Well-crafted exit strategies are essential for property flippers seeking to maximise profits.
This holds true if either closing a deal after renovation or refinancing a hard money loan.
There’s plenty of money to be made flipping properties in California’s highly competitive real estate market.
But without the right exit strategies, flippers can see good dollars disappear, especially when utilising hard money loans for vast sums of money.
These loans are attractive because they are generally approved quickly without the requirement of a solid credit history.
They also offer flexible terms ideally suited to flippers.
But they come with higher interest rates making every day critical toward the end of a project.
Here is a guide to the best exit strategies for property flippers borrowing hard money.
Sell the property
Obviously, this is usually the most desirable outcome for property flippers.
If they have chosen the right property in the right location and tailored the redevelopment to the preferences of local buyers, it gives them the best chance of selling the property.
This allows them to discharge the hard money loan while making a handsome profit.
But even when all those variables met, things can go wrong.
California is a highly competitive market for flippers and supply can sometimes exceed demand.
An economic downturn or market volatility also has the potential to delay or thwart a sale or reduce its expected profit margin.
That’s when alternate exit strategies come into play.
Refinance to a conventional loan
If for whatever reason your property doesn’t sell, refinancing your hard money loans into a conventional mortgage is a strategic move that will reduce your holding costs.
Do your homework and shop around for the best rates and terms.
But you need to act quickly to limit interest payable on the hard money loan.
The biggest risk of this strategy is that market conditions deteriorate, extending your holding period while further reducing your profit margin.
Rent your property
If your property has long-term potential as a rental, it can still be a cash cow to offset your holding costs.
Conventional lenders will require certain conditions to be met before they provide you finance:
- you’ll need a solid credit history
- your renovated property will need to meet specific safety standards and pass a bank appraisal
- you’ll need to provide evidence of your potential cash flow to strengthen your application
Renting a property also means you’ll need to undertake management responsibilities or enlist the services of a management company.
Lease option or rent-to-own
This can be one of the more effective exit strategies for sellers looking to widen buyer interest while maintaining cash flow.
Marketing the property as a rent-to-own can capture a much wider section of potential buyers who don’t yet qualify for traditional financing.
It allows you to negotiate a future purchase price, while maintaining cash flow via monthly rental payments.
But if your tenant defaults on rental payments or worse still reneges on the purchase, you can be left in a very tricky spot, especially if you have retained a higher-cost hard money loan.
Find an investment partner
Finding an investment partner or partners can split the holding costs.
If you don’t know any interested parties, you can attend real estate gatherings, connect online with investor groups or approach reputable and established property development groups such as Equidy.
You’ll need to engage a property attorney to draw up contracts that clearly outlining the profit-sharing terms and repayment plans.
And you’ll want to use your partner’s credit or capital to refinance the hard money loan.
This strategy helps reduce your holding costs and exposure to losses but at the expense of your profit margin.
Wholesale the property
This involves assigning your purchase contract or selling the property as it is to a new investor, potentially before renovations are completed.
It allows you to bail out of your project quickly for whatever reason and with minimum fuss to avoid renovation risks and holding costs.
But to do so, you’ll almost certainly need to be well established and connected within the real estate industry.
You’ll need to highlight your property’s assets such as its location, renovation potential and ARV (after repair value).
You’ll also want to ensure your wholesale fee covers the cost of your hard money loan, hopefully leaving room for some level of profit.
Sell to an instant buyer or iBuyer
An iBuyer is a company that purchases residential properties from private sellers for the purpose of reselling them for profit.
Opendoor, Offerpad and Zillow are examples of iBuyers that operate in California.
These buyers provide a quick exit strategy for flippers with cash offers and fast closings but at a slightly reduced profit margin.
To sell to an iBuyer, your renovations should be completed to maximise the offer.
That offer is final and without room for negotiation.
But you can negotiate favorable terms allowing you to discharge your hard money loan at the earliest possible time.
iBuyers offer good exit strategies to flippers because they entail minimal risk and rarely fall through.
But they are generally very particular about the type of properties they buy.
They normally favor single-family homes, townhouses and condos in good condition.
Hail Mary!
This is a last resort strategy.
If for whatever reason you cannot or choose not to sell your flipped property because of certain circumstances but still need to pay off your hard money loan, you may have to go the Hail Mary! option.
It involves one of the following:
Take out a subprime loan – these loans are at interest rates above the prime and may be available to borrowers who do not qualify for a conventional loan.
Selling off other properties, investments or assets – while far from ideal, it is preferable to defaulting on your hard money loan and having your property foreclosed by the lender.
Refinancing with another hard money loan – while costly, this strategy can buy you a little more time. It may also be possible to extend your hard money loan with your original lender.
Get advice today
Exit strategies should be considered and planned well before taking out a hard money loan.
Selling your property for a tidy profit is obviously the most preferable option.
But sometimes things don’t go to plan.
When that happens, it’s important to have a solid plan B in place before the interest payments of your hard money loan consume your profits.
Equidy is a hard money lender that works closely with its clients to facilitate the best possible outcomes.
At Equidy, our founders have an intimate and personal history with property, covering all aspects of real estate and property development in California for more than four decades.
We stand by our core belief that anything is possible and we try to prove it every single day.
Our goal is to reward entrepreneurship and help you crystallize your wealth creation dreams.
But we don’t just lend hard money.
We work creatively with you every step of the way, advising you about exit strategies and offering support networks to help your project take shape.
We enjoy long and established relationships with serious investors, sellers and real estate professionals while leveraging our reputation and trust and using clear communication to minimise the risk to all parties.
Contact Equidy today to book your free strategy call.
