Which Exit Strategy is the Best Play?
We recently closed on, yet another off-market deal that one of our “bird dogs” identified as distressed. We have been very active in this neighborhood, and it’s starting to show. The purpose of the bird dog is to drive around designated areas that we identify to have a lot of room for appreciation and find distressed properties. Bird dogging is a major aspect in the off-market value add play. Our investor purchased this property at $90,000, and we helped them identify three possible ways to move forward.
We could wholesale the property at $140,000 without any renovations for an easy profit of $50,000. This is a very solid move, and does not take a lot of work. The second option is to do a traditional flip. Purchased at 90,000, and remodel for 60,000, we expect the appraise value to be $235,000. This would bring a profit of $85,000. Again, this is a solid investment depending on your real estate goals.
However, after discussing with our investors what their long term real estate goals are, we decide that a cash out refinance would be in their best interest. We estimated that the remodel cost will be $60,000, bringing the all-in cost to $150,000. As stated, the property should appraise around $235,000. This option will allow our investor to refinance at $176,250, at a 75% LTV (Loan to Value) ratio. Because the new mortgage is higher than the all-in cost, the investor will receive $26,250 in hand to be able to reposition into an additional asset. We will be able to rent the home for $1,600 per month, and we essentially are in for $0 cash. When we looked at the big picture, and realized our investors long term goals, the only option that made sense was to re-fi and allow the owner to invest in another asset and enjoy the positive cash flow that was achieved. Another reason why the traditional flip doesn't work is because the percent of taxes that our investor would have to pay on the profit from the sale.