly theirs, regardless of the realities of the situation.
There are a few ways to deal with this. The first is to consult a lawyer and make sure your inheritance is ironclad; if so, you can do what you want with the property, and if anyone else comes at you with a claim, you have a solid defense and don’t have to worry about it overmuch.
The second is to offer them a right of first refusal for the sale. This is where you put the property up for sale, and if the siblings or whoever wants to buy it, they get first crack at it; if they can’t or won’t, it moves on, and you sell it as normal. They had their chance.
Another common option is to draft a legal agreement to split the proceeds of the sale. This may be amicable or contentious and is definitely the realm of a lawyer, especially when you’re talking about larger and more valuable commercial properties.
Selling the property, especially shortly after inheriting it, is likely to trigger capital gains taxes, which can reduce the actual amount you get for the sale and is something far too many people fail to account for. These taxes can be tricky to navigate and will vary from state to state, so be sure to know your local tax laws. There may also be inheritance taxes, estate taxes, or income taxes to consider.
With residential properties, you can sometimes get around these taxes by living in the residence for a year or three before selling. Obviously, this delays the sale, and you’re likely to want to make repairs as you live there just to make it more comfortable for you.
On the other hand, property taxes are also a consideration. Again, talking to a tax lawyer can be a great idea here.
Unfortunately, there’s no easy way to tell what a repair, refurbishment, improvement, or investment can be worth. The best you can do is to investigate comparable properties before and after and examine what the value might be with different kinds of repairs made to it.
Sometimes it’s simple. A house you inherited needs a new roof; if you sell it now, you can expect an offer that is market value minus the cost of a new roof since the buyer will need to replace the roof. Conversely, if you replace the roof, you can expect market value accounting for the new roof. If you get a good deal on the roof, this can work out in your favor, but the margin of difference is small.
On the other hand, for significant improvements, renovations, repairs, or anything done to larger-scale, larger-value commercial properties, it’s much harder to make a straight 1:1 comparison between them. Some repairs are going to be expensive for comparatively little value; others will be cheap for a huge increase. Often, you’ll need to pick and choose which repairs you want to make before selling.
Sometimes, a property is in demand. Maybe your parent was obstinate in not wanting to sell; a family home or a long-term investment may have been worth more to them in mental and social capital than the money would have been. Or, maybe the city wanted the property to bulldoze and build something, and they just didn’t want that to happen. You never know.
It’s possible that the property you inherited already has people interested in it, and you may have offers before you’ve even decided to sell.
Are those offers worthwhile? Would repairs increase the value such that an open sale, rather than a private deal, would be worth even more? This, again, is on a case-by-case basis, so you’ll need to do your best to evaluate your situation.
One thing that comes up when renovating a property is seeing it improved right before your eyes. Seeing the potential come to life, seeing damage repaired, and seeing the investment come to fruition; these can be powerful draws. I’ve known more than a few people who inherited property, decided to fix it up to sell, and ended up changing their minds when the new math worked out in favor of keeping it.
Keep the possibility open is all I mean here.
Now, I’m not a tax lawyer, a structural engineer, or a contractor. What I am is a commercial real estate broker; the best in California, in fact. If you’ve inherited a piece of commercial real estate in the great state of CA, and you want to sell it, why not give me a call?
My seller representation is top-notch, and I work as hard as I can to make sure you get as much as you can for the sale. I can also offer some general ideas and perspectives as to whether or not some repairs could be worthwhile.
Erik Egelko is a veteran of the commercial real estate business with a specialized focus on Investment Property Sales. In 2021 and 2022, Erik was the #1 ranked Broker in California for one of the largest CRE Firms as well as ranked in the Top 1% of brokers nationwide. He has extensive experience in a variety of asset types including: Retail Shopping Centers, Medical Office Buildings, Industrial Properties, and Multifamily Apartment Complexes. Over the course of his career, Erik has closed over $100,000,000 of commercial property sales throughout Southern California.