The Guide to Selecting the Ideal Real Estate Investment Exit Strategy
Are you a one-sized fits all investor, sometimes trying to fit a square peg into a round hole? Or do your real estate strategies depend on the situation, whether it be on a deal-by-deal basis or based on the ever changing market conditions? If the former describes your investment strategy, then this post is for you!
Ron Carlson, who does 15 to 20 transactions per month, asks, “what is the exit strategy here?” before purchasing any deal. In our recent conversation, Ron explains how he determines upfront what exit strategy he will follow for a given deal – wholesale, owner-financed, fix-and-flip, or wholetail.
Wholesale Exit Strategy
Ron has had many bad experiences buying and rehabbing high-end or historical houses, which he labels as anything worth over the $200,000 to $250,000 price range. When working within and above this price range, one must deal with a different type of buyer, perform a higher quality rehab, and pay higher closing costs. Therefore, for any high-end or historical property, Ron will automatically plan on wholesaling it. While it is probably a good deal overall, since it doesn’t meet his cookie cutter strategy, it isn’t a good deal for him.
Another situation where Ron will wholesale a deal is if he is low on funds. One of the first things he looks at when determining an exit strategy is, “how much capital do I have on hand” and “how much capital will this project require.” If he doesn’t have enough capital, then he will wholesale the deal.
Sometimes, Ron will take the expected project timeline into account as well. A deal, for example, may be within his ideal price range, and he may have enough capital to cover all the expenses. However, if the project will take too long, in order to avoid having his capital tied down, he will decide to simply wholesale the deal instead.
Finally, if Ron needs a quick profit, wholesaling a deal will be the first option.
Owner-Financed Exit Strategy
When Ron obtains a deal that is under $120,000, the most ideal exit strategy is to sell via owner financing. This $120,000 is specific to his locality, and it will vary depending on the local market you are investing in.
In Ron’s market, the down payment that individuals can typically paying for an owner-financed deal is 10%. Ron also finds that people have a hard time coming up with anything over $12,000 in cash, meaning that the typical buyer can afford a 10% down payment on a property worth $120,000. However, this $12,000 is typically the individual’s entire savings. Therefore, buyers are most comfortable expending $6,000 to $10,000 for a down payment, so properties that are sub-$100,000 are a lot easier to sell via seller financing.
Fix-and-Flip Exit Strategy
Ron will fix-and-flip properties that are within the $120,000 to $200,000 price range. When doing fix-and-flips, he likes to rehab the properties to a higher degree than the comparable properties because he wants to sell them fast. Ron has found that if he puts in an extra $2000 to $3000 into a property, it will sell 2 to 3 months faster than if he didn’t perform the higher quality rehab. The expenses that result from holding a property for those extra 2 to 3 months is approximately $2000 to $3000. So, Ron nets the same profit while unloading the property a few months earlier, which is advantageous for many reasons, one being that his capital is returned so that he can invest in additional deals.
Wholetail Exit Strategy
Ron describes wholetailing as putting “lipstick on a pig and throwing it back on the market.” Therefore, what differentiates a fix-and-flip and wholetail scenario is the condition of the property. Ron will follow the wholetailing exit strategy for properties in the same fix-and-flip price range – $120,000 to $200,000 – that don’t require a full cosmetic rehab or don’t require a rehab at all. The property needs to have good bones and be in livable condition, without any structural, roofing, foundation, electrical, plumbing, or HVAC problems. Essentially, Ron must believe that it will pass for an FHA or conventional loan in the as-is condition. If a property meets this criterion, the first option is to wholetail it, and a fix-and-flip as the back up plan.
Typically, Ron will put such a property on the market for 30 to 45 days. Depending on the feedback, he will keep it on longer. If it is getting a lot of showings or if people seem to be agreeing with the price, then he will go past the 45-day mark. However, if the feedback is negative, or if he is getting a ton of lower offers, he will pull it off the market and revert to the back-up plan – fix-and-flip.
Note: All of these price ranges and percentages are based on Ron’s specific market. Therefore, modifications are required for higher-end and lower-end markets. Ron’s advice – “adjust with the market and find out who has the cash.”
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.