Thinking of exit strategies even before you invest may sound rather confusing. However, the fact remains that it is indeed a preferred mode of operation when making a serious entry into the real estate investment game with an intention to win, especially when targeting short sales. A short sale is made when a creditor is ready to accept less than what is owed on a mortgaged property in order to avoid going through the tedious, time consuming, and costly process of a foreclosure or facing a bankruptcy situation. Lenders also do not want excess inventory and bad loans on their books.
For example, there may be a home loan borrower who owes $350,000 against an existing first mortgage. He may have fallen behind on his repayments and may be facing the possibility of a foreclosure. For effecting a short sale you directly make an offer to the lender/bank for say $270,000. In many cases the bank may agree for such a discount, as the costs involved if the property goes to auction may make them lose a lot more money than what they would lose if they accept the discount related to your offer. It also saves them from a lot of related problems. Plain and simple, it makes business sense for them.
As things stand at present the rate of foreclosures is high. This is the time to take advantage of this situation and make a good chunk of money for yourself. However, from an investment angle, you can get the maximum benefits only if you do not restrict yourself to a single deal. The higher number of deals, the greater the overall returns. If you decide in favor of such an investment strategy, it becomes essential for you to formulate exit strategies even before you make an offer to a lender for a short sale so that once you clinch the deal, you can quickly flip over the property to another buyer for a handsome profit and move on to making your short sale offer for the next deal. In real estate jargon this is known as wholesaling.
There are a number of things that you need to determine before you make your offer for a short sale in line with your exit strategy. The right approach would be to first research the price that the property can fetch if sold in the market. Usually in case of a short sale the market price of the property is less than the total amount payable against the mortgage. This means you must make your short sale offer by crafting a suitable discount on the market price, after giving due consideration to the total cost of acquisition of the property.
Another thing you need to consider is the time required to dispose the property and your expected profit margin. This has a direct relationship to the time and amount of your investment. When you intend to invest for a lesser duration, you may have to settle for lower profits. In such a case you can try to locate a buyer immediately after you get your acceptance letter for the short sale from the lender and later sell outright to the new buyer. The property may need repairs, which will lower the market price, as the new buyer will need to get the repairs done. Conversely, if you are ready to invest more for a longer duration and hold the property to get it repaired on your own before selling it off you may get a much higher price. You may even want to retain the property for rental income and also continue to hold it for price appreciation before you sell it to another buyer.
Your overall profit margins are going to depend on several such factors, therefore, for being a successful investor you must formulate suitable exit strategies in line with your individual situation and liking before you even step in to the real estate investment arena.
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435
Date Published :
Feb 26 2009