The truly ambitious, particularly in 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 knowing your 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 one of several well-devised real estate exit strategies will surely give anyone a significant advantage over their competitors.
What Is A Business Exit Strategy?
A business exit strategy is an entrepreneur’s plan to either sell or transfer ownership in a company. In essence, an exit strategy is exactly what it sounds like: a way out. Business owners can use it to either make a profit or to limit losses when necessary. Business owners typically think through potential exit strategies before ever going into business. The reason for this is because not only do exit plans provide a way out of the company. They also serve to guide business decisions along the way.
There is no one right answer when it comes to planning a business exit strategy. Some business owners will opt to sell shares to an existing partner, while others may hope to close the business at a certain point in time. An optimal exit will depend on the company’s size, the owners’ timeline and financial goals, and more. Suffice to say: choosing the right business exit strategy takes careful thought. However, when planned correctly, it can serve as an end goal and motivator for business owners.
What Is A Real Estate Exit Strategy?
A real estate exit strategy is the method by which an investor intends to complete a real estate deal. The exit strategy influences the way an investor will find, manage, and remove themselves from a given real estate deal. Deciding on a sound real estate exit strategy is crucial to your success, as the correct approach will ensure you maximize profits and minimize risk.
In business, exit strategies refer to the final way an investment will be executed or closed — for example, selling off stock in a business. In real estate, sample exit strategies range from assigning a contract in a wholesale deal to selling a completed fix-and-flip property.
All too often, investors fail to realize the importance of educating themselves on proper real estate exit strategies. In these cases, investors may not know what they are looking for in a given property before jumping in head first. In these cases, investors can lose time, and potentially significant amounts of money.
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-informed decisions when choosing the right exit strategies for your deals.
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Why Is Having An Exit Strategy Important For Real Estate?
An exit strategy is important because it not only guides an investor’s decisions throughout a given deal but also dictates how they will maximize profitability. While the implementation speed is of the utmost importance when facilitating 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 clearly understand how they intend to profit from every real estate investment before they even meet with a prospective seller.
Familiarizing yourself with each real estate exit strategy can save your business thousands of dollars, if not millions, over an entire career. It is never wise to negotiate 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.
How To Choose The Right Exit Strategy
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
Time to close
Condition of the property
Supply and demand
Location of the property
Understanding each of these individual factors will essentially determine which of the real estate exit strategies an investor should pursue.
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Top 10 Real Estate Strategies
Buy And Hold Real Estate
Bank Owned Homes
Passing On To Heirs
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 the different ways to exit from a deal can increase profitability, as you will know how to navigate even the most marginal deals. The following is a comprehensive list of real estate exit strategies you need to consider in the future:
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.” Wholesalers typically do not invest personal capital to facilitate deals and will charge a wholesaling fee. These factors make wholesaling an attractive way to get started in real estate investing.
Rehabbing, also commonly called house flipping, allows for the largest of profit margins, as it allows an investor to sell the target 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). The formula for a successful flip deal includes finding a property at under market value in a market where demand is strong, putting together a reliable team of contractors, sticking to the rehab budget and timeline, and then finally, selling the property quickly to the highest offer possible. However, because various factors can go awry, flipping does have some associated risks to consider as an exit strategy. Edward Mellett, Founder of Wikijob.uk, gives this advice: “Many investors believe that adding heated flooring and automatic lights will entice buyers to pay thousands more for their house, but the truth is that if the neighbors’ property is on the market with fewer improvements but a cheaper price, the buyers will likely choose the neighbors’. The market might take a long time to sell pricey residences, so keep this in mind if you plan to flip a house” To learn how the pros do it, consult our rehabbing checklist for more information.
3. Buy And Hold Real Estate
Buy and hold real estate 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 option is different from simply purchasing a property at market value and turning it into a rental property because of the rehabbing that is added as an extra step. Purchasing a property at a great price and then boosting its quality and appearance with some repairs and renovation will not only improve the property value (and thus the return on your investment), it will allow you to increase the rental rates. This is a popular real estate exit strategy for those looking to build up equity in an asset. However, make sure that you are ready to take on the responsibilities of property management.
4. Seller Financing
As its name suggests, the seller financing exit 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. This type of arrangement provides more flexibility for both the buyer and the seller than financing through a lender. If you are purchasing property, seller financing can allow you to buy more properties, not affect your credit report, and provide a swifter closing process. Also, you may be able to negotiate to put little to no down for a down payment. As the seller, allowing buyers to finance the purchase through you helps your listings stand out in the market. Seller financing can also create a source of monthly income – perhaps at a great interest rate – and spread out tax requirements as well.
5. Lease Options
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. Within this exit strategy, the owner and tenant will agree upon a rental period, after which the tenant will have the option of purchasing the property from the owner. Once the rental period ends and the tenant decides to move forward with the purchase, their monthly payments will be made to the property’s purchase. These payments will not be dissimilar to making mortgage payments but are made to the owner instead of a lender.
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, making it a great option for investors interested in doing a little bit of “DIY” without the full commitment required in a fix-and-flip property. Examples of ways to prehab include giving a home a new paint job on the interior and exterior, updating the landscaping, and perhaps replacing the carpet. Prehabs need not be excessively expensive or difficult and are usually limited to activities that can be executed without a professional’s help. However, the amount of time, energy, and money invested in a prehab is completely up to the investor. They are often sold to rehabbers who will continue to fix it up.
7. Bank Owned Homes
A bank-owned home, or real estate owned (REO), is a property sold by a lending institution, such as a bank. When a property has been foreclosed upon, the financing entity will seize it back into its possession and sell it under market value to a new buyer. Because it is expensive for banks to hold and maintain these properties, it is best to sell them as soon as possible. To do so, they will typically remove any outstanding liens and debts from the property. Bank-owned homes are sold through real estate auctions or are otherwise sold through the lender’s special REO listing website. Learning how to navigate the real estate auction process is, while not your standard exit strategy, learning how to navigate real estate auctions can result in some great deals.
A traditional exit strategy refers to purchasing a property and then working with a real estate agent to sell it for a higher price. Investors relying on this strategy will typically finance the property themselves or work with a mortgage lender. A traditional exit strategy is attractive because of its simplicity; however, investors who don’t buy in the right market could face high holding costs and small profit margins. The profitability of a buy and sell deal depends entirely on the home’s purchase price; without a complete rehab, investors will only be able to resell the property for so much. Therefore, to successfully pull off a traditional exit strategy, investors must secure the best possible purchase price. Investors interested in buying and selling should research motivated sellers, high-performing markets, and negotiation techniques.
9. Passing On To Heirs
Many investors choose to invest in real estate as a means to leave something to their family when they pass. Investors can pass property on to their heirs by creating a trust and will. Work with an attorney who can detail what will happen to your investments and who will inherit them at the time of your death. When they inherit the property, the property’s value will be adjusted to fit the current market value. This can prove more valuable than selling the property beforehand, as market prices may go up in value and the inheritor will avoid any capital gains taxes if they choose to sell the property after they inherit it.
10. Land Speculation
Land speculation is a risky form of investing. At its core, land speculation is a short-term investment that makes you, the investor, the middleman for the person selling the land and a land developer. Your goal with land speculation is to sell all or parts of your land’s rights to industries who can mine resources, gather materials, or use the land in some way. Land speculation is considered a riskier investment because it requires you to know the industry in the area, the value of the land, and the value of the resources on the land. You should always hire experts to inspect, appraise, and document the specifics of the land.
Real Estate Exit Strategy Mistakes To Avoid
While real estate investing is a sound opportunity to make significant amounts of money and achieve the lifestyle you desire, 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 most real estate exit strategies 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 moment’s 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.
But until then, it’s always good to know that you can always jump up to the more advanced strategies when you have a little experience under your belt. Approach it this way, and you’ll be putting yourself in the most advantageous position possible.
The right real estate exit strategies will guide you through all steps of a real estate deal, from start to finish. An exit strategy will determine which types of properties you work with, how to market them, and the potential profits of a deal. Take time to research the above options to identify the right choice for you (and your market). As you gain experience, you will learn how to use each strategy to your advantage and ultimately find the right ones for your business. Remember, by taking the time to think through your exit strategy, you can minimize overall risk and maximize your profits.
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