Discover why so many successful investors support their investment careers with house hacking—and learn from a frugality expert who has “hacked” his way toward financial freedom!
Buying real estate is great, but no one gets into it because it's a fun hobby. Investing in real estate is a
means to an end: wealth building. Over time, your property should gain serious equity and provide you with
substantial income and (hopefully) appreciation. Some investors choose to hold onto their investments
indefinitely. Some will simply hold onto cash-flowing properties forever with no intention of getting rid of
However, in your investing career, you will most likely elect to get rid of one or more of your properties for
various reasons. Choosing the best strategy for exiting your real estate investment is just as important as
deciding which one to buy. This chapter will give you a broad overview of the various exit strategies you can
use in your investment career.
Start with the end in mind.
When listing your home with an agent, be sure to interview several agents to find one you are comfortable with. In the
world of real estate agents, the 80/20 principle often holds true: 20 percent of the agents sell 80 percent of the
listings. It's important to find that 20 percent and allow them to work their magic.
When you choose the agent who you’d like to list your property, you will typically sign a listing agreement, giving them
the right to earn a commission if they sell the home. The agent will discuss with you all the important features of the
property and enter them into the multiple listing service (MLS), which all agents have access to.
At this point, you will decide what price the property should be listed for. Pricing is very important, as you do not
want to list too high (adding months to your holding time) or too low (leaving money on the table). A good agent will be
able to look at other similar properties and determine the best price to list.
The listing agreement also spells out the commission to be earned by the agent. The typical commission for a real estate
agent is 6 percent (though that can change slightly depending on price, property type, and location). This fee is
usually split between the agent who brought the buyer and the listing agent. In the case where your selling agent is
representing both you and the buyer, the whole commission is given to the agent.
Many individuals feel that locking down an agent is the end of their duty in selling the property and expect the agent
will take it from there. However, this is not the case. There are many tricks and techniques that you, the seller, can
do to ensure the property is sold for the highest amount—and quickly.
Start with making sure the appearance of the property is desirable, including both the interior and exterior. Look
around at competing properties, and aim to look better than the rest.
If selling a single family house, consider staging the home with furniture, artwork, plants, flowers, and other
accessories to help the buyer see a home rather than simply an empty house. If selling a multifamily or commercial
property, do your best to ensure all units are filled and operating at peak efficiency.
Once an offer is received, negotiations begin, and hopefully both parties will agree on a price and terms for the sale.
Paperwork for the sale of the property will be handled by either a local title and escrow company or an attorney,
depending on the common practices in your area. Both parties will sign the documents, the money will be funneled through
the title and escrow company or attorney, and the deal will close, leaving you with a large check to invest in more real
estate and grow your empire.
While the majority of homes are sold with a real estate agent, you don't need to use one. Most often, a real estate
agent will cost you an extra 6 percent. For this fee, an agent will typically:
For some, the cost of a real estate agent is too high, so they choose instead to sell it themselves. A major deterrent
to selling yourself, however, is that the listing won’t get put up on the MLS. Without being listed there, you’re
missing out on reaching the vast majority of individuals looking for a property.
To remedy this, one tool available to FSBO sellers is what’s known as a flat fee MLS listing service, in which a seller
will pay a flat fee to a real estate broker to list the house. This fee generally ranges between $150 and $400 and
includes very limited help from the broker. The broker will simply place the home on the MLS and might even offer a sign
in the yard, but he or she will do very little other than this.
This leaves negotiation, setting up title and escrow, and managing the closing in the hands of the seller themselves.
Additionally, since a real estate transaction includes both the buyer's agent and the seller's agent, a commission is
still paid to whichever agent brings a buyer to the deal. Instead of 6 percent, it usually will end up being around 3
percent out of pocket.
Seller financing (also known as "carrying the contract") takes place when an owner sells a property to a buyer but
carries the mortgage rather than requiring the buyer to get their own mortgage. This is done by investors all over the
world and across different investment types for a variety of reasons.
In a normal sale, the buyer will go to a bank to get financing for the house, and the seller will receive the total sale
price (less selling closing costs) in one lump sum. With seller financing, the seller is the bank. So, the buyer
provides a down payment directly to the seller and makes monthly mortgage payments to the seller for the life of the
loan or until the buyer decides to sell someday.
This is done for a number of reasons, but usually it is for buyers who don't typically qualify for a normal mortgage.
The current lending atmosphere can make it tough for many buyers to obtain traditional financing. They may not be able
to document all of their income, may be self-employed, or may have some blemishes on their credit reports.
Keep in mind that seller financing isn't only for the benefit of buyers who normally wouldn't qualify for a mortgage.
Many investors choose to sell off their properties using seller financing because they want to receive monthly income
that doesn't involve maintenance, tenants, or rentals. When a property is sold via seller financing, the property
becomes the new buyer's responsibility. With that comes all the rights and expenses that are associated with ownership
(including taxes, insurance, and maintenance).
A seller may also choose to use seller financing in order to offset the taxes due at the end of their investment career.
The IRS classifies this as an "installment sale" and allows the seller to spread out any capital gains taxes that may be
due. See your tax advisor for more information on the tax benefits of seller financing.
When offering seller financing, the seller should require a large, non-refundable down payment up front to protect their
interest and to reduce the likelihood that the buyer will stop making monthly payments. The higher the down payment, the
lower the risk to the seller.
For example, if a seller requires a $1,000 down payment, there is not a lot of incentive for the buyer to uphold their
obligations. However, if the down payment required is $30,000, there is a lot more incentive to perform. Additionally,
it is important that the seller goes through the same process as they would during a normal sale, using a title company,
attorneys, and other legal paperwork to ensure the sale is done correctly.
Seller financing is generally only applicable if the home is currently owned without a mortgage. If you have a mortgage
through a bank or other lending institution and decide to sell the property to another party using seller financing, you
will break the due-on-sale clause that exists in the fine print of the mortgage. If this happens, the bank may foreclose
on you. Seller financing is only viable for a free-and-clear house.
After a property has been sold with seller financing, the seller may choose to sell the mortgage or note to another
investor. This opens up the world of note buying, which is beyond the scope of this guide but is a very common strategy
amongst experienced investors. For more on notes, search the BiggerPockets website.
The largest risk associated with seller financing is the chance that your buyer may stop making payments at some point,
whereby you, the seller, will have to foreclose. In this case, you will be subject to the same laws and foreclosure
processes as any other lending institution, which will cost time and money. Each state is different, but you will
probably need to hire an attorney to get through it. After the foreclosure is complete, you will get the house back and
can sell it all over again, but you may have to deal with repairs and other issues before the home is ready to be
While the risk of foreclosure can never be completely avoided, it can be minimized if the note is managed properly. Do
this by screening the buyer carefully. Furthermore, as mentioned earlier, the best way to reduce your risk is to collect
the highest down payment possible. The more money you receive up front, the less likely you’ll have problems.
Another exit strategy used by investors is the lease option or lease purchase. This arrangement is made of two separate
parts: the lease and the option.
The lease is just like any other rental lease, where the tenant moves into the home and makes monthly rent payments.
The option is a legal agreement that allows the tenant to buy the home at a predetermined price in a predetermined
length of time. The option makes it illegal for the landlord to sell the property to any other investor during the
predetermined time period. In exchange for the tenant's sole "option" to buy the property, the tenant will pay an
upfront, non-refundable option fee that will typically be later applied toward the purchase.
Real World Example: John and Sally would like to buy a house from Fred, the investor, but lack the down payment and
credit requirements to get a loan for themselves. Fred has a mortgage on the property himself, so he cannot carry the
contract. He provides seller financing instead. Fred does a thorough background and credit check on John and Sally and
decides they would be good candidates for this. The parties then sign both a lease agreement and an option agreement,
giving John and Sally the right to buy the home for $100,000 at any time within the next two years. John and Sally
provide a $5,000 option fee and move in.
In this case, several different outcomes may occur:
1. It’s a great short-term exit strategy for a slow market. Flipping a property in the current
real estate market can be difficult and costly. Doing a lease purchase can provide positive cash flow and offer
the opportunity to wait for the market to improve while locking in a possible buyer.
2. Lease option tenants usually take better care of your property. Tenants who have a lease option
often feel more like buyers than typical tenants and will take much better care of a property than a typical
renter. Tenants can also be made responsible for small repairs in preparation for becoming homeowners.
3. No real estate commission is required. Unless you find the lease option tenant/buyer through a
real estate agent, you won't owe a commission when it comes time to sell via your option contract. Besides
marketing the home slightly higher than market value due to the flexibility you’ll be offering your tenant, you
can save up to 6 percent when the tenant buys the property.
While lease options often present a terrific win-win situation for all parties involved, there are some downsides to
be aware of before jumping in.
1. The dreaded due-on-sale danger. While technically no sale has taken place, many argue that a
lease with an option to buy can indeed trigger a due-on-sale clause because it transfers an interest in the
property. The language in the law that determines when a bank can trigger the due-on-sale clause is cloudy at
best, and while this may be a gray area, it is ultimately up to the bank to decide if they want to call the note
due and force you to pay back the entire loan within 30 days. Should this happen, you can challenge it in court,
but that will require significant financial resources.
2. You can't sell the property to anyone else. During the option period, the tenant has the
exclusive right to buy the home. If prices suddenly rise, you’ll be locked in at a certain price unable to sell
for more. Also, if the market begins to drop and go downhill, you won’t be able to sell to get out of the deal
until the "option" is no longer binding.
3. You could be sued. There is a story on the BiggerPockets blog about an investor who was sued by
a tenant who claimed (after being evicted for not exercising his buy option) he had "equity" in the home. While
the tenant had very little (or no) legal grounds to stand on, the tenant still cost the investor time and money
in court fees, hoping for a settlement.
One final note about lease options: very few lease-option tenants ever actually utilize their option and purchase
the property. As a result, some unscrupulous investors have used the lease option strategy to take advantage of
tenants, offering a lease option to individuals who will never qualify for a mortgage and charging outrageously high
option fees and short terms, hoping the tenant doesn't buy. These investors then rechurn the process over and over
again. This usually leaves the tenant in a worse position than they were in when the process began.
BiggerPockets does not approve of this practice and instead asks that you treat your tenants with respect and
dignity. Taking advantage of others for profit is what gives real estate investors a bad name. Don't do it.
Get the Ultimate Beginner's Guide as a convenient, downloadable PDF
As with any business venture, when you are successful, Uncle Sam will be there to collect his share. When it comes
time to sell a property that you own, chances are you will have significant taxes due, especially if you followed
the advice in this guide and bought a great deal. Thankfully, if you are paying taxes in the United States, the
government provides a way to defer those taxes to a later time.
There are a number of rules to be followed, but if done correctly, you can possibly use the money you would have
paid toward capital gains tax and instead put it toward your next property using a 1031 exchange. Essentially, this
is the government's way of partnering with you on your investment deals. There are a lot of complicated things that
go into a 1031 exchange, so be sure to talk to a qualified tax specialist before making any decisions.
At this point, you should have a clear understanding of how to eventually get out of your real estate investment. If
you begin with the end in mind, you’ll make it much easier to unload your property and clear a nice profit.
While you have reached the end of the BiggerPockets Ultimate Beginner's Guide to Real Estate Investing, your journey
is just beginning. You now have a very clear understanding of real estate investing and how to begin profiting from
it. Now it's time to put what you’ve learned into practice. If you have not yet done so, please head over to
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BiggerPockets is a community made up of hundreds of thousands of real estate entrepreneurs who help build each other
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part of our community.
Ask (or answer) questions on the forums, read recent blog posts, create a company profile for your business, or just
hang out with other investors. Motivational speaker Jim Rohn famously said, “You are the average of the five people
you associate with most.” So, if you are not currently associating with successful real estate investors, let
BiggerPockets help you with that.
That's it! Thanks for taking the time to read the BiggerPockets Ultimate Beginner's Guide to Real Estate Investing.
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