Who Buys Commercial Investment Property Low and Sells for Less Than High?
Two weeks ago, I met with a couple to discuss the market value of their commercial investment property that they had owned for 60 years. When they heard that their property value was off 25% from 3 years ago, they almost kicked me out of their office. In 2007, they had refused 3 cash offers for 25% more than the number they were hearing today.
Instead of looking at their gains over the past 60 years, they couldn’t see beyond the 25% correction over the past 3.
If the Zell maxim is true, “If you’re not selling, you’re buying,” they bought their commercial investment property back for 25% more in 2007 than they would get today. They believe that selling property for 75% of their 2007 value would result in a loss for the following reasons:
1. They refused higher offers. Therefore the commercial investment property’s market value has been proven to be higher than today’s number.
2. They were raised to buy low and sell high, not buy low and sell for less than high.
3. As long as they hold on, they may hit that peak again.
Unfortunately, they’re focused on the wrong priorities. Sure, 3 investors were willing to pay a higher price. But when they turned down the offers for their commercial investment property, they refused to accept the peak value and bought the property back at its highest value instead of seeing the big picture-“this is more than we ever paid and more than we think it’s worth.” They believe the value will return.
They belied the lessons their parents instilled in them. In 1950, they bought low. In 2010, they can sell high. True, the price has fluctuated over time and they missed peak property values in the market, but in the long-run they will sell for a profit and will enjoy a healthy gain.
As long as their equity remains in the commercial investment property, they will place their personal priorities on hold. They have plans for the cash that will enrich their personal lives. Those plans will wait. And they will miss the advantages of owning commercial investment property because they have no interest deduction, their equity is unleveraged, and the property is depreciated to a 0 basis, so they’re receiving no tax advantages.
Let’s face it, unrealized gains are unrealized gains. Let go of the past and move on.
If you’re holding out for another market peak, be prepared to wait. While it’s comforting to peer into the rear view mirror at what your commercial investment property was worth (N.B. there’s a reason why the mirror says “objects in mirror are closer than they appear”), take it all in and see your long term gains for what they are-profits.
And ask yourself, are you building wealth waiting on another hot market, or just missing opportunities because of your insistence on what could have been?