Choosing the right exit strategy for your real estate investment is just as important as choosing the actual property. As a real estate investor, you should determine an exit strategy at the beginning of your project, as part of your business plan. Having a strategy in place before you begin your project will ensure that you maximize your profits, and minimize potential risks.
When deciding your business plan, take advantage of our House Flipping Calculator to see how much flipping a house will cost!
Which real estate exit strategy you choose depends on your ultimate investment objective. The key is to understand the pros and cons of each strategy, and then determine which will award you with the best return on your investment.
Real Estate Exit Strategies
Exit Strategy #1: Traditional Selling
Property is sold to a buyer who is responsible for their own financing
Most homes sales are handled in the traditional way, meaning that the buyer makes an offer on a house contingent upon finding acceptable financing, and then goes to various brokers or lenders looking for a mortgage.
Advantages for Sellers
Once the financing is approved, the transaction will close
Disadvantages for Sellers
Slow and uncertain process
Advantages for Buyers
Buyer has the autonomy to pick the mortgage/loan (lower interests rates)
Disadvantages for Buyers
Getting approved for a bank mortgage can be slow and uncertain
Should you be 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!
Exit Strategy #2: Wholesale
Selling a property at a discounted, or wholesale, price
This exit strategy involves a real estate investor acting as the middleman between a motivated seller and a buyer. Some consider wholesaling as one of the easiest and risk-free exit strategies, especially for green investors. At the most basic level, this exit strategy is when a real estate investor secures a discounted property from a seller who wants to get rid of their property quickly. The investor then finds a buyer who is willing to buy the property at a small markup. In the end, this strategy allows the investor to get in and out of a deal quickly, with little risk, while also making a profit.
Advantages for Sellers
Property sells quickly
Disadvantages for Sellers
Discounted price leads to less profit
Advantages for Buyers
Lower initial cost
Disadvantages for Buyers
Risk that the property won’t resell for profit
Exit Strategy #3: Fix and Flip
Bought the property with the intention of renovating and then selling it at a higher value
In this exit strategy, house flippers acquire a property that needs repair, below market value, rehab the property, and then sell it for a profit. This exit strategy is similar to wholesale, except this is with the intention of rehabbing the property before re-selling it.
Advantages for Sellers
Property sells quickly
Disadvantages for Sellers
Discounted price leads to less profit
Advantages for Buyers
Lower initial cost
Disadvantages for Buyers
Cost of rehabbing property
Risk that flipped property won’t sell
Exit Strategy #4: Seller Financing
Seller loans money to buyer
One of the challenges in selling a house 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 continue to wait for a qualified borrower. For a seller anxious to sell their property, seller financing may be a solution.
What is seller financing? Seller financing is when the person selling the house lends the buyer the money for the purchase, instead of the buyer getting a loan from a bank.
Advantages for Sellers
Can lead to quick cash
Can enlarge the buyer pool
Faster closing times
Disadvantages for Sellers
Risk that the buyer defaults on their obligations
Advantages for Buyers
An alternative way to receive a loan if the buyer is having trouble getting a traditional bank mortgage
Lower real estate fees
Disadvantages for Buyers
Higher interest rate
Larger down payment
Both the buyer and seller need to do extensive due diligence before entering into a seller-financed transaction. Without understanding the financial status of the property and other party, each party bears a tremendous risk that the seller financing agreement could fail.
Exit Strategy #5: Rental
Seller keeps property and rents for cash flow over a period of time
Depending on your circumstances, you may choose not to sell. It is not uncommon for sellers to hold onto properties for cash flow over a period of time, rather than sell them for instant profit. This could happen when a neighborhood is primarily rental properties owned by investors and the seller wants to wait until an optimal time to sell the property.
Advantages for Sellers
Consistent cash flow
Equity of the property
Disadvantages for Sellers
Tenants are not a guarantee
Cost of taxes, fees and maintenance
Advantages for Renters
Lower housing costs
Limited responsibility
Disadvantages for Renters
No control over the property
No building of equity
When renting a property, price it as you would when pricing a house for sale. Look at comparables, prices per square foot, etc. Compare the features of your project with those of the competition. Are the amenities nicer? Is there available parking? Is there access to stores and public transportation? All of these factors make a difference. We recommend consulting with local realtors about rental rates.
Having trouble deciding between real estate exit strategies? Learn more about the differences between holding onto a propoerty and flipping it quickly, by reading our Buy and Hold vs Flipping Houses article!
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