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Three Exit Strategies for Flipping Houses
Whether
real estate investors purchase apartment buildings, luxury properties,
mobile homes, office buildings, or foreclosed houses, all successful
investors need to have an understanding of exit strategies. An investor
with a clear exit strategy has the end in mind— how the investor will
profit from the investment— before purchasing a property. An effective
exit strategy protects an investor’s principal and helps the investor
realize a profit.Most investors learn the importance of putting together a plan, which includes multiple components, such as outlining criteria for finding homes, conducting due diligence, making offers, financing purchases and completing repairs. Well-informed real estate investors become familiar with business cycles and monitor economic indicators and. Knowledge of business cycles and economic indicators enable investors to buy properties near the bottom of business cycles and sell near the top.
Real estate investors have an array of exit strategies from which to choose when it comes to profiting from their investments. In fact, most seasoned investors usually have more than one exit strategy in case the other option becomes unworkable.
Three of the most common exit strategies for real estate investors who flip houses include the following methods:
1) Flipping Houses
The basic concept of flipping houses entails buying properties at substantial discounts, making major or minor repairs and selling the homes within a short period of between 30 to 90 days. Many real estate investors choose this strategy because they receive return of principal and profit almost immediately. These investors reinvest their profits and repeat the process.
Investors must buy “right,” which means not paying too much for the property or miscalculating the repairs needed to bring the structure into condition to sell. In addition, the approach requires a good understanding of the state of the real estate market. Flipping houses carry a fair amount of risk, especially for investors who fail to perform the necessary due diligence on the property and the market.
During the last real estate boom, even inexperience real estate investors made lots of money flipping houses. When the real estate market collapsed, many investors who held one or more properties could not find reasonable buying prospects. Absent alternative exit strategies, these people lost a portion or all of their investment capital.
2) Wholesale Flip
Some real estate investors prefer not to deal with rehabbing properties. Instead, they buy properties at significant discounts or “wholesale” prices, sell to other buyers and take commissions. Usually the other buyers renovate homes and sell to homeowners.
The wholesale flipping process involves four basic steps: 1) Find the property and get it under contract, 2) advertise the property as an “Investor special”, 3) negotiate sale price and assign the contract to your buyer, and 4) close the transaction.
The wholesale flip transaction has minimal risk. Often, it requires little or no money down. The key to making it work is to put the following words next to your name on the sales contract, i.e., “John Wholesaler and/or assigns.” This language gives you the legal right to assign the sales contract to another buyer.
3) Rent and Flip
Many investors work this strategy in depressed real estate markets when credit-underwriting standards are tight, and potential buyers may find it difficult to qualify for mortgages. Many potential renters may have lost their homes to foreclosure and need to get themselves reestablished financially while renting. These individuals might represent the best candidates for buying your homes when flipping houses.
The rent and flip exit strategy have the most important elements of the other strategies— buying low and assessing repairs needed for the home. However, investors need to purchase the property, renovate the home and rent it for steady cash flow with the end game in mind— flip the home for a nice profit.
Conclusion
Other exit strategies may include refinance, buy and hold or lease/option. Regardless of exit strategies, investors who have exit strategies in place can protect their real estate investment. Solid exit strategies minimize risks and improve the chance of meeting your intent of realizing cash flow, quick profit, property appreciation or a combination of the three financial objectives.
Author Bio: John B Landers has more than 15 years of practical experience in the private/public housing and construction industries as a manager, business owner and real estate investor. As a freelance writer for the past six years, he researches and writes content on a variety of subject matters, including the economy, real estate, foreclosures, home improvements and consumer finance.
John also has a Bachelor’s degree in Business Administration with a minor in economics. Visit Free Foreclosure Database.com website for news and practical tips on foreclosure investing and free unlimited access to foreclosed homes listings.
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