A good friend of mine finds hard-money loans for potential Investors, Builders and Developers. One of the biggest reasons for the Lenders turning the deal down is the Investor does not have an adequate Exit Strategy. Even worse, there is no Exit Strategy at all!
Many potential Investors spend hours and hours researching the market, researching prices, researching the cost of loans, actually researching everything but their exit strategy. Why is this important to Lenders and why should it be important to Investors? The obvious reason for investing is to make an income and eventually a profit. Have you as an Investor thought out and planned for all the contingencies?
- Long term gains or short term profit
- Market indicators that can affect your investment
- Costs of ownership
- History and predictions for this type of Investment from the experts
- What happens if there is a dramatic change in the market?
- What if your strategy is not working?
- Do you have more than one exit plan?
This past week, I had a Foreign National client close on a home that is far from the beaten path near a fishing village on the SW Florida Barrier Islands. His first idea was to purchase it, put about $30,000 in upgrades and keep as his vacation home. He would finance half of the purchase price and pay cash for balance. He also wanted to use it as a seasonal rental and then sell the property in 5 years. Exit strategy in place.
Due to recent zoning changes and the cost of the short term loan (Direct money lender), he turned down the financing and paid all cash. This saved him $12,000 in insurance fees and early payment penalty fees. But now, his original exit strategy would not work. So while waiting for the closing, he and I took a different look at the comparables. I had negotiated a price well below market price. With only $15,000 in renovations to update the older house, he has significantly increased his equity and re-sell value. Once the work is completed, it is going to be listed for sale as well as for seasonal leasing. If our predictions and planning are correct, he has the potential of doubling his profit in a much shorter time frame with this new exit strategy.
The old adage "you make the profit when you buy, not when you sell" is very important for Investors. Can you exit successfully based on the purchase price and cost of ownership? Don't hope for the profit, plan for it. It is almost as important to plan your way out of the Investment as it is in obtaining your Investment Property. A "good deal" on a property is only a good deal if it accomplishes your investment goals.
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