The truly ambitious, particularly in the field of residential redevelopment, recognize the importance of an efficient business model. Establishing a proven system, a plan if you will, has the potential to propel any business to the forefront of its respective industry. Accordingly, both monetary gains and personal development may exponentially increase in the presence of a well-devised strategy. The importance of real estate exit strategies is, therefore, never to be underestimated.
Those who take the time to familiarize themselves with the intricacies of each procedure may be rewarded accordingly. Conversely, those who neglect to acknowledge the benefits of an appropriate real estate exit strategy may be voided of the opportunity to achieve relevance in their industry. In the words of Alan Lakein, “Failing to plan is planning to fail.”
Ultimately, it is up to the individual investor to determine their success, relative to their peers. However, implementing a well-devised real estate investment strategy will surely give anyone a significant advantage over their competitors.
Real estate exit strategies, as their names suggest, are plans in which the investor intends to remove himself or herself from a real estate deal. The decision to implement a sound exit strategy is crucial to success, as the correct approach will result in maximized profits and minimal risks.
All too often, investors fail to realize the importance of educating themselves on proper real estate exit strategies. As a result, we have taken the time to provide like-minded individuals with a guide to several exit strategies. Our goal in creating this system is to equip you with the information needed to make well-in- formed decisions when choosing the right exit strategies for your deals.
The Importance of Real Estate Exit Strategies
While speed of implementation is of the utmost importance when attempting to facilitate a transaction, do not attempt to initiate a deal without evaluating potential exit strategies. As an investor, it is critical to evaluate each scenario with the end in mind. That is, have a specific plan for each house before you purchase it. Investors should have a clear understanding of how they intend to profit from every real estate investment before they even meet with a prospective seller.
Familiarizing yourself with each individual real estate exit strategy can save your business thousands of dollars, if not millions over an entire career. It is never wise to consciously enter into negotiations with a seller without knowing how you will be exiting from the deal. Not only will blind ambition increase risks, but it will eviscerate any potential chance to negotiate from a position of power. Essentially, neglecting to consider an exit strategy reduces potential profits while simultaneously increasing risks.
Influential Exit Strategy Factors
The decision regarding which real estate investing strategies to use is not as rudimentary as it may appear. There are several key factors to take into consideration when planning an exit strategy. Ultimately, the potential profitability of each deal is correlated to the respective strategy that is chosen. Understanding each plan will help every investor maximize returns on their investment.
Unfortunately, there is no golden rule that differentiates between each strategy for particular scenarios. Therefore, knowing which real estate exit strategy to use is dependent on the investor’s familiarity with the following factors:
- Short and long-term goals
- Experience level
- Time to close
- Purchase price
- Property value
- Condition of the property
- Market conditions
- Supply and demand
- Financing options
- Profit potential
- Location of the property
Understanding each of these individual factors will essentially determine which of the real estate exit strategies an investor should pursue.
Real Estate Exit Strategies to Consider
Real estate exit strategies are directly correlated to the individual acting on them. Investors are expected to delineate between each option based on their desired outcome. The exit strategy they choose depends on the amount of cash they want to invest in the project and their level of experience. It is important to note that there is no right or wrong strategy. However, knowing all of the different ways to exit from a deal can increase profitability, as you will know how to navigate even the most marginal of deals. The following is a comprehensive list of real estate exit strategies you need to consider in the future:
- Wholesaling: Simply put, a wholesale deal will witness the investor act as the middleman between a seller and an end buyer. Essentially, the investor will find and quickly sell a property for a respectable profit margin. There are two methods in which an investor can wholesale: They can either sell or “assign” their purchase contract to an end buyer, or they actually close on the property and immediately resell the property to another investor in the form of a “double close.”
- Rehabbing: Rehabbing allows for the largest profit margins, as it allows an investor to sell the subject property at full market value. A rehab involves purchasing a house, renovating it and selling it for more than the original investment costs (purchase price and repair costs). To learn how the pros do it, consult our rehabbing checklist for more information.
- Buy & Hold: This is a similar concept to that of rehabbing. However, instead of selling the renovated property, an investor chooses to rent it out to receive monthly cash flow. This is a popular real estate exit strategy for those looking to build up equity in an asset.
- Seller Finance: As its name suggests, the seller finance strategy involves a creative technique that permits the owner to sell the property to a buyer. Essentially, the owner finances the deal and acts as a bank. However, monthly payments are awarded to the owner. The seller maintains the mortgage loan to cover the sales price.
- Lease Option: A lease option, otherwise known as rent-to-own, allows the owner to rent the property to a tenant, but with the option to purchase it at a later date. Should the option be picked up, monthly payments are put towards the purchase of the home.
- Prehabbing: Prehabbing is a hybrid combination of both rehabbing and wholesaling. During a pre-hab, minimal work is done to bring the property up to selling quality. They are often sold to rehabbers who will continue to fix it up.
- Real Estate Auction Process: While not your standard exit strategy, learning how to navigate real eatate auctions can result in some great deals.
Factors That Can Ruin an Exit Strategy
While real estate investing is a sound opportunity to make significant amounts of money, there are risks that every investor must take into consideration. Specifically, certain factors may impede or even ruin a projected real estate exit strategy. According to Ryan Moeller, in association with BiggerPockets, the following factors may ruin any potential real estate exit strategies:
- Tenant issues resulting in lost rent.
- A distinct lack of demand, failed escrow, or the backing out of a lender may prevent a property from being flipped.
- Unexpected maintenance costs can cancel out profits.
- Poor property management can diminish value and hurt potential cash flow.
Understanding the factors that may prevent an exit strategy from working is critical to any investor. However, savvy investors counteract potential obstacles with multiple strategies. A backup plan is critical, as things can change at a moments notice. Having multiple real estate exit strategies will proceed to lower impending risks and allow investors to achieve the maximum return on their investment.
Due to their lack of experience, investors relatively new to the industry should stick to projects that incorporate exit strategies they are familiar with. New investors should always start with projects that require minimal work. As they gain more experience, they can begin to take on increasingly larger projects that require more complex, and perhaps more profitable, exit strategies.