Fix and Flip – Some Advanced Exit Strategies
Having different exit strategy options for your fix and flip is very important. Depending on how properties are moving in your target market, you may want to choose one exit strategy that has the best profit potential for the risks being taken.
In my last post I shared with you an actual deal under contract. As a reminder, here are the particulars: 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. Let’s explore some of the other exit strategies and options.
Previously we looked at Fix and Flip using Hard Money and Fix and Flip using a Private Lender. Today we will look at two more options that can be used.
Fix and Flip using Seller Financing on a Free and Clear Property: If a seller is motivated by the hassle factor and doesn’t need the money right away, this may be a good strategy. In this case the owner does not have a loan on the property. The owner may not want to pay the taxes for the sale of the home all at once. Whatever the reason you negotiate a sales price higher than they are asking. Crazy right? Not so fast! Let’s say we offer $55,000, no payments for six months, and then monthly payments of $200 for five years with a balloon payment of $43,000. Notice I didn’t mention interest; these are principal only payments. The money for repairs would need to come from personal resources or a private lender. Now you can sell the property with a rent to own or on contract to someone else. With the rent to own you get a non-refundable option credit (NROC) from a new home owner. In this case, we sell the home for $85,000 on a two-year rent to own with a $5000 deposit. You collect rent for $800 a month minus $400 costs ($200 to original seller, $200 for taxes and insurance) for a monthly cash flow of $400. At the end of two years the new buyer has to finance the deal and pay you $80,000 ($85,000 - $5000 option) at which time you pay off the original owner $50,200 ($55,000 - $4800 from monthly payments). You pocket almost $30,000 at closing plus you’ve made $400 on a monthly basis (tax-free if done right) for the last two years. There are many caveats to this strategy; however it can be a great builder of both cash flow and long-term wealth. The same type of thing can be done by selling on contract.
There are many other exit strategies that can be used. It is important to know what is going on in your particular market and have the contacts to make an exit strategy work. If you don’t have a list of people looking for rent to own, then that may not be the best strategy. That is why it is important to build your network and your list for the particular types of transactions you like to do. I’d like to hear comments back on other exit strategies that might work in this situation.
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