{"id":79019,"date":"2019-08-11T09:00:23","date_gmt":"2019-08-11T15:00:23","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=79019"},"modified":"2021-03-16T12:04:49","modified_gmt":"2021-03-16T18:04:49","slug":"2016-07-22-exit-bad-deal","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2016-07-22-exit-bad-deal","title":{"rendered":"How to Exit a Real Estate Deal Gone Bad"},"content":{"rendered":"

I\u2019m pretty sure that every real estate deal we go into looks rosy in the beginning. The numbers look good, the property looks good, the market looks good, and the cash flow looks good.<\/p>\n

Then maybe some time goes by, and you\u2019re standing there wondering what went wrong. I know I\u2019ve been there. While it could be the case where we made an error in judgement when entering into the investment, often something changes that\u2019s outside of our control.<\/p>\n

So, what are those possible changes, and how do we stay on top of them?<\/p>\n

Evaluating Your Portfolio<\/h2>\n

Regardless of what you invest in, I think it\u2019s prudent to periodically evaluate your portfolio.<\/p>\n

I review both my properties and my notes at least on a quarterly basis. My notes are probably easier since I get statements from my mortgage servicer, and I only invest in performing notes on a personal basis. As for my real estate, I have a property manager also send me monthly statements with everything collected and all the expenses we\u2019ve encountered broken down, so that part is pretty easy.<\/p>\n

When it comes to portfolio analysis, though, it\u2019s really up to us as investors to adjust our strategy when needed. For example, my mortgage servicer doesn\u2019t tell me the best time to sell a note. Maybe it\u2019s best to sell when equity is up in the marketplace, when there\u2019s more than 12 or 24 months of payment history, when there\u2019s less than a certain number of payments remaining, or when you\u2019ve already collected back your initial investment. You get the idea.<\/p>\n

Well, it can work similarly for real estate. For me, I look at my properties\u2019 location, cash flow, condition, appreciation potential, insurance expenses, taxes, and aggravation level at least yearly. (Does anyone look at aggravation levels besides me? This can include the level of difficulty for renting it out.) I also look for strategies to increase profitability and cash flow, if possible.<\/p>\n

To be honest, in over 25 years of owning rentals<\/a>, I\u2019ve had almost everything that can negatively impact a piece of real estate happen to me. I\u2019ve had property values drop. I\u2019ve put three kitchens in the same unit in a 10-year period. I\u2019ve had abandoned cars, units burn down, tenants get incarcerated, and even an attempted murder in one of my units. I\u2019ve had a SWAT team and the DEA destroy units. I\u2019ve had natural disasters like floods and trees crashing through the unit.<\/p>\n

\"african<\/p>\n

Related:<\/strong> 5 Smart Exit Strategies for Buy & Hold Investors Looking to Get Out of the Game<\/a><\/em><\/p>\n

But, I\u2019ve also had good times too, with many good tenants staying over 10 years.<\/p>\n

It\u2019s a numbers game that comes with the territory. Like Tony Robbins says, \u201cIt\u2019s not about resources, it\u2019s about resourcefulness.\u201d Sure it helps to have reserves, but it\u2019s not about what happens to us as landlords, but how we react to what happens.<\/p>\n

Oftentimes, I look at my properties to figure out how I can improve things. For example, I may renovate or add a bedroom to increase rents. Maybe I\u2019ll rent the garage separately or drop a prefab garage on the property. I\u2019ve even built garages on a lot behind one of my multi-units, which dramatically increased the value and appreciation potential.<\/p>\n

I\u2019ve also taken out lines of credit on rentals to tap into the equity<\/a> and use it to reinvest in other real estate deals, but I mostly use it to do hard money deals for fellow rehabbers and to buy notes. I really hate to see all that equity (from market appreciation and from paying down of the mortgage) just sitting there idle and underutilized.<\/p>\n

Pulling Off the Band-Aid<\/h2>\n

Sometimes\u00a0the property has just turned into a loser. Maybe the cash flow is down due to higher taxes and township inspection fees. Or maybe the maintenance is so high because it\u2019s an older property that\u2019s becoming a money pit. I had a property once where the flood insurance got so high it just wasn\u2019t worth keeping. Sometimes you can no longer make lemonade out of lemons, and it\u2019s time to cut your losses.<\/p>\n

There are other times when I look less at how the individual property is doing and more at how the entire portfolio is looking, especially if they are good properties in good areas.<\/p>\n

It\u2019s not necessarily a bad strategy to have your high cash flow, low value (or appreciating) properties help pay for the good properties. I have a good friend whose note portfolio\u2019s cash flow helps to maintain his real estate portfolio. This strategy can work really well in some places like California, where real estate may not cash flow as well but has a lot of potential appreciation.<\/p>\n

\"multifamily-real-estate\"<\/p>\n

How You Leave the Party<\/h2>\n

But how you exit the deal can be just as important as the investment you choose. Sometimes it is how we sell that makes the biggest difference.<\/p>\n

I remember my mom had three houses that by retirement had doubled in value. They cash flowed alright, but Mom was sick of the ongoing maintenance and management. (To be quite honest, I was getting tired of hearing about it, too.)
\n
\nRelated:<\/strong> What\u2019s Your Exit Strategy? A Case for Converting Your Real Estate to Paper Assets<\/a><\/em><\/p>\n

So, we sold the properties with special terms to other real estate investors. We carried a second mortgage for five years, interest only, with a seller\u2019s assist, and this allowed the buyers to take over Mom\u2019s properties with no cash out-of-pocket. Plus, the properties still cash flowed for them.<\/p>\n

Mom didn\u2019t have to pay any real estate commissions, she got out of the maintenance business, and she continued to cash flow (from the notes) on properties she no longer owned. She no longer had earned income in retirement, so she didn\u2019t miss the little bit of remaining depreciation very much. This was a great way to exit, and it worked very well for all parties.<\/p>\n

In addition to selling with terms like mom did, there are also other strategies available. If you\u2019re not cash flowing enough but there\u2019s significant equity, you could increase your yield by refinancing and reinvesting that capital (as I mentioned before) in something that cash flows more. Of course, you can sell the property. If you take a loss, you may be able to offset other gains somewhere else in your portfolio. That being said, deciding upon the right strategy is really up to the individual and depends on their situation.<\/p>\n

\"\"<\/a><\/p>\n

What\u2019s the turning point for you that means it’s time walk away from a deal? What is your favorite strategy for leaving the party?<\/em><\/p>\n

Let me know with a comment!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Maybe that real estate deal looked great at first – but somewhere down the line, you realized it’s NOT a good addition to your portfolio. Here’s what to do.<\/p>\n","protected":false},"author":807,"featured_media":113998,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4241],"tags":[],"class_list":["post-79019","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-business-management"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/79019","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/807"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=79019"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/79019\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/113998"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=79019"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=79019"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=79019"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}