Exit Stategy

Your Exit Strategy should be a priority thought before buying a property. If you don't have an Exit Strategy, you have just made a major mistake. There are enough properties with many more to come in the near future so don't bet on a purchase a loser.

Exit strategies come in many forms. Most people who want to be RE investors think that flipping is sexy. "Flipping" or buying and selling a property before the first payment is due is the quickest way to make some fast cash to fund other deals, but there are large tax consequences. BUY & HOLD is a great way to save on those capital gains taxes. If you sell a property in less than 12 months + 1 day, the IRS considers you a trader and the tax rate is about 40% on any profits realized from the proceeds of the sale. In contrast, if you were to hold that same property for 12 months + 1 day and then sold, the tax on said gains drops to approximately 15%. That can make a big difference on wither a deal is profitable or not. Always consult a competent real estate CPA before purchasing property as an investment.

The person with a foreclosure on their record today is not the dead-beat of yesterday. We have become a generation that buys big ticket items based on the amount of monthly payment we can afford today and our emotions drive what decisions we make. Along with emotions, the creative 100%+ financing that the lenders and Wall Street brokers have designed, we as Americans have become comfortable with having the nicest and biggest homes that we can afford... at least we can afford the monthly payment at the time of purchase.

EXAMPLE: A family that bought a $200k house with an Adjustable Rate Mortgage (ARM) that has a 2 to 5 year "teaser" interest rate is OK until the loan adjusts to a higher rate and the monthly payment goes up 40 to 60%. Now they can't afford the monthly payment and the housing market has slowed down or in some areas has slumped and the house goes into foreclosure.

RENT-TO-OWN: Now the Investor that has a $150K house can Rent-to Own, Lease-Purchase, Lease-Option or Owner Finance that house to our family that could not afford the larger house with the ARM. All that is needed is a contract stating the intentions of both the seller and buyer. There are many types of contracts used in Rent-to-Own transactions. Investors should always consult a real estate attorney before drafting any contract. More on these contracts will be covered in a later post. A home warranty is a good idea and also a nice selling feature.

BUY and HOLD for the long term is another type of wealth building. Building equity while renting the property and having someone else make the mortgage payments. If you are investing for equity through holding property long term, buying the property at a discount is still a smart move. You need to make sure you have enough cash available for repairs and to cover the mortgage during times of vacancy. A good home warranty is a good idea to help reduce maintenance costs and also for a speedy repair at times that may not be convenient to you the Investor.

WHOLESALING is a strategy where the Investor buys a property at a deep discount and sells the property to another Investor at a discount. The most desirable way to wholesale is to have a buyer for the property before you actually purchase the property. This is where we get into the various types of closings, ie Back to Back, Simultaneous or ABC closings. Getting to know your closing agent or attorney and how they like to do these types of closings is paramount. *Note: You have to have a relationship with your closing agent BEFORE you close the deal. Also, more on this in a future blog.

RETAIL SALE: This is where the Investor buys a property, rehabs it and then sells to a retail buyer, usually listing with a Realtor using the local MLS. Something to remember is that a retail buyer has many financing options that may require the seller to have owned the subject property for a "seasoning" period of time. This varies between 90 days to 365 days. See the Tuesday, August 19 blog "The Housing and Economic Recovery Act of 2008."

Selling ebay: This is an exit strategy that less than 10 investors are using to sell their homes. Ebay is one of the top 3 sites on the web with the most hits in one day and you can sell property there. Drew Perry IS the leading expert for selling property on ebay. Check out his site at www.DrewLive.com.

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Thanks for reading, now GO MAKE SOME OFFERS!