Multiple Exit Strategies May Multiply Your Profits.

    Some people claim you earn your money when you buy and get it when you sell. Often, you earn your money well before the sale—you earn it when the contract to purchase (purchase agreement) is signed by the seller. This can be true even if you don’t know what you are going to do with the property you just contracted to buy. If you have a contract on a property that provides many profitable exit strategies you may be able to earn your money with very little of your own money at risk and secure your profit very quickly because you will have many possible end buyers to market to and many lenders who will be happy to finance you.

     I recently spoke with a previous partner about a deal he thought he would get under contract soon. It came from one of the ubiquitous yellow letters that you often hear of on this site. This was a small house on a good sized lot in an area with strong demand. Even before the final purchase price and terms were agreed to it was clear that the contract would be valuable and I agreed to fund it without asking any details of the property—other than the location and the size of the lot.

     The property is located in an area where I have previously knocked down houses and constructed new spec homes. Many homes in that area with less than 1,000 square feet of living space are being replaced by 2,200 – 2,800 square foot homes. A good sized lot to me is one upon which I am fairly confident that I can build a large enough home to profit from the tear down and/or new construction. This lot was larger than the others I built on recently so I am highly confident that new construction can be profitable.

     The price range that was being discussed was low enough that the purchaser might be able to make a significant profit if they simply flipped the home to another builder at a higher price. (Because of the speed of this transaction and the low risk it might actually be the best use of this contract). The purchaser is a builder and they might be able to find a buyer who would want them to construct a custom home on that site. This is a good option because the buyer of the new home arranges for the financing before construction is started. Another option would be to build a spec home. This is much riskier but the home is located in an area where many spec homes are being constructed and, as I said, I have already participated in a couple similar projects in this area so I have a very good idea of both costs and the sales prices that can be expected. The risks of this option can be quantified even if they cannot be known exactly.

     The contract was signed and I decided to look up the home. It is small but it is a nice home. I was surprised to see that it had been updated quite recently. The hardwood floors and cabinets are in nice condition. So are the granite counter tops. This provides a couple more possible profit points—the home could be rented for a while or, this is a long shot, resold to a homeowner.

     Multiple profitable exit strategies on a property make the contracts very valuable. It is easy to find financial partners to fund these deals and end buyers to purchase them.