The term “Asset Disposition” can seem pretty daunting to a new investor or business owner. However, the term in real estate simply means that you will be liquidating property. It is generally done for a person or business to obtain funds on hand for future investments. So whether you are doing it to expand your business or to increase the amount of cash you have on hand, this aspect of the investment process is inevitable.
To understand in a much broader perspective, here’s a brief overview of asset disposition.
What is an Asset Disposition?
An asset disposition is the transfer of assets or securities by assignment, sale, or another transfer process. It is simply the transfer of ownership of an asset. In which the asset is either given away or sold.
Assignment or transfer dispositions can also be performed for accounting and tax purposes. It helps to gain relief from related taxes or other liabilities. It could also refer to the disposal of assets used as security for a loan.
The bottom line is that the investor gave up (disposed of) the property. In addition, the terms “sell” and “buy” can be used interchangeably for “disposition” and “acquisition.”
What is the Asset Disposition Process in Real Estate?
Real estate disposition is generally regarded as the final stage in the process of investing in real estate when the property is sold.
The following steps are included in the real estate investment process:
1. Find your niche and market
Typically, a real estate investor would choose a niche or property within the wider real estates category. It can be retail shopping malls, office buildings, and apartments. However, you will need to select a target market.
2. Target the right investment opportunity
In this stage, you’ll seek specific investment opportunities. You’ll look for available properties. And conduct your due research to create pro forma projections and financial analyses.
3. Follow through with real estate acquisition
After you’ve located an investment property, the following step is to purchase it. During this phase, you will submit the seller a letter of intent.
Once all of the areas of negotiations have been settled, you will put everything in writing. After which, you will proceed with the transaction, including obtaining financing.
4. Manage the investment property
You will become the proud owner of an investment property as soon as the loan is funded. While you own the property, you will be responsible for its upkeep and maintenance. Furthermore, you will also manage its day-to-day operations.
5. Liquidate your asset
Lastly, when you’re ready to unload your asset, that’s when disposition comes into play. You will be the seller and will be responsible for finding a buyer.
If you follow a buy-and-hold approach, it may be a long time. However, if you’re using a fix-and-flip method, you’ll most likely be searching for a buyer sooner rather than later.
What are the Different Strategies for Asset Disposition?
Now that you understand how real estate transactions work, the next stage is to identify the various disposal strategies. As an investor, you generally have three options.
1. Traditional Sale
A traditional sale usually involves hiring a broker to help you determine the fair market value of the property. It also involves marketing the property for sale.
If you choose this strategy, you will be working with a buyer who can pay cash. Or obtain traditional financing from a bank or another financial institution.
2. Owner Financing
Another possibility is to sell the property using owner financing.
An investor can purchase a property using owner financing, which does not require a loan from a traditional financial institution.
In this situation, the owner will act as the lender. They will let the buyer pay off the property’s sale price over time by making payments straight to them.
If you take this approach, you’ll still need to create a mortgage and mortgage note. You might also need a land contract to make sure that the buyer is legally obligated to pay you what you’re owed.
3. 1031 Exchange
If you want to defer your tax liability after you’ve sold your first investment property, you might consider a 1031 exchange. It entails using the proceeds from the sale of your property to buy a similar investment property.
The theory behind this transaction is that there will be no income to tax because you will not get any sale proceeds.
The Bottom Line
Every property owner will wish or plan to liquidate an asset at some point. It can be to expand a firm into something bigger or to boost cash on hand. With that in mind, use this as your guide for Asset Disposition. You can also seek assistance from Lindon Engineering Services to arm your disposition process.
