What Is My Exit Strategy? Why A Seller Should Evaluate This Issue Before Listing And Selling A Property

By Dave Hamerslough and Victoria Naidorf

April 10, 2024

The National Association of Realtors (NAR) settlement of the class-action litigation regarding, among other things, offers of compensation through the MLS may cause sellers to evaluate a number of issues. Some current seller issues will include (a) the concepts of value that were discussed in my last article, (b) the amount of compensation that they are willing to pay their own broker/agent, (c) the amount of compensation (if any) they are willing to offer to a broker representing a successful buyer, (d) whether to offer any seller concessions (including, but not limited to credits or a cash payment to a buyer), and (e) how these issues will be impacted by their broker also representing the buyer (dual agency). PRDS and C.A.R. are creating/revising listing agreements, advisories, and other forms to address these issues. Future articles will discuss these forms and issues as they evolve.

This article focuses on another issue that sellers should always evaluate in conjunction with making the decision to list and sell their home: where is the seller going to live and/or invest their proceeds after selling their property? The question they should be asking themselves is “What is my exit strategy?”

Based on the number of claims that I have handled in the last four months, there have been a number of sellers who have simply not evaluated, let alone established, their exit strategy. Neither the MLS practice changes required by the NAR settlement nor the type of market will eliminate the need for sellers to do so.

Before identifying some of the issues a seller should consider with respect to their exit strategy, the following examples illustrate what factors led to the claims that I have recently handled on this issue.

Case #1: the seller who was going to move out of state, thought they would be happy in the city they had selected and would be able to work remotely from that city, only to discover during escrow that their expectations were not going to be realized.

Case #2: the successor trustees of a trust who failed to take into account that the trust and/or beneficiaries would have to pay taxes on the appreciation in value between the date of death of the trustor and the sale of the property (four years of fairly high appreciation).

Case #3: the sellers were hoping to move into an adult living facility, but their preferred facility did not have a space reserved for them; they discovered that there was no space at the time they were scheduled to close escrow on the sale of their current home.

Case #4: the seller who accepted a buyer’s offer but changed his mind during escrow; he realized he’d made a mistake in evaluating his future options and preferred staying in his current home.

Case #5: the sellers who owned investment property but did not calculate their net proceeds after taxes; even worse, they failed to timely investigate and identify potential exchange properties.

Whether I represented the seller, buyer, or one of the brokers in these claims, my approach to analyzing these claims involved, among other matters, the following legal and ethical questions: analyzing whether the parties had performed their contractual obligations; whether the disclosures were fully completed; whether there was a basis and/or a requirement for amended/supplemental disclosures; whether the transaction and purchase price were fair, just, and reasonable; and the equities.

The resolution of these claims, from the seller’s perspective, turned on whether there was a basis to attack contractual performance. If that did not exist, then the seller would need to request a cancellation and offer money to incentivize the buyer to agree to a cancellation. In each case, it was costly for the sellers to unwind their transactions. These claims might have been avoided had the sellers fully evaluated their exit strategy, preferably before listing their property but at the very latest before entering into contract.

The decision to sell and move out of your home is usually not an easy one. Sadly, too many sellers have not zeroed in on everything that should be considered. What, then, should sellers be asking themselves in evaluating their exit strategy? The following are some of the questions/ issues that should be explored by sellers in connection with selling their property:

1. Who is involved in and assisting you in selling the property and/or purchasing another property or moving into a retirement community (e.g., spouse, family member, financial advisor, CPA, physician, etc.)? Have they been consulted?
2. Are there any personal, financial, or health issue that could impact your evaluation and decisions?
3. Where do you plan to live once escrow closes? Have you thoroughly examined where you plan to live to satisfy yourself that you will be happy there?
4. Are you in contract to purchase a property or have a written agreement to reside in a particular facility? If not, when do you expect to start looking for a new place to live? Do you have any deposit at risk in a purchase or other type of transaction? Do you have an agent to assist you in that transaction? If you are purchasing a home that is under construction, when do you expect it to be completed? Have you confirmed in writing with the builder/developer when it will be ready for occupancy?
5. If you are planning to move into a retirement community, which one are you moving into? Have you been approved and/or accepted? Are there any contingencies or conditions that must be met before you can move in, such as space availability and any health requirements to be able to live at that facility? Have you signed a contract? What consequences or penalties will you face if you cannot fulfill that contract?
6. Do you have time issues, pressures, and/or constraints that could impact closing on the sale of your home? If so, what are they? For example, do you need to be able to move into another property by a certain date?
7. Do you need to close on the sale of your property to be able to fund your next purchase and/or move into your next living arrangement? If so, do you have any options in the event that escrow doesn’t close in time to meet your time frames?
8. How much money do you need to net from the sale of your property to complete your next move?
9. How did you calculate the funds you expect to receive from selling your property? What is the basis for your opinion regarding the amount of money you will need? For example, have you consulted with your CPA or qualified tax attorney to determine the amount of net funds that you will be receiving from close of escrow and whether those funds are subject to any taxes?
10. Is there any financial information that you have provided to your agent for inclusion in a net sheet that is inaccurate or needs to be updated? For example, are there any outstanding tax liens? If so, do you have any paperwork and/or communications regarding those liens and have you consulted with your CPA or qualified tax attorney about handling or paying off the liens?
11. If you are anticipating completing a tax-deferred exchange, have you investigated and/or identified potential exchange property? Have you consulted with a 1031 exchange specialist and/or intermediary?
12. Are you the only individual who will be receiving the net sales proceeds? Has anyone made a claim with respect to all or a portion of those proceeds? If so, whom, and have you consulted with a qualified California real estate attorney or a trust and estates attorney regarding that claim?
13. Have you signed a listing contract with any other broker in the last two years? If so, with whom and when? Was it terminated and, if so, in what way? Do you have a copy of the listing contract? Are there any writings regarding its termination and/or any buyers that the other broker procured during that listing? If so, provide that documentation to your agent and determine if you owe anyone else a commission. If you do, you should consult with your own qualified California real estate attorney.

Sellers who have not properly disclosed all of the relevant information about their property to prospective buyers could face the loss of a sale and/or face an action for damages, either of which could create a financial hardship and greatly impact the timing of moving. Before selling, sellers should ask themselves:

1. Have you made a diligent search of all of your records regarding your current property, including your purchase of it, any repairs, maintenance, improvements, and/or renovations you have made to it, and any work that has been done to the property in order to get it ready for sale? If so, have you provided all such documentation to your agent? If not, provide them to your agent promptly.
2. If the property is in an HOA, do you have access to any HOA newsletters, minutes from any Board meetings, or updates that have been provided by the HOA and/or any management company? If so, have you provided those to your agent? If not, why not? Have you ever served on the Board of Directors for the HOA or any committee appointed by the Board? If so, when, and what did you do? Have you provided this information to your agent?
3. Have any repairs, maintenance, improvements, and/or renovations been completed to your property since you filled out the seller disclosure forms? If yes, have you provided this information to your agent?
4. Has anyone, including any neighbor, ever brought any issue, condition, and/or alleged problem or defect to your attention with regard to your property or your neighbors’ property? If so, who, when, and what was the issue? Do you have any writings or communications regarding any such issue? Have you had any oral communications with that neighbor about the issues? If so, provide that information to your agent.
5. Have you received any communications of any kind, including red tags, notices of violation, correction notices, etc. from any government entity or administrative body such as a review board? If so, when, and what were the issues? Provide copies of all documents and communications in this regard to your agent.

Carefully and fully completing the seller disclosure forms and providing all documents requested in those forms is essential to being able to sell your property and moving on with your life.

Determining the viability of any seller’s exit strategy takes time and patience. Answering the suggested questions above and making all required disclosures should not be viewed as a quick process. Sellers need to take their time in properly assessing their current and future needs. If not, they may find themselves in one of my claim scenarios.