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