For Any Deal You Do
Exit Strategy One: "Retail" the Property
This means that you will sell the property for the highest price you can on the retail market. This is how most homes are sold, whether they be listed with a real estate agent or sold for sale by owner. Your buyer when you retail a property borrows from a conventional lender and almost always moves into the property to live there.
There are two main ways to implement this exit strategy:
Plan A: List the property with a great real estate agent in the area and let them sell it for you. If you choose this option make sure you ask around for referrals for the best agent in the area of town and for the specific type of property you are selling. We recommend that you interview at least three agents prior to listing your property and get a written commitment from them of the specific action steps they will take and by when to get your property sold fast. When we want to retail a property we will often choose this option. Top agents are worth every penny of commission they earn because the will simplify the process and do most all the work for you.
Plan B: Sell the house for sale by owner. This is a viable option for many investors. The biggest downside to this option, aside from the time factor, is that most homes are sold to buyers who found out about the property through the "Multiple Listing Service" or MLS for short. The MLS is the proprietary database of properties for sale that real estate agents have access to. If you choose sell a property yourself then you'll have to aggressively market the property with for sale signs all throughout the area and classified advertising in the local paper. One useful middle-ground is to list the property with a flat fee real estate broker. These real estate companies will put your property into the MLS and do some of the marketing in exchange for a flat fee sales commission, usually less than a few thousand dollars. If you choose this option you will have to be willing to pay a sales commission to the real estate agent representing the buyer of the property (typically 3 percent of the selling price.)
Exit Strategy Two: "Flip" the deal
This is a fast-cash exit strategy where you lock up a property under contract and then sell your contract to another buyer, typically another investor, who will pay you a cash fee to assign your contract over to them. The biggest benefit of flipping a deal is that it generates instant cash. For many new investors it's more important to them to get a quick cash payday than it is to hold on to a property over a period of time to make the maximum amount of profit. The most important lesson for your long term success if you choose to flip deals early on in your investing is for you to remember that it's critical that you choose the best properties to hold onto over time. If you don't, no matter how much money you are making flipping deals, you are still caught on the treadmill of needing to find and flip your next deal... and the next one.
Exit Strategy Three: Lease out the property to a traditional renter
This is perhaps one of the most common exit strategies of average investors. They buy a house and put a traditional renter in it. This renter leases the property either on a month-by-month rental agreement or a longer term lease (typically for one year).
The four benefits of this exit strategy that you get because your renter's money allows you to hold onto a property over time:
1. Cash flow!
2. Appreciation!
3. Amortization (the loan paying down)!
4. Tax Savings!*
*NOTE: Our good friend and world-class tax strategist Diane Kennedy wrote a phenomenal book that discusses all the details of tax strategies for real estate investors. The book is called Loopholes of the Rich: How the Rich Legally Make More Money and Pay Less Tax (Wiley and Sons) and we recommend you get a copy for your wealth library.
1. Paying for the maintenance
2. Time to manage the rental property (Dealing with tenants and toilets can be very time consuming.)
3. Expense of "renter turnover" (The most expensive thing for most landlords is the cost to re-rent out an empty property. Not only to you have the cost of the lost rental income while the property is vacant, but they also have the cleaning and painting and "prep" costs to get the property ready to show to prospective renters.)
Exit Strategy Four: Offer the property on a "Rent-to-Own" basis
Wouldn't it be great if there was a way you could get the three main benefits of owning a rental property--the appreciation of the property, the amortization of the underlying loan, and the tax savings from owning a rental property--without the three main downsides of owning a traditional rental property? Good news! The rent-to-own exit strategy comes extremely close to doing the impossible--it gives you all the benefits of a traditional rental property, while minimizing the three major downsides.
The way this strategy works is that you find a tenant buyer who wants to rent to own your property. This tenant buyer will lease out your property on a two or a three year lease with a separate option agreement which gives them a locked in price at which they can buy the home at any point over that two or three year term. As part of agreeing to give them this fixed "option to purchase" price, your tenant buyer will pay you a non-refundable "option payment" of 3 to 5 percent of the price of the property. Plus, in many cases your tenant buyer will also be paying slightly higher than the market rent because they aren't just renting the property, they are renting to own. This increased rent, when added to the option payment you collect up front, really boosts your cash flow on the property. The best part of a tenant buyer isn't this increased cash flow in our opinion. To us, the best part is that since you have an occupant with an "owners" mentality not a "renters" mentality, your tenant buyer will treat the property with much more care and attention. We even get our tenant buyers to take care of all the day-to-day maintenance and upkeep of the property!
Because rent-to-own has all these advantages over traditional rental properties we think you can understand our bias in real estate towards the rent to own exit strategy.
Exit Strategy Five: Sell with "Owner Financing"
This means that as a seller you take back some or all of the purchase price as a loan that your buyer will pay you over time.
Example: You sell a house for $400,000 where your buyer puts up a $20,000 cash down payment, gets a conventional first mortgage for $340,000, and you the seller carry back the other $40,000 as a second mortgage. Because of your willingness to participate in the financing, your buyer is able to much more easily get a conventional loan to fund her purchase of the house.
Example: You bought a house six years ago subject to the existing financing. You bought it for $200,000. The current loan balance on the underlying financing is $150,000 and the loan has an interest rate of 6 percent. You agree to sell the property to your buyer leaving the underlying financing in place for them for a total price of $400,000. Your buyer, who has lousy credit but great income, gives you a cash down payment of $60,000 and you agree to "carry back" the other $340,000 of the purchase price at an interest rate of 8 percent. Now not only do you make a healthy profit from the high selling price you got by agreeing to finance the whole purchase price, but you are making a great monthly income from the spread in the underlying financing (you pay the old loan at 6 percent but you collect at 8 percent from your buyer.) Your buyer is thrilled because with his lousy credit scores there was no other way for him to be able to buy such a nice home as this.*
*FOOTNOTE: This technique is called selling on a "wrap-around mortgage" and it is something we discuss in more detail in Making Big Money Investing In Foreclosures Without Cash or Credit (pp. 214-236).
Four Downsides to Exit Strategy One--Retailing a House:
1. Competition: When you sell most properties retail you are competing with other sellers who are selling their properties in the same area. This can mean more time before your house sells or a lower selling price through the negative influence of competing properties.
2. Expense: Often when you are selling a property retail you have the added expense of paying real estate sales commissions--from 3 to 6 percent of the selling price. While you can sell without an agent involved, this lowers your chances for a fast, full price sale.
3. Time: One function of greater competition from other homes for sale is that your property may take longer to sell. This means you have to wait longer to sell which lowers your ultimate profit and delays your big payday.
4. Conventional Lenders: When you retail a house, your buyer will almost always be relying on a conventional lender to finance the bulk of the purchase. Our experiences have been that many times this lender gets picky part way through the sales process and this can cause an otherwise willing buyer to have to back out of purchasing your property.
When you sell with owner financing you can avoid or minimize each of these four major downsides of the retail exit strategy.
Four Benefits of Selling With Terms:
1. Eliminates Competition: Look at your local paper and see the properties advertised for sale. Out of a hundred properties advertised for sale only two to five will be advertised with owner financing. This means that by offering owner carry terms you are differentiating your property from over 95 percent of the competition! Not only is there a very limited supply for owner financed properties, but there is actually a much larger demand for owner carry properties because more people can qualify for the financing you are providing for them. This means you can charge top dollar for the property (and many times a little over top dollar) and get it since anytime you limit supply and increase demand value increases--simply economics!
2. Lowers Your Expenses: Again since your property stands out from the competition you usually won't need any agent involved in the sale which saves you up to 6 percent of a sales commission. Plus, since your buyer has such limited options available, they are more than willing to pay all the closing costs. This saves you a few more thousand dollars on the sale!
3. Faster Sale: With such a valuable and scarce thing as an owner carry property you will usually be able to sell the property 30 to 50 percent faster than a traditionally retailed home.
4. Fewer Lender Hassles: Even if you have your buyer use conventional financing to fund a portion of the sale, since you are carrying back a chunk of the financing yourself, this makes it much easier for your buyer to secure their conventional financing. This means a much higher certainty of your buyer's loan sailing through without any snags or hassles.
We hope you enjoyed this special report on exiting deals profitably. For more information on how to make money investing in real estate go to www.resultsnow.com. You'll find dozens of investor resources there. For those of you who are reading this who are really serious about taking your investing to the next level we urge you to go to www.resultsnow.com and look into our Mentorship Program. It's the fastest way to successfully launch your investing business.
Good luck to you,
Peter Conti and David Finkel
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