Sometimes, when flipping houses, things don’t go as you planned.
Murphy’s Law does dictate that whatever CAN go wrong WILL go wrong.
Not that you want to think about the negatives but you should always live by this credo:
Expect the best…but plan for the worst.
This is when you need a solid exit strategy to get you out of trouble.
Typically, that trouble is the house just isn’t selling…but it could be other things as well.
So if you come into a situation where you either cannot sell or you need to sell quickly due to outside circumstances, you’ll want to consider a number of exit strategies – most of which you should think about before you get into the transaction to begin with.
Here are the top five below.
1. Lower The Price
Exit strategy number one is simply lowering your price. But don’t just lower it willy nilly…the idea is to understand where your bottom line number is at all times and adjust it accordingly.
Of course, every day that your house sits on the market, it costs you money – primarily because you’re borrowing money to do your deal. So the idea is to really understand for every thousand dollars you lower your price, how does that weigh against your bottom line.
If you’re selling the property at $300,000 and your projected profit might be $60,000, you have some room there. If it’s only a $20,000 profit, you may have much less room for price drops.
Sometimes you have to lower your price and take your lumps – and those lumps may be slim profits or worse case scenario, losses for you. If that’s the case, lesson learned and move on to the next.
2. Lease Options
Exit strategy number two is what’s known as a lease option.
A lease option entails finding a buyer that may have some money and is able to put down a deposit. That deposit and their subsequent lease option payments secures their right to buy that property at some predetermined date down the road.
For you, it gives you some cash ahead of time – so you’re able to extract some profit out of the property. You can then charge them a monthly lease amount or a monthly rent plus an option fee on top of the rent which will increase your cash flow at the same time.
A lease option may be a better option than being a landlord because your tenant has a vested interest in the property and they’ll usually take very good care of it.
With lease options, the lessee* could put down anywhere from $10,000 – $50,000 on it depending on price. You as the lessor* can keep this money in the event that they decide they don’t want to buy any more. This is a non-refundable option payment, and it’s perfectly legal.
*By the way, “the lessor” is the individual who owns the property and “the lessee” is the person who will be renting or in this case leasing. I always get the two confused…:-)
The option down payment protects you and your investment, so if the lessee changes their minds, that money would not be refunded. So it’s really a win-win situation in that the lease option buyer (lessee) might be in a situation where they might have a good job, they have money but their credit is bad. And the reason why their credit might be bad they could have simply just went through a divorce, maybe bills weren’t being paid or any number of scenarios.
So in this case, the lessee doesn’t want to rent, they want to own. A lease option is a great way for them to own a house, while helping to solve your problem at the same time. In cases where you don’t want to give the house away by reducing the price, a lease option is often a great solution.
Exit strategy number three is landlording – which is nothing more than buying a property and then renting it out. If you decide you don’t want to sell the house at a lower price, then renting is a good option.
The number one thing you don’t want to do is default on your loan, so subsidizing those loan payments with rent is a helpful way to do this.
Defaulting on your first loan is a quick way to end your real estate flipping career, so becoming a landlord is a far better option to make things work for you.
Before you get into the flip, it’s always good to know what the market demand is for rentals in your area. This doesn’t necessarily mean you wouldn’t do a deal because the rental market in the area isn’t great – but it’s just a real good idea to know ahead of time.
Maybe the house is in an area where rentals are in demand and the property you’re buying is a both a great flip but also it would be easy to rent as well. We have this happen all the time where we think it may be better to landlord instead of sell outright when the property is finished.
The other thing that would be good to know is whether you can you get conventional financing if you need it. This way, if you have a hard money loan or a private money loan, you can pay off that loan with a traditional mortgage while getting a lower interest rate at the same time. Maybe the reduced monthly payment can now be covered by the monthly rent.
There are some mortgage brokers that work with buyers to determine if the end result would be a financing deal from a mortgage company or bank. They actually have hard money lenders as well that they work with – and these are good mortgage brokers to get to know.
If you’re a serious house flipper, you ideally want to buy a property, renovate it, and then sell it to make some money.
But if you’re in a situation where you can’t make things happen with a current flip, you may want to consider wholesaling it.
About a year ago, I wholesaled a property because I had several different deals going on and at that time, I simply didn’t have the scale to handle another one.
In this case, I actually bought this property because I was thinking about moving my office in there. I decided against it as there were just too many challenges involved with the local building inspector.
So I decided to sell it to another investor to get out of it. I wasn’t in trouble per se, the deal just wasn’t a good one for me at that point in my career.
I wholesaled it to another investor and I was free and clear so I could focus on my other properties I had going on at the time.
Sometimes you just want to get rid of a property you bought quickly. You may not be “in trouble”, but you just need to unload as fast as possible. This strategy – although we have done it only in very rare circumstances – may be a solution for you.
I don’t know if this is a word – but I’ve never heard it before. I actually thought about this one this morning as I was prepping to write this post….I call it “wholetailing”.
It’s kind of like wholesaling a property – but to a retail buyer.
Let’s say you bought the property and for some reason you just needed to get out of it quickly. Maybe another deal came along and you wanted to close on that one and you needed the money from this one to finance the other.
So instead of doing a full renovation on this property, you do a quick clean out instead. This could be a property where there may have been a hoarder in the house or the house is just a complete mess or it maybe it had a really bad smell of garbage or pets or something else.
To get out of a property like this quickly, you would just go in there with a dumpster and clean it out to make it saleable. Maybe you hire a demo crew to go in and clean everything out. Or perhaps you might just rip up the old carpet and replace it, redo the floors which may just happen to be hardwood, and do a quick sanding and refinish.
So instead of doing a full renovation, you put $5,000 or maybe even $10,000 in the place and just do some light cosmetic repairs.
I say “cosmetic repairs” here because you NEVER want to just cover stuff up. I cannot stand the guys that go into a property and just cover up known problems like mold and structural issues that could seriously hurt the new buyer.
When you renovate, even in a “wholetail” kind of rehab, you always want to approach it responsibly. You never want to sell any property to someone where you have knowledge of serious structural issues or other kinds of issues like electrical hazards or mold behind the walls. That is NOT what I’m getting at here.
When I say “a quick clean out”, this means that the house is solid – with a good foundation, good framing, good bones – it’s just a mess and unattractive and is relatively easy to clean up.
This is more a combination of wholesaling and retail selling in that you’re selling it to a retail buyer but not as a complete renovation. If your broker indicates that there is a market for properties that are not completely renovated, it’s a worthwhile strategy.
The property completely rehabbed it might be worth $220,000 but you’re offering it at $160,000 instead. Your profit is a quick $20,000 instead of a much larger sum, should you have done the complete renovation.
The idea is that you might find yourself in this situation where you can make a quick dollar because of whatever your personal situation may be. Maybe you have a few more deals going than you want to or maybe you just don’t want to do two deals at the same time.
In cases like that, wholetailing is a great way of getting out of it which is why it’s a worthwhile exit strategy to consider.
If you’ve made it this far, please leave a comment below! What do you think did I leave out any exit strategies? Please leave a comment and share your opinion — or ask me anything you’d like about flipping houses!5 Smart Exit Strategies For When Things Go Wrong Flipping Houses by Michael LaCava