Know Your Exit Strategies Before You Start Investing
By Paul Esajian on May 13, 2016
There is more than one way to invest in real estate. This is particularly the case when it comes to buying flip and rehab properties. On every rehab deal there can be as many as a half dozen, or more, different selling options. Depending on the market and your risk tolerance some of these make more sense than others. What cannot be disputed is that you need to have an understanding of all your exit strategies before you get very far. You never know when you will need to utilize one of them on your next deal. Here are a few of common rehab exit strategies you should familiarize yourself with.
- Wholesale. There are times when an unexpected deal comes your way that is too good to pass up. Even though the timing may be poor you still see tremendous value in the property. Instead of letting the deal go to someone else you can utilize the wholesale option. Wholesaling is the process of getting a property under contract and assigning that contract to a fellow investor. The profit margins won’t be nearly as high as a full rehab but the risk and workload are reduced as well. Wholesale lets you get in and out a deal quickly with minimal exposure.
- Rehab And Resale. This is the most traditional form of rehabbing. Under this scenario you buy a property, fix it up and put it back on the market as quickly as possible. To maximize your value you lean on your real estate agent for marketing and list price advice. The option offers the highest upside but also includes the greatest amount of risk. You are on the hook for all the materials and labor in the hopes that you can maximize value. You need to know your market and be ready to adapt if there are any changes. In a perfect world you will do the work and find a buyer as quickly as possible at the highest possible price. This is currently the most common form of rehabbing.
- Sell Without An Agent (FSBO). One of the ways to improve your bottom line is by selling the property on your own. While you will save money on real estate commission there are many other factors to consider. The first is that a real estate agent knows the market better than you. They will price the property accordingly and get it sold as quickly as possible. They also know which marketing strategies may work best for your property and location. If everything goes right you will walk away with a higher profit but this can be a risky proposition. Before you make an offer to buy you should evaluate if this is the best option for you.
- Seller Financing. There are many time in the rehab process that things will not go as planned. The better you are at adapting and rolling with the punches the more successful you will be. You may not have previously considered seller financing but it can be a viable option. With seller financing you hold the note from the buyer instead of a bank. The buyer has full ownership of the property and pays you a predetermined interest rate. This situation usually comes up with buyers who are willing to pay top dollar for the property but may not be eligible for traditional financing. You can end up making a higher monthly rate of return but spread out over a longer period of time.
- Rent. There are times when you just can’t get your property sold. The market may have shifted or you may have gone over budget causing you to increase your list price. An option under this scenario is to consider renting the property out in the short term. A lot can change in a market in twelve short months. Even though you may want to recoup your investment by selling renting may not be a terrible option. Most rental markets are still very strong and you may be able to rent for more than you think. During the lease you can still try to sell your property when the lease term ends.
- Lease With Option To Buy. If you decide to rent you may find a renter that wants to purchase your property. However they may lack the credit score or down payment to move forward at this time. If this is the case you explore the lease to buy option. As the name indicates the tenant continues to rent the property but has an agreed up purchase price. A portion of their payment goes towards their down payment. If they are eligible to purchase at the agreed upon date they can close if not they risk losing their contribution. This gives you monthly cash flow and eliminates having to find a buyer down the road.
If you are focus on rehabs long enough eventually you will use one of these options. Most of these do not work in every situation but you should at least have them in your bag of tricks. If you use one of these just one time it will make it all worth it. At a minimum you should be able to react if you cannot sell your property or a better option presents itself. It is always best to know the end goal before you begin.