Companies own tangible assets, including property or equipment that the business uses to generate revenue. When those assets reach the end of their productive cycle, the companies no longer need them and dispose of them. By understanding the asset disposal process, companies can correctly document the transactions in their books of accounts.
This article looks at asset disposition in real estate and provides in-depth information regarding the process.
1. What do you mean by disposition in real estate?
In the field of investing, disposition means the process of liquidation of assets to improve liquidity or funds on hand. Selling of stock investments in the open market, like the stock exchange, would be the most common form of disposition.
However, the same term applies to real estate or donations made to trusts and charities. It means that the investor has relinquished possession of the asset. Funds achieved through liquidation of assets are used in two ways – funding a different business venture or increasing cash flow for the business.
In real estate, a disposition is the process of selling a property.
2. What are the steps of disposition in real estate?
When a property is sold off, which is usually considered the final step in investing in real estate, that process is called asset disposition.
The following steps are involved in the process of investing in real estate. The process of investing in real estate involves the following steps:
Finding your place in the market – When investing in a property, an investor will pick his niche or a particular type of property within a wider category of properties, such as office buildings, apartments, vacant land, etc. You would also want to choose a specific market as your target. Most investors wouldn’t want to stray out of their local market when investing.
Targeting the appropriate opportunity – Once you have identified your target market and the niche, you can look for a special investment opportunity. During this phase, you will seek out available properties, conduct your research, and put together a model financial analysis if required.
Going ahead with the real estate acquisition
At this stage in the process, you submit a formal letter of intent to the seller, conduct negotiations, prepare the documentation and get everything in writing. If needed, you will also be required to arrange to finance.
Managing the property
Once the loan is funded, you get ownership rights to the investment property. As the owner, it is your responsibility to upkeep and maintain the property and see after the daily operations.
If you do not want to deal with day-to-day maintenance, you could hire a property management firm.
Asset liquidation
When you wish to dispose of the asset, you need to find a buyer. If you have bought the property for investment and prefer to buy and hold, you would be waiting a long time before looking for a buyer.
However, if you intend to follow the flip route, you would seek to find a buyer much sooner.
3. What are the different asset disposition strategies?
Here, we look at different strategies for the disposition of assets. As an investor, the options available to you are as follows:
Owner financing – The investor can buy a property using owner financing. There is no reliance on traditional financial institutions for the loan in this option.
The owner acts as the lender and permits the buyer to pay off the property’s sale price by directly making payments to them over a time period.
If you choose this option, you would want to draw up a mortgage or a contract to ensure that there is legally binding on the buyer to fulfill their end of the bargain to pay the owed money.
Traditional sale – Under a traditional sale, you will be hiring a broker or agent who will help you determine the property’s market value and work on the marketing aspect of the sale.
With this method, you will be engaging with a buyer who would be paying cash or getting traditional financing from a bank or some other financial institution.
1031 exchange – 1031 exchange helps in deferring your tax liability. Under this option, the proceeds from the sale of your property are utilized to purchase a like-kind investment property.
This theory works because, since you will not receive any amount from the sale proceeds, there would be nothing to tax under income.
Why and when to dispose of your property?
People who are new to the disposition process might not know the reason or time to sell off a property. Disposing of a property could be one of the most significant decisions in real estate.
Most investors generally rely on vast experience and knowledge of the market to know the right time to dispose of a property. However, for new investors, it might not be easy to know.
We’ll give you two general reasons why it might be time to sell a property.
If you feel that all indicators are pointing towards a disposition, but there is a bit of uncertainty, you could hire an experienced broker who can help you grasp the market conditions.
In the meantime, you could dispose of a property if:
You received a great offer – An investor sometimes receives an offer for a property that is so good that they can’t refuse. Usually, this happens just before the end of the planned holding period, but sometimes, the price offered allows a great return for shareholders.
Investment has reached the end of the planned holding period – Investors will want their money back when the investment reaches the end of the planned holding period. So, to return the money might necessitate selling off the property.
However, in case the market conditions aren’t suitable for a sale that can bring a profit, the holding period is commonly extended until the time they improve.
Difference between acquisition and disposition
It would help to focus on acquisition and disposition when investing in real estate, regardless of whether you’re an investor or an owner-operator. “Acquisition” refers to the day when the asset is purchased, and “disposal” refers to when the asset is sold.
Acquiring a property involves gaining real ownership or control. To acquire a property, four factors need to be considered: marketing, lead processing, due diligence, and closing.
1 – Marketing
Investors hope to find properties they can buy as investment properties. The acquisition process employs strategies that generate responses from motivated sellers. A few examples of acquisition marketing include direct mail marketing, online marketing, text message blasts, and REOs and foreclosures.
2 – Lead processing
It occurs when someone responds to the messages found through marketing efforts. They do compile information for due diligence and present an educated offer.
3 – Due diligence
After lead processing, due diligence is the next step. After the lead has been processed, you want to make sure there are no unforeseen issues that could prevent the investor(s) from making a profit.
4 – Closing
After all final terms have been resolved on the property and the due diligence phase has been completed, closing occurs. It is typically handled by a closing agent (such as a title company or an attorney).
Although this is just a brief description of the acquisition process, you should be able to see the differences between it and disposition. Disposition is the act of selling or liquidating an asset. With the acquisition, you go through the process of buying that asset.
The disposition would not be possible without the acquisition.
Valuation of depreciable assets on disposal
When depreciable assets are disposed of, the owners need to determine the cost of the assets. Business owners can now write off removed components from remodeling projects.
The estimation of the removed assets is done by studying the construction drawings, the demolition plans, the latest depreciation schedules of the facility, and the final pay application of the contractor.
The asset disposition you derive, as a result, should give a list of the removed components, the cost valuation, the accrued depreciation of each as of the construction date, and the net asset cost to be abandoned.
Conclusion
We hope you have derived a fair bit of understanding about the asset disposition process. Lindon Engineering Services provides services in asset disposition studies that help assess the cost of the disposed of property.
