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5 Smart Exit Strategies For When Things Go Wrong Flipping Houses

by Michael LaCava on February 23, 2014 · 19 comments

  
exit strategies

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.

The best strategy to counter this is to nail your ARV up front so you avoid this situation to begin with. If you’re not familiar with ARV, I highly encourage you to read this.

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.

3. Landlording

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.

4. Wholesaling

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.

5. Wholetailing

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!

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{ 19 comments… read them below or add one }

Gerald K. February 23, 2014 at 11:43 am

Good Article Michael. I always just thought of selling or renting as exit strategies but there are some variations on those as you put forth. Nice to have options. I did a search and found this definition on BP for Wholetailing:
http://www.biggerpockets.com/blogs/1257/blog_posts/14300-what-is-wholetailing-

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Michael February 23, 2014 at 4:03 pm

Thanks Gerald. Good to have options and happy you found a few more

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Logan February 23, 2014 at 11:50 am

I think this is pretty useful information. I bought a property close to university for my son, unfortunately he dropped out early so I was stuck with the property. I renovated it because its a solid building in good location and now I’m receiving rental income.

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Michael February 23, 2014 at 4:04 pm

Thanks Logan. Nothing like passive income. Thanks for sharing your strategy.

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Sara Cunningham February 23, 2014 at 1:08 pm

Our second flip just didn’t sell for what we wanted and we needed to get done income coming in. We ended up doing a lease to own option on it. It works great for us the potential owner gas taken great care of it. The cash flow is great and of course they are also responsible for all the maintenance and repairs. We pay the property tax and insurance on it.

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Michael February 23, 2014 at 4:05 pm

Great Sarah. Cash flow is nice and no typical rental issues with lease option buyer for sure.

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JerryW. February 23, 2014 at 7:09 pm

Thanks Michael for the article. I am currently doing my first major flip and its good to have options to consider. I find my ideas for fix up are a bit too grand. I have to keep myself in check.

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Michael February 27, 2014 at 7:29 pm

That great JerryW. Love to hear more about it?

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Scott February 23, 2014 at 10:47 pm

Wholetailing…I have never heard this term before, but I really like it and have done it a few times. I can get in and out of a property quick with this, I have a property I closed on Friday did some clean up and paint on Saturday and put it on Craigslist to advertise an open house Sunday and had 4 full Wholetail offers and pocketed $13,332 profit. Another one I closed on it in the beginning of the month and planned to do a total rehab but decided to try to Wholetail it instead and sold it Wholetail at the end of the month by asking for $10,000 down and financing the balance over 8 years at 10%, she is living there fixing it up and plans to get a mortgage on it from the bank within a year, I know the may not happen but am OK if she doesn’t get a bank mortgage.

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Michael February 27, 2014 at 7:32 pm

Sounds good Scott. Just take a look at the dodd/ frank laws on seller financing. If you are doing seller financing directly to the consumer then you have to follow certain guidelines when it comes to rates, terms……
All the best

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Tracy February 25, 2014 at 1:43 pm

Hey Scott, timely article. We’ve been “lucky” enough to be able to continue to retail our re-sales even though some investors are struggling (to get them sold in a timely manner). It’s important to know alternative, strategies, though. As well, I’m at the point where I wouldn’t mind keeping any of our rehabs as a rental, if worse came to worse.

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Mark Ferguson February 25, 2014 at 1:55 pm

Great article Michael! Sometimes lowering the price and biting the bullet will save you even if you have to take a small loss. So many investors won’t lower the price because they won’t make enough profit for their work or will lose money. The market doesn’t care about those factors and losing a little money is much better than losing a lot!

It is always good to have other options as well.

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Michael February 27, 2014 at 7:33 pm

Great point Mark. The market doesn’t care what you are trying to make or how much money you spend so get over it and move on.

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IJ March 4, 2014 at 9:52 am

Great article. Thanks for the sharing it.

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Michael March 12, 2014 at 6:05 pm

Your welcome IJ.

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Shaun March 5, 2014 at 9:59 am

Lots of good points here Mike.
Thankfully the only one I have had to do so far is lower the price, and only a couple times for any major impact from original projections.
I know around here I would not be to excited to get into the better to rent it then sit on it or drop the price enough to move it cases. As you know there usually isn’t much debate on if a house will be a good flip or a rental, generally clear cut one way or the other and rarely can a place work well as both.
That said better to stop the bleeding and at least cover some costs then just wait to lose it when you can’t carry it with no income anymore.

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Michael March 6, 2014 at 4:47 pm

Yes I agree and that’s why its #1. The problem is some don’t think through the pricing strategy until its too late and then they act out of desperation.

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John Sheldon March 12, 2014 at 12:20 pm

Wow, I totally agree with Michael. As a matter of course, one should always go IN to investments with multiple exit strategies. I was told by a wise mentor of mine that ONE is a not only a lonely number when it comes to this subject, it is also RISKY.

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Michael March 12, 2014 at 6:07 pm

Sure is John. Thanks.

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