exit strategies for real estate investors

 

How often in life does everything go exactly to plan?

Real estate investing is no different, except the stakes are much higher. You need contingency plans for your contingency plans, a depth chart that would make an NFL team proud.

In other words, you need multiple exit strategies. You can’t always sell properties conventionally, and you can’t always hold them as rentals, either. What do you do if your flip turns into a flop, and you only have short-term financing? Or if you can’t keep your rentals after all, because your spouse walked out and hired a pit bull of an attorney to requisition your assets?

Our plans don’t always work out, but when we’re working with assets worth hundreds of thousands of dollars, failure isn’t an option. Here are five unconventional real estate exit strategies, that all investors should keep warm on the back burner in case their main dish gets burnt.

 

1. Bundle Multiple Properties

Have several properties you need to sell? Consider selling them as a bundle.

matt-andrews-real-estate-investorThe properties could be bundled to offer a “package discount,” or they could be fully renovated, turnkey properties selling for a pretty penny. Matt Andrews of REFreedom.com uses this tactic all the time: “After we find, fix, and rent the properties, we package and sell them (sometimes 5, 10, 20 at a time) to large funds, buying groups, and international investors.”

Sure, there are fewer buyers in the market for property bundles, but they are serious buyers with deep pockets. They can move fast and settle quickly.

Consider also that rented properties are self-sufficient, on a monthly cost basis. It costs a lot of money to carry vacant properties while trying to sell them, but sellers have the luxury to wait for the perfect institutional buyer to come along if they’re rented and earning money while on the market as a performing bundle.

There’s also an economy of scale at play here. It’s no picnic marketing a handful of vacant properties separately, but selling as a bundle means only one “product” to market and sell. This helps investors and marketing agents focus their efforts, and frees up more time and resources to market that bundle more aggressively.

 

2. Auctions

Auctioning off properties works great when you need a quick sale.

Don’t expect top dollar – auctioning real estate prioritizes sale date over sale price. But when you absolutely, positively need to sell a property by a certain date, auctions are a reliable way to sell.

As anyone who has auctioned anything can tell you, who you choose as the auctioneer matters. A lot. Reputable auction companies attract serious, reputable bidders, who trust that the auctioneer is not deceiving them. It takes time for auctioneers to build trust – just ask Sotheby’s, who has been around since 1744.

Established auctioneers also have powerful marketing machinery in place, to reach the maximum possible audience. They have extensive mailing lists, standing ad slots with local publishers, familiarity with the best ways to reach the right prospects in the local market.

But even when you use a reputable, experienced auctioneer, the outcome remains a gamble. Your final price will come down to who turns out that day, which can be affected by random variables like the weather, or seemingly unrelated events like a conference taking place across town. Maybe the traffic is just exceptionally bad that day, and prospective bidders decide not to make the drive.

Auctions aren’t quite an act of desperation, but they certainly won’t attract top dollar, either.

 

real-estate-exit-plans

3. Guerilla FSBO Tactics

Realtors are expensive, and aren’t always necessary. Sure, unique and upscale properties probably need a realtor to do some serious sales maneuvers, but an average middle-class house? The primary marketing is a simple MLS listing.

Today’s real estate investors can list their properties on the MLS using services that cater to For-Sale-By-Owner customers, at a fraction of the cost of a realtor. But the MLS is just the beginning.

There are entire Facebook groups dedicated to local real estate available for sale. If you’re targeting investors, there are also Facebook groups for local real estate investors, not to mention local real estate investing clubs.

It doesn’t take a realtor to put a “For Sale” sign in the window, or host an open house. Or, for that matter, to post flyers in the local grocery stores, fitness clubs, coffee shops, etc.

In some ways, this technique is the opposite of hiring an auction house. You’ll do all the work yourself instead of handing it off, but you’ll maintain much more control over the process, and you can wait for the right price. You’ll also be in an excellent position to offer seller-financing as part of the package, to help encourage buyers along (more on this later).

 

4. Use a Niche Realtor Specializing in Investors

The best realtors have a deep niche; they may not do everything, they do one or two things extraordinarily well.

That niche of course includes your property’s location – your realtor should be an absolute expert on that market. But if you’re trying to sell to another investor, and you want to use a realtor, you need to find the local realtor who knows every investor in the market worth their salt.

In this case, you’re not paying for their MLS access, or their ability to bake muffins while hosting a hunky dory open house. You’re paying for their network. You’re paying them to get on the phone and call every investor they know until they find one who bites.

The right investor specialist realtor can find you a buyer in a day. They have a rolodex overflowing with hungry investors, and they’ll know exactly who to call for your specific property type. “Two-story brick rowhouse in Federal Hill, rented for $1,900? Yep, Wendy loves those. I’ll give her a call right now.” Done. Fini. Past tense.

 

5. Lease Option/Rent-to-Own

While most investors understand the concept, most have never actually used a lease option agreement. The idea is simple: if you’re not in a rush to sell, you can sign a lease with Spencer Renter that gives him the option to buy the property within a year or two, for a preset price.

The tight timeframe protects the seller in several ways. First, it provides urgency for the buyer, and pushes them to act quickly. Second, it protects against the seller committing to an outdated price, if the property appreciates quickly.

Lease options can be especially effective in slower markets, where there isn’t enormous demand at the present moment. In red-hot markets, it’s just not necessary, and is likely to leave the seller burned by losing out on the appreciation over the course of the option term.

To help the renters purchase, sellers can provide financing. This creates both work and risks for the seller though: they have to service the loan, and if the buyers default on their payments… well, it’s a lot more expensive and time-consuming to foreclose than it is to evict. And then there’s the question of the seller’s own mortgage – are they paying it off? With what money? Are they doing a wraparound mortgage and keeping their original loan? If so, they’re probably in violation of their loan terms, which nearly always require payoff in the event of a change of ownership.

Still, seller financing can combine well with a lease option, to sell a property for top dollar. It just takes more patience than, say, auctioning the property off.

Tip: Be sure your lease agreement includes a “no-equitable interest” clause. Double check that your state permits them, but they protect your property – and your ownership of it – until the tenant-buyer actually settles.

 

Scalability

As real estate investors grow their portfolios and tackle larger projects, it becomes ever more important that they have multiple exit strategies when something goes wrong. Life is not predictable, and the higher the stakes, the stronger the need for contingency plans.

Scaling your real estate business means both risk management and creating systems for exiting with a profit. “What made these strategies successful was our ability to systemize then scale up the process,” explains Matt Andrews. Once a system is refined so that it’s easy for any employee to handle it, the sky is the limit for real estate investing businesses.

What unconventional real estate exit strategies have you used? How’d they work out for you? Success stories and failure parables are always welcome.

 

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