If you’re just entering the realm of real estate investing, you may be hearing the terms “acquisition” and “disposition.”
If you’re not sure what they mean or how they apply to you, read on!
Having a handle on this vocabulary will ensure you’re confident moving forward and know how to handle your real estate investments.
That said, we still recommend hiring a real estate broker until you have enough experience.
Let’s get started.
1. What is a disposition in real estate?
When investing is concerned, disposition refers to the process of liquidating assets to have funds on hand.
The most common form of disposition would be selling a stock investment on the open market such as a stock exchange.
However, this term also applies to real estate or donations to charities or trusts.
The bottom line when it comes to this term is that the investor has given up possession of an asset.
Typically, the liquidated funds are used in two ways: to fund another business venture or to increase cash flow.
When it comes to real estate, disposition refers to the process of selling (disposing of) a real property.
2. What’s the disposition process in real estate?
Real estate disposition is generally considered the last step in the process of investing in real estate when the property is sold.
The process of investing in real estate involves the following steps:
When investing in a property, an investor will select a niche or property type within a broader category of real estate (ex: vacant land, office buildings, apartments, retail shopping centers).
When you do this, you’ll also want to choose a target market.
Most, but not all, investors will stay within their local market when investing.
After identifying your target market and niche, the next step is to look for a specific investment opportunity.
During this stage in the process, submit a letter of intent to the seller, negotiate, and put everything in writing.
If necessary, you’ll also need to acquire financing.
When the loan has been funded, you’ll be the owner of the investment property.
While you’re the owner, you’ll be responsible for upkeep and maintenance as well as daily operations.
If you don’t want to deal with the daily maintenance, then you may consider hiring a property management company.
Others will prefer to stay more involved.
When you’re ready to dispose of the asset, you’ll work to find a buyer.
If you’re following the buy-and-hold strategy, then it may be a long time before this happens.
If you’re following the flip strategy, then you may be seeking out a buyer sooner rather than later.
3. What are the different strategies for disposition?
Hopefully, the above explanation gave you a general idea of how disposition works when real estate is involved.
In this section, we’ll look at different strategies for disposition.
If you’re an investor, these are the options you have available to you.
A traditional sale typically involves hiring a broker who will help you determine the fair market value of the property and market it for sale.
If this is the route you go with, you’ll be working with a buyer who can pay cash or get traditional financing from a bank or another financial institution.
A second option is to sell the property using owner financing.
An investor can buy a property with owner financing, which doesn’t rely on traditional financial institutions for a loan.
In this case, the owner will act as the lender and allow the buyer to pay off the sale price of the property by making payments directly to them over time.
If you choose to go this direction, you’ll still want to draw up a mortgage and mortgage note or a land contract to ensure the buyer is legally bound to fulfill their promise to pay you what you’re owed.
Are you interested in deferring your tax liability?
If so, this is where a 1031 exchange could come in.
This scenario involves using the proceeds from the sale of your property to purchase a like-kind investment property.
The theory behind this sale is that, since you won’t actually receive any proceeds from the sale, there won’t be any income to tax.
Once you’ve sold your initial real estate investment property, you may consider going this route.
That said, 1031 exchanges are subject to lots of rules and time frames.
For example, you’ll only have 45 days to find a replacement property.
Be sure to talk to a local broker who is experienced with this type of transaction.
They can help you navigate your specific situation.
You can also read more about 1031 exchanges in our dedicated article, 1031 Exchange for Land? 14 Things (2021) You Need to Know.
4. What are some tips for disposing of a property as a real estate investor?
When investors get to the liquidating stage of the investment process, they normally hope to dispose of assets quickly.
So, in order to make this process go as fast as possible, here are some of the top tips to finding a buyer immediately.
Hiring a professional and experienced broker to help with your disposition is one of the best moves you can make if you’re not familiar with this process.
A broker will help you to understand the market and decide on a fair sale price for your property.
They can also help you market the property to buyers and assist with the negotiation process once you have offers in hand.
Just make sure you hire someone with expertise in your real estate niche, such as a vacant land specialist.
One mistake people make is not having paperwork ready to go.
Before you put the property on the market, all transaction documents should be prepared.
In commercial real estate, it’s considered standard procedure to provide a pro forma to any interested parties.
Additionally, if you have an existing tenant in the building or retail space, you’ll need to provide a copy of the lease.
Furthermore, if there are any easements on the property, you’ll need to provide that paperwork.
Having your paperwork sorted before you put the property on the market ensures that you can move forward quickly with any buyer that comes to call.
The real estate market moves fast.
As offers begin to roll in, do your best to respond as quickly as you can.
Another mistake that investors make is waiting to respond in hopes that they will receive a better offer.
Unfortunately, this “playing hard to get” mentality doesn’t often work in the seller’s favor.
It can just lead to a buyer deciding to look elsewhere while the seller puts off deciding.
Additionally, if your real estate investment has been a joint venture, meet with all parties ahead of time for a decision-making meeting after a letter of intent has been submitted.
This will ensure that everyone is aligned and ready to move forward collectively.
5. What skills do you need to be successful in a disposition?
Dispositions require you to build relationships with buyers when marketing a property.
Here are three skills that will make you successful in these situations.
Real estate is all about building relationships and understanding the buyer you have in front of you.
Building rapport ultimately comes down to good communication skills and finding common ground and shared experiences.
Whenever possible, mirror and match mannerisms so that the other person understands your shared interest.
Learning how to properly market your property will help you to be successful in a disposition.
Market it to buyers and potential buyers by posting your property on a real estate websites, local real estate investing association’s property lists, Craigslist, Zillow, etc.
This is also where an experienced property broker can be helpful.
Another acquired skill that can be helpful in this department is understanding closing procedures.
Wholesaling closing strategies such as assignments, double closing, and simple closing are things you need to know because you’ll need to communicate them in your purchase agreements with investor-buyers who are interested in buying your properties.
If you’re new to the disposition process, this is another instance where you’ll consider hiring a broker to help you facilitate this process.
6. Why would you dispose of property?
If you’re new to the disposition process, you may not know why or when it is time to sell a property.
Disposing of a property can be one of the most consequential decisions made in real estate, and there’s not necessarily a “right” answer.
Investors often rely on their years of experience and knowledge of the market to understand when it’s the right time to dispose of a property.
However, if you’re new to investing, this probably isn’t helpful.
As such, we’ll give you two general reasons why it might be time to sell a property.
If you think indicators are leading you to a disposition, but you’re still unsure, hire an experienced broker!
They can help you understand market conditions and if a real estate disposition makes sense for you.
In the meantime, you may decide to dispose of a property because…
Sometimes an investor will receive an offer for their property that is simply too good to ignore.
Typically, this comes before the end of the planned holding period, but sometimes a price is offered that allows for the delivery of an excellent return for shareholders.
If this is the case, you may consider disposing of the property before you originally planned to.
When your investment reaches the end of the planned holding period, investors will expect their money back.
In order to return their money, the property must be sold.
That said, if market conditions aren’t favorable for a profitable sale, then it’s common for the holding period to be extended until they improve.
Keep in mind that selling a property for the right price is just as important as purchasing the property for the right price.
Evaluating this correctly can be the difference between a profitable transaction and an unprofitable transaction.
7. If I hired a real estate lawyer to help with my disposition, what would they do?
Lawyers and professional staff are equipped to help with the following tasks as they pertain to dispositions.
8. What’s the difference between acquisition and disposition?
Regardless of whether you’re an investor or an owner-operator, acquisition and disposition are the two most important benchmarks for any real estate investment you’re involved in.
Put simply, “acquisition” refers to the day the asset is purchased, and disposition is the day the asset is sold.
Acquisition is the process of gaining real ownership or control of a real estate property.
In order to acquire a property, there are four factors to consider: marketing, lead processing, due diligence, and closing.
Acquisition employs strategies that generate responses from motivated sellers.
The hope is to find properties that can be bought for investment purposes.
Examples of acquisition marketing include direct mail marketing, online marketing, text message blasts, and REOs and foreclosures.
This occurs when someone takes the leads found through marketing efforts and responds to those messages.
They gather information for due diligence and compile it to make an educated offer.
Due diligence is the next step after lead processing.
Once you’ve processed the lead, you want to make sure there are no unforeseen issues that could hinder the investor(s) from profiting from the deal.
Some of the information you should take the time to gather include:
- Rent rolls
- Profit and loss statements
- Property zoning
- Conversations with contractors, appraisers, inspectors, etc. to identify any major issues with the property
Closing occurs when the property has passed the due diligence phase and all final terms have been resolved.
This process is typically handled by a closing agent (i.e. a title company or an attorney).
This is just a short overview of the acquisition process, but you should be able to see how it differs from the disposition process.
With disposition, you’re selling and liquidating your asset.
With the acquisition, you’re going through the process of purchasing it.
Without the acquisition, there wouldn’t be a disposition down the line.
There you have it!
A disposition is the act of selling an asset or security.
It can apply to stocks, donations to charities, trusts, real estate, and more.
Understanding these basic terms will help you as you navigate the work of real estate investing.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.