Every property flipper needs a failsafe exit strategy.
Without one, hard money lenders won’t even consider funding your project.
And for an exit strategy to be foolproof, it needs multiple layers.
That means contingency plans – a Plan B in the event Plan A fails and even a Plan C in the event Plan B fails too.
Here is a closer look at what makes a strong exit strategy for flippers and how California hard money lenders evaluate them.
Defining an exit strategy
The end game of a flipper is to profit from the rehab of a property, normally by selling or renting it.
The end game of a lender is to profit from the repayment of a loan to a flipper.
Hence an exit strategy is vitally important to every lender because it details how the borrower intends to repay the loan.
California lenders demand this because they fund short-term, high-speed deals.
Why an exit strategy matters in California
California boasts one of the richest and most lucrative real estate markets in the country.
It is also extremely diverse and at times volatile.
That’s why lenders require so much detail regarding when and how they will be repaid.
Environmental planning laws and permits in many jurisdictions can cause significant delays to projects.
Time is money and if not factored into a flip, the project can be jeopardised.
There are multiple other reasons why an exit strategy is so important:
- higher purchase prices in California equate to higher risk for both borrower and lender
- contractor availability puts pressure on project timelines
- appraisal volatility in some California micromarkets can distort lender metrics and eat into expected profit margins
- the highly competitive nature of house flipping in California raises purchase prices, raises expectations on the quality of improvements and may result in a surplus of flipped houses, creating a buyer’s market
The three types of exit strategies
Flip and sell
This is the most common exit strategy among flippers.
A property is bought, renovated and sold for a profit.
It is the ideal exit strategy when the ARV (After Repair Value) delivers a handsome profit and works well for cosmetic flips completed in 6-9 months.
Refinance and rent
Upon completion of a project, a flipper may refinance to a more traditional loan and retain the property to rent.
This can be a good exit strategy as long as rental income covers the service of the debt and there is a desire to capitalize on long-term appreciation of the property.
It is a strategy growing in popularity in markets like Riverside, Sacramento and San Diego.
However, borrowers will require a solid credit history to obtain a traditional loan as well as a favorable DSCR (Debt Service Coverage Ratio) and provide evidence of rental projections.
Refinance and rent may also become a default option or Plan B if, for whatever reason, a property fails to sell.
Sale of a completed development or construction project
This applies to fully completed flips, ground-up developments or sometimes ADUs (Accessory Dwelling Units).
Many California buyers prefer brand new constructions with high-end finishes rather than homes which have undergone only light makeovers.
It allows flippers to achieve profits of 15-30% above what they might extract for basic rehabs.
The exact value depends on demand and absorption in the local California market.
What hard money lenders consider to be a strong exit strategy
Demonstrating a clear and executable exit strategy can be the difference between securing a hard money loan or being rejected.
Be clear and concise, presenting your timeline in weeks rather than months.
Show all relevant costs while providing the name of the contractor, listing agent and broker who will help you complete the project and sale of your property.
There are multiple factors which hard money lenders consider go towards delivering a strong exit strategy.
The most important is one with at least two tiers:
- Back-up plan in the event Plan A fails (refinance, rent)
- Built-in financial buffers to allow for unforeseen circumstances
- Realistic timelines
- Proven contractor bids
- Clean Comparative Market Analysis (CMA) of similar properties
- Details of borrower experience
Red flags for hard money lenders
Without multiple exit strategies, very few if any hard money lenders will finance a project.
And while hard money lenders are not overly concerned with a borrower’s credit history, it can become a factor if there is no compelling exit strategy.
The biggest red flags are:
- No back-up plan
- Weak borrower qualifications for refinance exits
- Inflated or overly optimistic ARV
- Ignoring local market absorption rates
- No plan for delays or cost overruns
Get finance and support today
An exit strategy seems like an obvious part of any loan application.
But if not planned and communicated effectively, it may ultimately prove to be your Achilles’ heel.
Don’t gamble on such an important presentation without the help of a professional.
Let Equidy work with you on your exit strategy to ensure all your boxes are ticked.
Equidy is a hard money lender meaning once your exit strategy is in shape, they can finance your project!
Equidy has been known to approve loan applications in as little as 48 hours.
Equidy has had an intimate and personal history with all aspects of real estate and property development in California for more than 40 years.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in challenging economic times, they love to reward entrepreneurship and strive to see their clients realize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
