Hedging your bet, multiple exit strategies.


Hedging your bet, multiple exit strategies.
by James Miller

When we analyze a property, the emphasis seems to fall heavily on the front end.  We try to figure out if we are getting a good deal.  If we will have some equity, or cash flow left after we spend our hard earned cash on down payments, closing costs and contractors.

This will often revolve around one assumed exit.  If you are buying a fixer-upper it is usually to sell and take a profit, If you are holding for the long term, it is often that we want to use the property as a rental.

My suggestion in this post is that you take the time to learn about and examine all possible exit strategies as you evaluate your purchase.   The reason for this is that when we get into a real estate transaction things rarely, I dare say never, go as planned.

I am currently holding rehab properties (fixer uppers) that I had intended on selling when we were done with the repairs and remodeling. In this market I have had to expand my exit horizons. We are now looking for Lease option tenant buyers for the properties a the next best exit and hav enot eliminated the idea of just renting them out.

If you were a landlord a few years ago when anyone and everyone was getting qualified for a mortgage, you know that the rental market was hit pretty hard.  You waiting list of reasonably qualified tenants disappeared and your found yourself letting in the less than desirable crowd.

Some landlords took a different route and did condo conversions on their properties, taking due advantage by capitalizing the loose lending market. This was an exciting alternative to renting during that time.

Right now we are doing a lot of advertising for homes we have available for sale using a lease option.

A lease option is essentially a “rent to own” agreement in which the seller allows the tenant to purchase at a predetermined price within a predetermined time frame.   We typically allow the potential buyers two years to exercise their option to buy, and get an above market rent and sale price for this privilege.

This also works for the buyers as they are often not able to get into a home otherwise.  This is especially true today in this difficult lending environment where near perfect credit and 20% down are hurdles too high for many new home buyers.

Outside of Lease Options, I am willing to hold a second mortgage on many of the properties I have. This sometimes allows the sellers to come to the table with less of a down payment as the banks’ LTV requirements are still being met.

While I don’t like these as much as lease options, I am also willing to sell on land contracts, or contract for deed.  Very similar to the lease option in that the deed stays with the seller, but it gives the buyer more ownership rights to the property.  In a nutshell, it is harder to evict a land contract buyer than it is a lease option buyer.

Tried and true, renting a property may be a viable alternative to selling. I would surely try one of the two aforementioned alternatives before this, but I can’t deny it as a plausible option.

I should take a moment to mention that many  of these exits where the seller continues to retains ownership for a brief period of time is due to long term capital gains.

If you own a property for more than a year you only have to pay taxes on the profit at a rate of 15% as it is long term capital gains. If you hold it for less than a year, you will have to pay taxes on the profit at the same rate of ordinary income.  This can be as high as 35%.

This reason alone should make you want to make sure you have your property titled in your (or your LLC, or land trust) for longer than a year.

Another viable exit and probably one of the best is the ability to flip a contract. Unless it is otherwise explicitly spelled out in the offer to purchase, you can assign your position in the contract to another party.

This may not be as sexy as rehabbing and reselling the property for the big bucks, but it has the best return on investment, as well as, having the benefit of eliminating your downside exposure.

If you have multiple exit strategies lined up for your property, you have hedged yourself against getting caught in the many potential pitfalls that having only one exit strategy can expose you to.


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