Know Your Real Estate Exit Strategies
Having an effective exit strategy is just as important as your entry strategy. There are a number of investment real estate exit strategies to choose from, but a good exit strategy will ensure that you are receiving the best results as an investor when your house flip comes to a close. There are no incorrect exit strategies, instead, it depends on your house flipping objectives and your initial plans. Each exit strategy has its own benefits and drawbacks.
The Selling Price
You should review the business plan that you established early in the process. Make sure that you have set a price that makes sense for the market and your target return on the investment property. It’s also a good idea to know the lowest price that you can accept and still be able to make money on the project. Knowing the lowest price you’ll accept that will still turn a profit will help you negotiate offers.
When looking at the plan you developed early in the process, you should look at the price you first targeted to sell the property. Determine if this price is still valid.￼
When you’re figuring out the price, have at least three realtors tour the property and give you some suggested listing prices to help you determine market value. The realtors should show you the basis for their suggested pricing, specifically showing you comparable homes for sale, recently closed sales and homes with similar recent improvements.
Once you have a good sense of the current market value, compare it to your expectations from the beginning of the project. If you were conservative from the start, the numbers will be similar.
It’s best to price the property close to the current value. You can sell slightly below the market price if you want to sell fast and you have enough profit built into the project. If you have more time, then you can price it a little higher. If the costs were higher than you anticipated or the current market value is lower than you originally thought, then you will have to to make some difficult choices to complete your flip.
A property will only sell for what the market will bear, no matter what. Do not price it above the market in order to recover your costs because it will not sell at that price. If it doesn’t sell then the property will become stale on the market, creating more problems for you while increasing your cost. You’ll be forced to reduce the price and have wasted time and money.
It’s possible that you may even have to give up a profit and accept a loss if you spent too much and did not get a commensurate increase in value for the property. Act decisively in this situation, as it will likely get worse, not better.
A good exit strategy will ensure that you are receiving the best results on your house flip.
Traditional selling is a real estate exit strategy where the buyer is responsible for their own financing. Most home sales are handled in the traditional way, meaning that the buyer makes an offer on a house as long as they can find acceptable financing and then goes to various brokers or lenders looking for a mortgage.
Recently, many people have challenged traditional lender’s tight control on mortgage lending. Due to these controls, people who used to have no issue qualifying for a mortgage loan are now having difficulties. Even the most qualified borrower will have to go through an extensive and detailed underwriting process to be approved.
The seller’s benefit of having the buyer find their own financing is that once this financing is approved, the transaction will close. The seller will get paid for the sale at the settlement table and be out of the transaction. This is optimal most of the time. However, when the buyer gets a mortgage the process is often slow and not always positive, creating a problem for both parties.
If you are lucky enough to get a cash offer, verify that the buyer has the cash and then accept the offer even if it means getting a slightly lower price for the property.
Cash is king in the real estate world.
One of the challenges that come with selling a house in the current market is that a buyer may have trouble getting a mortgage. The current lending environment may mean that a seller has to lower their asking price, take a loss or they have to keep waiting for a qualified borrower. If someone is anxious to sell, then it might be wise to attempt seller financing.
Seller financing has made a comeback in recent years in the residential housing market. It’s not for everyone, but there are a lot of advantages to seller financing. If a seller needs quick access to cash, seller financing will lead to a quicker sale. Seller financing also enlarges the buyer pool by making the property available to borrowers that might not qualify for financing otherwise.
Closing times are faster without the need for an outside lender and the property may get a higher price if the seller is willing to “hold the paper” on the loan. The buyer will have lower fees, which free up more cash to pay to the seller. The seller will receive a stream of income on the note, which could be sold to a third party if the seller chooses to do so.
However, there are disadvantages for both parties with seller financing. For the buyer, they will most likely pay a higher price for the property, a higher interest rate and need a larger down payment. The situation is also more complicated and riskier when the seller still has an outstanding mortgage on the property.
It is likely that the seller’s mortgage has a “due on sale” clause which would require that the loan be paid off upon sale. Should the seller’s mortgage lender know about the sale, they could require the seller to pay the loan off, which they might not be able to do.
When there is an existing mortgage, the buyer is relying on the seller to keep its mortgage current. If the seller defaults on their loan, the buyer would be subject to foreclosure.
For the seller, it runs the risk that the buyer defaults on its obligations to the seller, and it will have to foreclose and evict. During the buyer’s ownership of the home, it could be damaged or the utilities or taxes may not be paid. This could all become the seller’s problem when there is a foreclosure.
Both the buyer and seller need to practice extreme caution with each other before entering into a seller financed transaction. Without understanding a property’s and each others’ financial status, each party is putting themselves at risk if the seller financing agreement fails.
Depending on your circumstances, one of the more effective real estate exit strategies may be to not sell at all but rent the property instead. Be sure that your rental price is consistent with the market for the size of the property and the upgrades you installed.
It is not uncommon for house flippers to hold onto renovated properties for cash flow over a period of time rather than sell them for instant profit. This can either be a long term or short term strategy.
In a short term case, a house flipper may want to get the property fully occupied with cash flowing in order to make more money from it upon sale. This could happen when a neighborhood is primarily rental properties owned by investors and the house flipper wants to wait until an optimal time to sell the property.
In the long term, the rehabber is making an investment to receive positive cash flow over an extended period of time.
In the long term hold circumstance, the house flipper must make sure that any loans on the property are at the lowest possible interest rate. Most rehab lenders are expensive, but necessary because traditional lenders do not generally lend on rehabs.
A finished, cash flowing property, however, is a different story. The rehabber should approach traditional lending sources to refinance out of the more expensive loan as quickly as possible. The best scenario is when the rehabber can pay off the rehab loan in cash, but that is not usually feasible.
After this, look at your expenses and see if they were in line with your projections on the business plan. If all the current factors are consistent with your projections then you are in good shape.
When renting property, price it as you would when pricing a house for sale. Look at comparable prices per square foot, etc. Compare the features of your project with the competition. Are the finish and the amenities nicer? Is there available parking? Access to stores and public transportation? Consult local realtors about rental rates, it can make all the difference.