Exit Strategies – Part1
Here is the scenario: ARV = $85,000, Repairs = $10,000, Sale Price = $42,000 with a 30 day CASH closing. In this case the investor is looking to wholesale the deal for a quick profit of $8000 – $13,000. Lets explore some of the other exit strategies and options.
Fix and Flip using Hard Money: If the market is moving in the area, the investor could seek funding via a hard-money lender (5 7 points, plus 14% interest). In this scenario, the investor will pay an additional $5000 or more in interest and around $2000 in closing costs. That brings the total cost to $59,000 ($42K + $10K + $5K + $2K) with a potential profit of $26,000 ($85K – $59K). The investor would need to get the repairs done quickly and get the property back on the market. If a realtor is used to sell the property, the potential profit would be around $20,000 ($26K – $6K in commissions). Before choosing this exit strategy, the investor would want to have a reasonable expectation of selling the house quickly. That may mean lowering the asking price, thus reducing the potential profit and increasing the risk. This exit strategy probably is not the best choice for this property.
Fix and Flip using a Private Lender: Using private money can make these deals extremely profitable. Generally you can offer private lenders as little as 8% interest making the holding costs reasonable. In this case a private lender provides $55,000 for the purchase, repair, transaction costs and all holding costs. If this money is used for six months, the interest @ 8% is only $2200. That brings the total cost basis to $57,200 and a potential profit of $27,800 ($85K – $57,200). Again, the investor must evaluate the market and determine if there is a reasonable expectation to make a timely sale at or near the asking price. This is an example of why you really need to build a network of private lenders.
Fix and Flip – Selling at Retail: Based on the negotiated 30 day closing, this one is unlikely to work well. It would have been possible if the investor had negotiated a 90 day closing or used an option to control the property. In this scenario the investor markets the property to a list of first time home buyers. He sets the price below market value, lets say $80,000. The investor advertises that the first time home buyers credit will be matched with a full price offer within 30 days. The investor advertises that the new owner will have an opportunity to pick out colors and countertops (something that needed replacing). That brings the cost basis to $60,000 ($42,000 purchase, $10,000 repairs, and $8000 tax credit match) and the sale price of $80,000 brings a potential profit of $20,000. The nice thing is the repairs will only be done after the closing. The buyer has a new home that has $13,000 built-in equity and gets a check from the government for $8000 to do more updates or furnish their new home. This exit strategy requires a little more time than 30 days and a list of retail buyers.
Stay tuned for Part 2 of this post where we will look at some other options that can be used in this scenario. Please leave your comments if you have other options to suggest.
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