Do You Know Your Short Sale Exit Strategies?
If you are a short sale real estate investor working the foreclosure market, it is imperative that you understand your exit strategy.
In simple terms, an exit strategy is a "how can I get paid if I do this deal" strategy. For example, if you purchase a property, whereby the debt is required to be negotiated (i.e., a short sale), there needs to be strategies formulated that allow the investor several ways to exit the deal AND provide for a paycheck. It is easy to buy a deal, only to find out later that making a profit will be a challenge.
Contrary to what most people think, there are several exit strategies that exist with short sales. I'll cover three in this article.
Exit Strategy Number 1: This is the easiest strategy, whereby the investor acts as a debt negotiator for the deal and is compensated by receiving a fee for their services. There can be many variations to this, including real estate agents on both sides of the transaction.
Exit Strategy Number 2: This strategy is commonly referred to "flipping properties." In this strategy, the investor submits a wholesale offer on a property and (normally) does the debt negotiation with the lender(s). In parallel, the investor searches for a new buyer. The idea is to negotiate a wholesale price with the lender that is lower than what a "retail" buyer would offer for the property. The spread between purchase and re-sale has to be large enough to cover the closing costs for two closings.
Two closings are normally needed because the wholesale purchase has to close with the foreclosing lender, and then another closing with the retail buyer. I have done numerous of these closings and the techniques and paperwork seem to change almost daily. These are more complicated than advertized and require a funding source (e.g., flash cash) for the wholesale purchase.
Exit Strategy Number 3: This strategy would be referred to as a "fix and flip" or a "fix and hold" transaction. The idea is the same as the wholesale strategy in Strategy 2, except the investor owns the property for a period of time and performs a certain amount of repair on the property. The property is then put on the market to be sold or tenanted. This strategy can have the most risk because of several factors, including purchase costs and holding costs, ineffective repair work or costs, or downward trending market effects.
After these strategies are mastered, the savvy real estate investor can profitably maneuver through many more types of deals.
The key point is to understand that we have to be ever more diligent on calculating the offer. Note, formulas used to calculate offers on long-term hold real estate are not at all related to fix and flip formulas, and these deals are normally disastrous for the unsuspecting investor.
We talk much more about this in the What2offer mentoring program. After years of doing these calculations by hand, my partner and I have developed an online real estate software to make our lives much easier. We can now crank out offers and determine the exit strategy in seconds.
To Your Success,Tom & Svein
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There are several different strategies to be used in the real estate investment game. You can focus on fix and flips, hold long term rental homes, even rent to owns, wraps, or some or all of the above. The key with investment properties is that you know what you are doing. This is particularly a difficult market to be in. You need to know what is valid out there today, your real estate contracts need to be up to date, your real estate offers need to be spot on, etc. Your repairs also need to b
There are several different strategies to be used in the real estate investment game. You can focus on fix and flips, hold long term rental homes, even rent to owns, wraps, or some or all of the above. The key with investment properties is that you know what you are doing. This is particularly a difficult market to be in. You need to know what is valid out there today, your real estate contracts need to be up to date, your real estate offers need to be spot on, etc, etc.
This morning, I heard the reporters say the government is now considering increasing the minimum down payment to a whopping twenty percent (for real estate purchases). This is for the average home buyer, not just for people wanting to purchase investment properties.
When I first started investing, most of my transactional paperwork was purchased from various national authors from Webinars and boot camps. It was pretty much true that these authors said "make sure you have your local attorney adjust these forms or make your own." However, like most folks, I was directly using the forms included in my generic paperwork set from my various workshops.
A short sale is a process, whereby the lien holder(s) accept(s) "less than what's owed" to release their lien(s). A lien is a charge (or encumbrance) against a property making it security for the payment of a debt, judgment, mortgage, or taxes. This process is normally facilitated between lien holders of notes and a third party--called a debt negotiator--and us the real estate investor.
When I first started my real estate investing business, I focused on learning how to get customers and then learning how to put deals together and then learning how to close deals. The next thing I learned is how to get more deals, while I was already working on other deals. It wasn't too long before I was so busy that I could not take on any new deals. I was the proud owner of a Level One business. Today, I own a level Three business. Here is what you need to do to reach this for yourself.
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This morning, I heard the reporters say the government is now considering increasing the minimum down payment to a whopping twenty percent (for real estate purchases). This is for the average home buyer, not just for people wanting to purchase investment properties.
If you're a real estate investor like myself, you've most likely attended many seminars, workshops and the like. If these courses involved fix and flip real estate, they have undoubtedly included a formula to make offers to buy investment properties to rehab and resell.
In the old days of a few years ago (smile), calculating fix and flip real estate offers was fairly simple. All you had to do was determine the after repaired value, give yourself a margin of error/profit, subtract off the repairs, and your offer was normally good to go.
Let's say the median priced home in the US is about $240,000. According to the news, there are about $10 Million homes somewhere in the foreclosure process. So the idea is to give these qualified homeowners a loan modification to reduce the interest rate such that the new payment is 31% of their gross income, or less.
When I first started investing, most of my transactional paperwork was purchased from various national authors from Webinars and boot camps. It was pretty much true that these authors said "make sure you have your local attorney adjust these forms or make your own." However, like most folks, I was directly using the forms included in my generic paperwork set from my various workshops.
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