Cashing Out Early

[Juan Diaz]

Sometimes you have a fabulous property that you love flipping. Sometimes you’ve got a project that drags on and on, but you know the return will be worth it in the end. And sometimes you’re faced with a choice: is it possible to cash out of an ongoing project and avoid that painful slog while still turning a profit?

It’s something that is less-talked about than going through the entire development process, but there are very legitimate methods of making a tidy profit without going through with the construction process and without being a wholesaler. In fact, there are a few specific moments throughout the flipping process that you can profitably cash out at.

The whole flipping or developing process is pretty simple. You buy a house, fix it up, and sell it. During this process, you have four opportunities for profit:

• 1.Wholesale the property immediately after purchase
• 2.Sell the property after entitlement
• 3.Pre-sell the property during the build process
• 4.Sell the property through traditional means after completion of work

Each of these methods have their plusses and minuses. The first, wholesaling, is only really an option if you purchased a property cheaply enough. However, it is a fantastic way to quickly realize profit for minimal investment. You can usually get a home in contract and sell the contract without putting any money down yourself, if you find a wholesale-able deal.

I’ll skip the second option for now, but the third option is also one that’s not super popular: pre-selling during construction. Most people like to buy already-constructed houses, but if you’re a developer or designer in enough demand, sometimes you can find a buyer willing to commit after seeing the plans that you’ve created. The key here is creating good enough marketing material and renderings so that someone can see the finished product in their mind. If you can do that, you’ll be able to pre-sell your house and skip some of the hassle of putting it on the market. The buyer wins too—they’ll be able to customize some of the finishes, and avoid any potential market increase between sale and the finishing of construction.

The fourth option is the tradition method of cashing in on your property, putting it on the market and selling it through normal means. No point in going into the details here, you’ll probably get your highest pure-dollar return if you go this route.

Let’s rewind back to the option that we skipped, option #2. This option can be a very lucrative option if you’re developing from the ground up. Especially in constrictive building environments, an entitlement is a very valuable thing. In the Bay, we estimate that an entitled property will sell for about one third of its final value, while an empty lot without entitlement is worth perhaps 20-25% of final value. This means that if you’re skilled at negotiating with building departments, you can cash out earlier in the process and sell your property once you get the full set of permits.

This option can be a very valuable one if you’re in a restrictive market like the Bay Area. Approval to construct a new property can take months, so while you’re waiting for the planning and building departments to review your proposal, the market can really go up. So you may find yourself holding plans in hand for a piece of property whose value has already increased significantly. If you don’t want to run through the hassle of construction, that’s a great point to cash out of the deal and turn a nice profit.

So if you’re going through a long and arduous development process, don’t be discouraged! With some creativity, you can probably find an exit strategy that will make you money. But word of advice: never try to sell a half-finished house.

Best of luck!

Juan