Choosing the Right Entry and Exit Strategies Will Help Ensure a Positive Outcome for Your Fix-and-Flip Deals
When you watch our show on HGTV, you usually see me and my wife going through a lot of crazy things while we fix and flip houses for our real estate investing business. Most of the time, despite all of the surprises and drama that make good TV but stressful flipping, we come out on top. However, it doesn’t always end with us selling quickly and making thousands of dollars.
Even seasoned flippers like us can get into sticky situations that require good exit strategies. For example, we had one house that went way over budget but that we thought could sell at a good market price. Then that house sat on the market for weeks while we wondered what we would have to do to get back on top. In another case, we had a house that had major foundation and structural issues, and by the time we were done with rehab, we had to take a $3,000 loss when we sold it.
Even though things don’t always go as planned, we always do everything in our power to create the best possible outcome, even in the worst-case scenarios. If you have a good entry and exit strategy, you can cut your losses or even make a small profit instead of losing big-time and risking your reputation with your investors, contractors and buyers.
The first step to making money in real estate is, of course, finding a house below market value. But now that the flood of foreclosed properties has been reduced to a trickle, where’s the best place to find them?
Here’s a look at my favorite entry strategies and ways to find houses below market value:
1. Get in the car and drive neighborhoods
Look for ugly, distressed houses, FSBOs (“for sale by owner” properties), estate sale signs, even moving trucks. Drive the neighborhoods you want to buy in and then contact the sellers. You can get their names by looking up the property information with county public records.
2. Use a great real estate agent
Get your agent to pull expired listings and run a list of houses that have been sitting on the market for months that obviously have some kind of issue no one wants to fix. A good example is a two-story house with no deck in a neighborhood where this is expected. I’ve seen houses sit on the market for months because no buyer wanted a house without a deck, and they didn’t want the hassle or expense of building one. Remember, where there’s an issue, there’s usually an opportunity!
3. Send letters to qualified lists—bankruptcy, divorce, probate and houses where the owner has a different mailing address from the property address, which is usually indicative of a rental. Yes, this is old school, but it works. Regularly send letters to these lists—at least once a quarter—and build relationships with these people. This strategy can take a little longer to yield results, but put the effort in and it can yield big results.
Now let’s talk about how you can plan the right exit strategy for a flip in any situation.
When the Market is Flat
If you did everything right, but your house isn’t selling because the market has gone flat, you have a choice. The first option is to hold onto your flip and try to rent it out. With the right property management company, this isn’t a bad deal and could help you make some money while you wait for the market to bounce back.
However, if you borrowed money to make this flip happen, you might not have the luxury of waiting on monthly cash flow to slowly recoup your losses. If you really need to get as much money back as quickly as possible, you’ll need to sell fast. To do that in a flat market, you’re going to have to start with a heavily discounted asking price. Doing this should spark interest, even in a flat market.
When You Can’t (or Shouldn’t) Finish the Flip
Sometimes you find out that you’re in over your head and that you really just can’t finish the rehab and flip the house. That’s when you start calling other real estate investors. Again, you have a choice here. You can call them to propose that you partner up on the property, or you can offer to sell it to them at a fair rate with the rehab in progress.
If you can find someone who thinks he or she can finish the rehab and get the house sold quickly, you’ll be in good shape to use this as an exit strategy. To make sure that’s an option for you, take the time to network and build relationships with other real estate investors and wholesalers. You never know when they might be able to help you out.
When Your House Won’t Sell
If your house has been sitting on the market for a few weeks, it’s time to start ramping up your marketing. It’s also time to think about how low you can go without losing money, and it may even be time to think about what you’d deem an acceptable loss on the property. Take into account what you paid to fix and flip the house and how much capital your real estate investing business has to lose. This will give you a good bottom threshold, and you can decide how much to lower your house’s asking price to attract more buyers.
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