Real Estate Exit Strategies
There are three different real estate exit strategies for investment properties. They are:
- Lease Option/Purchase
- Or Flip
Each exit strategy is a viable one. The biggest reason today that you want to make sure that you incorporate this money source into your planning is because they can perform quickly at closing, which is sometimes what is needed to win the deal. They can give you 100% financing plus the rehab money to fix up the property as well, which means you have no money out of pocket into the deal. It’s important to understand that regular financing with banks require that the prospective house be in good working order. Your potential purchase that fits your goals may not be able to be financed traditionally because of a broken window, leaky roof, missing toilets, holes in the walls and so on. When you have hard money at your fingertips as an investor, it gives you a sizable advantage when you’re up against other bids. REO brokers and sellers know that you can close faster, and they know that your money source knows that if there is work to be done to the house that your funding is still intact, while other buyers with conventional financing will not be able to close on the deal. Other real estate investors will pass up deals because they do not have this money source lined up as part of their acquisition strategy. This source is a game changer for you to be a DM.
The best way to create a good relationship with an HML is to bring them really good deals, pay them on time and most importantly, get them the information they request very fast. They are deciding who to give their money to, and if you drag your feet, then you can create problems for yourself twofold. Not only will they lend to someone else, but you will get the reputation that you’re not a serious player in the real estate world. If you can jump through the hoops that the HML puts in front of you then you have a good chance of securing funding for the deal and, once a relationship is well established, they will be more willing to look at future deals that you present to them.
The pros are:
- Fast (and easy) money, with the ability to get the money within the same day or next day typically.
- Less qualifying and no approval process as with a bank, they don’t evaluate the deal based on the 3 C’s.
- Ability to develop a working relationship with an HML and have money at your fingertips when a good deal comes along.
- If you cannot get traditional financing then usually hard money is a sure bet.
- Quick closing, sometimes they can provide you with money the same day the deal is presented.
- They can give you 100% financing plus the rehab money to fix up the property.
- The right HML can be flexible with terms if you have a good reputation with them… points up front or when you close, monthly payments included in the payoff, if they provide fix up money for your deals held in escrow, etc.
The cons are:
- High interest rate.
- Best for short term financing deals, either you are looking to do a quick flip or know that you can refinance within a 4 to 6 month time frame in order to pay the HML off and get a much lower interest rate.
- HML’s are primarily focused on property value (they typically like to see 30% equity in the property).
- HML’s typically charge 3 to 4 times more than a bank does.
Look in the mirror before you start looking through the window, the next step is to be honest with yourself. Are you a professional real estate student who likes to spend time learning and not executing? Are you buying into too many things as an excuse to not get started? Are you letting negative fear stop you from moving forward? Or are you the dealmaker, who knows that there is a cost to other people’s money, and by keeping your money intact you now have reserves to do more deals when other money is not readily available?