How to Convert Equity to Cash Using Proven Exit Strategies

InvestorDirector.com 

Picking an exit strategy before getting involved in a deal is crucial to an investor’s success.

An exit strategy is the mechanism that facilitates the conversion of a home’s unused equity into cash. There are only two ways to do this. One way is to sell; the other way is through “cash out” refinancing a property if the owner’s intention is to sell it years later. The table below lists the most common exit strategies investors or owner occupant homeowners employ when trying to convert a house’s equity into cash. Each exit strategy begins on the left side of each row; with an “acquisition technique” consisting of a purchase or the control of a particular home. The word “control” refers to the act of selling someone else’s house for a fee that an investor sets with the seller, the buyer or both parties. This can be done with a simple handshake between each party or with legal contracts between all of the parties involved. The act of selling someone else’s deal is often referred to as performing an assignment of contract or executing a purchase option. Investors that practice the art of selling other people’s homes for a fee are often referred to as middlemen, bird dogs, transaction coordinators or intermediaries. Reading each row from left to right represents a simulation of how wise investors move through various deals. (To view this table, please visit www.investordirector.com, and find this same article).

In real estate, it’s crucial to know how you’ll make your money before you make your money by identifying your exit strategy. You may, for instance, buy a home well under market value and decide you want to rehab it and sell it quickly as an occupied rental unit below market value to another investor looking to buy and hold a rental unit. In this case a wholesale rehab is your exit strategy or “game plan”. The exit strategy you employ on each deal you do is determined by the following factors:

The type of market you’re in. Your local market conditions combined with bank lending guidelines (assuming your buyers will need financing to buy your house) determine supply/demand. Generally speaking, hot markets and steady markets are characterized by high demand for jobs, low unemployment, reasonable interest rates and banks willing to lend money generously to buyers. In markets like these, just about any wholesale or retail exit strategy will work. Flat and failing markets are characterized by higher unemployment, tighter bank lending practices, an overabundance of houses and low purchase demand. In these markets, it’s wiser to execute the wholesale flip exit strategy, which involves the acquisition or control of ugly houses to sell to new investors getting into the business who want to do a rehab project. Many people have poor credit in a flat or failing market, so mastering credit repair techniques and helping people with marginal credit to buy your house(s) by through a lease to own program at retail prices are also reliable exit strategies.

Exit strategies being employed by successful investors in your area. The best way to meet the players in this business is to network with several mortgage brokers, appraisers and real estate agents in your area. These genres of real estate professionals know who is succeeding in real estate investing. The investors who continually buy and sell property with much success are their repeat customers – and your new mentors. Find these investors and take a few of them to lunch. You’d be surprised to learn how willing they are to show you the ropes.

Who you intend to sell to. The type of market you’re in dictates who you will be selling to. There are only 2 types of home buyers: investors and owner occupants. Both hot and steady markets allow you to sell at retail price points to owner occupant buyers. In these markets, demand outpaces supply therefore buyers are willing to pay more. When you have what someone else wants in combination with scarcity, you can command a higher price.  In declining markets such as our current market, investors come out of the woodwork to buy high equity houses. Everyone wants a great deal in a bad market so executing wholesale flips (unrehabbed) to other investors is a wise exit strategy. Also, if you can offer nicely rehabbed homes at wholesale prices, you’ll have no trouble selling to owner occupant buyers.

How effective your marketing is. Do you have a database of buyers ready to purchase your deal? If so, do you know what they want? Do you have a small budget set aside for lawn/street signs, newspaper ads etc. to market your deal? These are a few questions you need to ask yourself before you buy a house with the intent to flip it or hold it as an income property. In any real estate deal, your business plan starts with your potential buyers and works backwards from there. With no buyer in place to facilitate your profit, you’ll end up holding the bag. To find your buyers, you’ll need to create demand for your house(s). Creative and appealing marketing is how a real estate investor creates demand for their homes.

Remaining equity after all of your estimated costs. By identifying the market you’re in, you can calculate whether you want to sell a deal at wholesale prices or at retail prices before you acquire a house. Knowing what price points dictate a good deal to purchase and also knowing what it costs to rehab homes both play vital roles in making sure you can exit a home properly with profit in hand.

Incentives you can provide to close the deal fast. Laced into your personal marketing campaign are ideas that will get your buyers’ attention. Hopefully, you already know that buying too many houses with little out of pocket to keep as rentals is a bad idea. But there are so many people out there who need affordable housing and do not have much money to put down on a home. This is where you can step in. By understanding seller financing and using it as an incentive to attract buyers, you will have no trouble making a lot of money in this business. Providing zero down financing for owner occupant buyers and rookie investors is a great selling incentive that will drive buyers to you. Much tighter bank guidelines have destroyed many people’s ability to purchase their own home with little or nothing down. Providing zero down financing (i.e. giving away a portion of your equity to replace their inability to come up with a down payment) for your buyers will keep you continually buying and selling for profit.

Some more ideas to attract buyers will depend on the equity you have left in any given deal. Some investors I know provide 6-12 month’s mortgage payments for their buyers because they have made such a gigantic profit that they can afford to do this. This marketing works because it separates them from other investors who are just selling a house with no incentives. Other investors advertise “free furniture” – already staged in the house. Other sellers offer custom renovations for their buyers while the home is being worked on – similar to new build construction. Some investors even have gone so far as to take $15,000 of their profit and put a brand new car in the driveway for their buyers – “free” with the purchase of the home. You can get as creative as you want when it comes to executing your marketing plan to bring buyers. The more creative marketers in this business never have trouble with their exit strategy on a deal.

How your buyers intend to make the purchase. By what means does my buyer intend to buy my property? How qualified is my potential buyer to receive a mortgage? These are the most important questions you need to ask yourself as you meet potential buyers. As an investor, you don’t just buy and sell homes. This business requires more than just basic knowledge. You need to understand how the whole mortgage process works from credit qualifying right through to the closing table. The best investors are either loan officers who operate a net branch or they work very closely with several loan officers. Because a good mortgage professional knows how to finance your potential buyer, they are literally the vehicle that brings you and your buyer to the closing table. The mastery of real estate finance is far too deep to get into here. In a nutshell, you have to be on the front lines of real estate finance to know if your buyers are qualified to buy or just wasting your time.

Don’t commit to buying a home unless you have an exit strategy picked out that you know will work. A definite cause of failure in real estate is not thinking about how you’re going to exit your investment before you buy it. For each investment you make, you must match your exit strategy to the market you’re in and the network of people you’ve created to assist you with your exit. In hotter markets, you can buy or build just about any house and sell at any time. In a flat or failing market, every move you make must be carefully executed.

Some say that money in real estate is made on the buy side of a transaction. In other words, the equity at the time you purchase a home is the equivalent to money. That is a load of garbage. In real estate, you make actual money by converting the equity you gained from a good purchase into cash or by helping someone else convert their equity into cash for a set fee (by controlling a property as a middleman or transaction coordinator). Either way, this occurs on the sell side of a transaction and can be done by selling the property or by refinancing if the goal is to hold a property as your own. That is why you must have a game plan or exit strategy in place for every deal you do. Converting equity to cash through a premeditated exit strategy is how you make money on every deal.