Flipping Houses

Ignore These 4 House Flipping Exit Strategies at Your Own Peril

Expertise: Flipping Houses, Personal Development, Real Estate Investing Basics, Mortgages & Creative Financing
105 Articles Written
Exit Strategy House Flipping

When house flipping, everyone always seems to focus on the ENTER strategies – learning how to find properties, using wholesalers, wholesaling properties yourself, working through real estate agents, etc.

But not as many of us focus on the EXIT strategies of house flipping.

But sometimes, no matter how many solid exit strategies you may have, there will always be bad things that happen that you couldn’t have ever anticipated in a million years.

One of which happened to me just a few weeks ago…

If You Have an ENTER Strategy…You Better Have an EXIT Strategy

Exit strategies in house flipping or any form of real estate investing are nothing more than back up plans. If things don’t go the way you plan on your house flip, then you have to think of what is your back up plan or do you even have one.

I know the excitement and feeling you get when you buy a house, can’t wait to start the renovation to turn it into a beautiful home that you will be proud to sell.

It’s an awesome feeling, no doubt!

But of all the feelings you get in house flipping, the best one of all is after all your hard work has paid off, when you walk out of a closing with a really big check in the five-figure range.

***It’s funny because as I write this, it reminds me that I should probably enjoy those moments more thoroughly. The truth of the matter is that I am renovating so many homes now, I don’t enjoy it or maybe don’t take the time to enjoy it – nearly as much as I used to when I first started flipping houses. Whatever you do, don’t do this!***

Because when things really go wrong… they did just recently for me…how I yearn for that feeling – and it makes me think I’ve taken it for granted.

The House Flipping Exit Plan

When it comes to exit plans, you should have that plan in place right from the start. That plan should be in place before you even put your offer, have determined your MAO, pulled out the calculator to determine the 70% formula or before you finalized your ARV.

Before all of this comes you should have your exit plan already figured out.

Especially because of recent events, it’s reminded me that the exit plan is the most important thing to determine in real estate investing – whether you are buying and flipping or buying and holding for long-term rental income.

For the purpose of this article, let’s assume your plan is to buy, renovate and sell the house, take the profit and move on to the next flip.

By the way…if you’re counting on using the money from one flip to find another flip shortly thereafter, that would be your first mistake. Never count on the funds from one closing to purchase another property.

It’s certainly OK to use money from one flip to fund another flip. But if you don’t close on the first property in time to purchase the next, then you’ll need to be prepared to have money from other sources readily available.

Ok back to your plan to sell…

As you purchase the property just stop and think for a second “what would happen to my plan to sell if things went awry?”

4 House Flipping Exit Strategies You Need to Know

I know it is hard to think of all the things that can go wrong – especially when everyone tells you that in real estate investing it’s so important to stay positive at all times.

I talk about mindset here at BiggerPockets all the time and how important thinking positive is in overcoming your fears.

This is not that kind of thing though…this is just good business planning to prevent disaster coming your way. You want to be proactive and not reactive.

Having said that though, a wise man named Dick Bruce once said:

“If you fail to plan, you plan to fail.”

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In keeping with wise man Bruce’s words, here are four strategies you must follow:

1. Lower Your Price

Do you know what your break even price is? Are you prepared to sell and make no money or even lose a little money so it’s not catastrophic for your business?

The idea is to know what your break even number is. You should also know what your monthly carrying costs will be as well so you can think ahead of price reduction strategies and actually have a plan in place with your listing broker to reduce the price after so many days.

You MUST know what the mature date is on your loan and plan towards that as well.

2. Do a Lease Option

With a lease option you may be able to actually get the price you want for the house.

A lease option is simply an agreement between you and the buyer where they give you a down payment (known as the "option payment") to rent the property until they are able to exercise their option to purchase it. Lease option buyers are usually people who have a stable income but just happen to be in a situation of not being able to currently qualify for a traditional loan.

This could be due to many reasons – but they are on the path to credit recovery and have a plan to restore their credit in maybe 18-24 months.

Most important, you will need to know if your lender is agreeable to extending your loan to allow for a longer term. If the answer is no, then you should make sure some another bank or financial institution will refinance your loan.

Proactive planning – not reactive planning will save years on your life with these kinds of situations.

3. Rent It Out

If a lease option doesn’t work, you can always rent it at the prevailing market rate to a qualified tenant.

If you’ve done your research in the area and have found that there is demand for rentals, then this is even better.

If your financing on the house is from a hard money lender or some other kind of short-term financing where your monthly payment is fairly high, consider refinancing into a long-term mortgage to lower your monthly costs.

4. Punt…and Take the Loss

What happens if you had all of these exit strategies in place…but none of them will actually work?

It just so happens that after five years of real estate investing, I find myself in that very situation right now.

Here’s the story….I’ll make it brief:

  • I partnered on a property with a builder and he handled the closing on the land.
  • I then refinanced the land purchase with a loan to build a house on that land.
  • On refinances like this, you don’t typically get owners title insurance because you would have had it already from the purchase. But in this case, the land was purchased at auction.
  • The title came back clear and marketable – so we closed and everything is good.
  • The house gets built and sold to a very motivated buyer.

Not so fast though….

  • At the closing, the closing attorney finds something in the title back from 1930 that no other title examiner had ever found in the land court exam.
  • Typically title searches don’t go back that far all the way to 1930 – but on this title search, they did.

Yes, friggin’ 1930…

  • Now, the property we had bought at auction, built a house on and had already sold to a very satisfied buyer…now does not have clear title.
  • I think: “No problem, at least we have title insurance, so we’re good”…or so I thought.
  •  I call my builder/partner and ask him to send me the title insurance policy.
  • Much to my dismay, he tells me that he always buys it, but in this case he didn’t buy it…

Bottom line: we cannot sell the house.

House Flipping Recovery and Rediscovery

Regardless of who is to blame, we have to figure out away to get out of this one – without taking a huge loss. Right now, we’re still figuring that out…

One “punt” option we immediately thought of was to rent to the buyer for the three to six months it will take to clear the issue (we hope it’s only that long through the land court).

This way, the buyer gets the home they want and are able to move in immediately. We collect rent to cover our monthly expenses and all is well.

Perfect, right? Wrong.

The buyer was advised not to do this kind of rental arrangement. Just when we thought we were out of the woods…we’re still right in the middle of them again.

Our best estimate is that the title should be cleared in no more than six months. At that point, we will then re-list it and sell it quickly.

Fortunately, we have a huge cushion and can absorb this additional monthly expense, but it really sucks to do it….we are still searching for solutions.

What do you think we should do?

If you were in my situation, what would YOU do?

If you made it this far, please leave a comment below! I would love to hear what you think we should do in this worst case scenario. Thanks!!!

Photo: Ben McLeod

Michael LaCava is a full time real estate investor, house flipping coach and the President of Hold Em Realty located in Wareham, MA. He runs the website House Flipping School to teach new real estate investors how to flip houses and is the author of "How to Flip a House in 5 Simple Steps".

    Replied about 6 years ago
    Hmm, what a bummer. I think I would try to lease the house to someone on a 1 year lease, while the title situation was worked out, then list and sell it once everything is cleared up. Of course, you might try to find someone willing to do a 6 month lease or shorter. I wouldn’t want the house to sit empty that long producing no revenue, and I certainly wouldn’t take a bet that the title issue will be cleared up in only 6 months. Of course, you know all the details, so only you can determine the best course of action.
    Replied about 6 years ago
    Hey James – That is exactly what we are trying to do. I might have a buyer already that may rent it out on a lease option until we can close.
    Kevin Vincent
    Replied about 6 years ago
    Imho, the problem with renting it is that you wouldn’t be selling a “new” house anymore.
    Replied about 6 years ago
    That is a good point Kevin and a straight out rental would be my last choice. Going for a lease option sale.
    Replied about 6 years ago
    In this case I would bet there are no living witnesses to sort this out, how about taking the property through the foreclosure process to settle all issues? About a year ago I had a seller signed up, in checking the title we found about 12 liens, and a second mortgage, that according to the owner was paid off, but no satisfaction is on record. The lender is now defunct. I decided the equity in the deal was just not worth my effort to stop this fellows first mortgage holder from foreclosing, and then sort this mess out. I will however be interested in the property when it becomes a REO for sale with a free and clear title.
    Replied about 6 years ago
    Probably the right move Dennis.
    Amy Arata
    Replied about 6 years ago
    I’ve had something similar happen and I found a title company that would provide “affirmative coverage”. That is, they’d sell title insurance that would not cover this specific issue, which was unlikely to pose a problem anyway. Another time, the title company was useless and had missed a sliver of land that had not been conveyed but was needed to meet setback requirements. They were incompetent and were going to take months to fix this simple problem and I was going to lose my buyers. I did a web search to find the previous owners (who had been foreclosed on AND were divorced). I hired a mobile notary and got them each to sign a deed for the land sliver over to me. I met them were it was convenient for them. I pointed out that they might owe back taxes on the land, which made them eager to sign! Sometimes you need to just take things into your own hands. I’d get a second opinion about having insurable title.
    Replied about 6 years ago
    We tried for affirmative title and the buyer title company and my attorneys title company could not get them to write it. You are so right Amy and do have to take things in your own hand sometimes. I recently had a lease option where I had to help the buyer because his mortgage broker just wasn’t getting things done. I consulted with a mortgage broker I know and he told me what to have the buyer do and it helped save the deal. The “experts” are not always experts. Thanks for your suggestions.
    Frank O
    Replied about 6 years ago
    Man that sucks. I’m not as familiar with land purchases as others might be on the site. I didn’t realize that title insurance went back that far either. I was really reading the scenario you drawn up like it was a narrative. With the all the unthinkable drawbacks that could possibly come up in a deal, no one is immune. Not to rain on your parade, but it’s good to learn from other’s mistakes (such as yours) so that I can bear this in mind in my future deals. Thanks
    Replied about 6 years ago
    Glad to help Frank. If I can help others avoid potential mistakes by sharing mine I will. Unfortunately no matter how well prepared and how much you learn you can not avoid 100%. Learn and grow and don’t repeat! Thanks for your comments
    Douglas Dowell
    Replied about 6 years ago
    Thank is a major buzz kill, Mike has your lawyer laid out the pro’s and con’s of a quiet title law suit to clean this defect up? It would seem to me the best option for every one involved. Making your buyer in good faith whole otherwise seems to be pretty costly.
    Travis Daggett
    Replied about 6 years ago
    Michael, Awesome! I like the “find-a-way, make-a-way” attitude!
    Replied about 6 years ago
    Oh wow that SUCKS! I would do what it sounds like you are and do a quiet title action to clear up whatever BS they are worried about. For the property itself I would probably look at doing a lease option so you the place isn’t vacant (Especially over the winter!) and you can offset at least some of the costs, as well as have a buyer in place when things are clear. Not sure how you need to structure the contract though. They obviously can’t exercise the option prior to getting the issue fixed, and you would want to extent (I would think) if the contract came due and you hadn’t fixed it yet.
    Replied about 6 years ago
    You can say that again shaun. You are right on with your assessment. Looking to lease option/sale. My lender will make more money so at least someone is not upset.
    Replied about 6 years ago
    Good glass half full look at it. 🙂