Six Strategies to Help Real Estate Families Navigate Tough Decisions
February 21, 2022
By Lise Stewart and Natalie McVeigh
Real estate holdings can feel like a secure financial investment, particularly in turbulent times. However, deciding when to buy, how long to hold, and when to sell can result in tough conversations among family members. These questions get even more complex when considering whether the family members are the inheritors vs originators of the assets.
When working with a large family recently, several family members wanted to sell a few underperforming properties that were part of a large real estate portfolio. Other members of the family felt that selling now wouldn’t be prudent; those properties had been in the family for a long time and to some, held sentimental value in addition to the potential commercial value. Their grandfather, the originator of the portfolio, had been born in one of those homes. Others pointed out that the value of the land the properties sat on has increased dramatically, while the rental value of the individual houses has not. Therefore, it seemed to make more sense to sell to the persistent developers who knocked on the door. The family became mired in arguments, while making very little progress on a cohesive plan to move forward.
Another recent example was a family coming under pressure from the younger members to sell a significant number of properties to fund the education of the fourth generation. The younger generation, and in some cases their parents, argued that the return on investment from the rental properties could realize a greater long-term value for the family if it was spent on something that offered a more immediate benefit.
These examples help to show how the desire or decision to sell is not always based solely on financial or market analysis. When we work with families as they navigate this process, we generally recommend that they consider the following:
- Educate the next generation on the assets. Ownership often sounds like it means easy and immediate access to money and that is not always the case with real estate assets. Knowing the market, class of asset and what to expect allows each member to make informed decisions about the assets anchored in a common language and on a level-playing field, which can create a pathway for steady income.
- Define your ownership philosophy. Why are you in the real estate game? Is it to create long-term wealth, preserve particular properties for historical or family reasons, to offer an immediate positive impact on personal lifestyle? If there are different opinions as to why ownership is important, the group can explore the ways in which the family enterprise can meet different values and needs. Consider an exercise in which the family identifies all of the non-financial benefits of ownership first and then all of the financial benefits second. Next, identify the risks or threats in each category. This exercise can assist family members to clearly articulate issues they may not have considered in the past and help each participant to understand the perspective and concerns of the others.
- Develop a basic strategy document. This strategy should focus on understanding the current value, the desired value, the potential opportunities and threats, and the family’s appetite for risk. Determine a few key goals that everyone can agree to and develop the strategies or initiatives to achieve those goals. Treat the ownership/management of the real estate like a business. This means creating clarity regarding desired objectives and outcomes and a process to realize the impacts the family wants to see.
- Work through if/then scenarios. Some examples include: What if the impacts of climate change create safety or quality of life issues for those who occupy our rentals? What if we are offered a below market price for a property, but the sale would be quick and timely? What if a family member needed a significant amount of cash, say to settle a divorce, and requested that a property be sold to provide the necessary liquidity? What if a family member wanted to invest in a property that was not attractive to other family members? What would the protocol be in that case?
- Create an opt-out (buy-back) policy that has a reasonable market-value. Too often these conversations turn into “we all keep, or we all sell” and the reality is that there are different family branches, needs, locations, liquidity options, and attachment to the assets. Binary solutions only create a zero-sum game. It is helpful to explore how each family group wants to create their relationship to the assets before it becomes a false dichotomy or either/or situation.
- Offer alternative legacy options. Families often attach legacy and getting together around the assets that create the funds as necessary for connection and preserving the extended family relationships. Without the assets, what would this look like? If a family enterprise sells their assets, does it make sense to put X amount of dollars into a family travel fund? It is important to explore other ways to create the sense of legacy and connection that can serve the needs of the family.
Developing a foundation of understanding, a philosophy and shared plan for growing, using enterprise wealth, and a creating a method for working through tough decisions can build and preserve family harmony.