Ignore These 4 House Flipping Exit Strategies at Your Own Peril
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