Do You Have an Exit Strategy Before You Buy the Flip?

Question

One thing I think every investor should know before closing on a flip is exactly how they plan to get out of the deal.

Selling at your target price may be Plan A, but what happens if the property sits longer than expected, the market changes, or the rehab costs more than projected?

Having a Plan B could mean adjusting the price, refinancing, holding the property as a rental, or simply having enough reserves to give yourself more time.

The financing gets you into the deal, but the exit strategy is what gets you out profitably.

Before leveraging capital, always do your own due diligence on the numbers and only take on financing you can realistically afford.

For the experienced flippers here  what’s your backup exit strategy when a flip doesn’t go according to plan?

Andy Sabisch · Answer

I try to ensure that the flip factors in a down turn in the market and unexpected expenses in the flip.  Too often people run numbers that assume the best rather than plan for the worst and a delay in completion with a hard money loan or a down turn in the market due to the season or interest rates makes what was a good deal an anchor dragging the flipper down.

We do LTRs as well so making sure that is an option if the flip does not work out is a backup plan but unless we want to hold it as a rental, we try to get it for a better price up front or rethink the project.

Ashish Acharya · Answer

Nicholas, I agree with the idea of underwriting the exit before you buy the flip, not after something goes wrong.

Plan A might be selling at the target ARV, but I’d want to know what Plan B looks like if the rehab runs over, the property sits longer, or the resale market softens. That could mean lowering the price, refinancing, holding as a rental, or simply having enough reserves to wait without being forced into a bad decision.

For me, the biggest test is whether the backup exit actually works on its own. If the rental option is deeply negative after taxes, insurance, vacancy, management, maintenance, and debt service, then it is not really a backup exit.

From the tax side, flips are generally active business activity, so if someone is flipping consistently and profitably, I’d also evaluate whether an S-Corp makes sense based on profit level, activity volume, payroll, reasonable compensation, and the overall structure.

There can also be a strong planning opportunity when you combine active flip income with rental real estate. Depending on participation, depreciation, entity structure, and whether the rental losses are actually usable, those losses may sometimes offset active real estate income. In the right fact pattern, taxable income can potentially be reduced very significantly, even to zero, but it has to be planned correctly.

I’d rather buy a deal with two workable exits and slightly less upside than one with a great projected profit and only one way out.

Feel free to DM me, I’d be happy to send over a few resources that might help with flip underwriting and downside planning.

Maurizio Pisciotta · Answer

For me, the best backup plan is usually making sure the deal can work as a rental (long term) before I even buy it.

If the flip doesn’t sell at the number I want, I’d rather have the option to rent it, refinance if the numbers make sense, and wait for a better time to sell instead of being forced to cut the price just to get out.

That said, the key is really buying right in the first place. If your purchase price, rehab budget, and ARV are too tight, there may not be a good Plan B. I’d also keep enough reserves for extra holding costs because that’s usually what starts hurting when a flip takes longer than expected.