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Knowing Your Exit Strategy First 7/21/2008
Excerpt from the Real Estate Investing Quadrant Success System
The first thing you do in any investment is to decide what type of investment it will be and what you're going to do with the property. Will you turn the deal over to another investor for a quick finder's fee, or will you fix the property up and sell it retail to a homebuyer who will live in it. Maybe you'll want to keep the property as an income-producing rental, or maybe you'll create a no money down deal for yourself to live in.
How you plan to complete the deal is commonly referred to as knowing your "Exit Strategy" and is a term used by real estate investors to describe how they plan to sell a property and make a profit.
Know Your Exit Strategy Going Into The Deal
You should always know exactly what you are going to do with a property before you buy it. You'll also never want to make an offer on a property unless you know exactly what you are going to do with it if the offer is accepted; nor will you ever buy a property and then figure out what to do with it after the fact.
How you go into a deal many times will affect your exit strategy or how you go out of the deal. In other words, if you pay all cash for a property, you may not be able to keep that cash tied up for a long period of time. Therefore, you would either need to flip the property to another investor for a fee, fix the property up and retail it to a home buyer, or refinance the property to get your cash back.
Choosing The Right Exit Strategy
Your exit strategy is based on three main factors. These factors are: your personal goals, the seller's needs, and the property itself.
First of all, your goals are very important when deciding what types of investments to do. For instance, is your immediate goal to make some quick cash or to build a retirement nest-egg? If your goal is to build a monthly residual income, you'll have to consider the exit strategies that produce a monthly income, such as Lease Options or rentals. If your goal is to make some quick cash, you'll have to consider doing some wholesale or retail deals.
The Seller's Needs
You'll also need to consider what the seller's needs are. Is the seller a bank needing all cash or is the seller a private individual simply looking for debt relief.
For instance, if you are looking to lease a property with an option to buy, bank owned properties are not good prospects because most banks are looking to sell for cash, especially when the property needs work.
Finally, you must analyze what type of investment a property is most suited for. Is the property in a resalable area suitable for selling to a homebuyer, or is the property located in an area that is better suited for rentals. You don't want to be rehabbing and retailing a house that is in a war zone, for example. Does the property need repairs and are you prepared to have them done?
Don't worry if you think that deciding on an exit strategy is complicated. Once you know and understand the Deal Quadrants, deciding what to do will be pretty easy.