By definition, a real estate exit strategy is a contingency plan that one executes to either dispose of or divest from a position or interest in real estate once a certain timeline is passed, a status is attained, a circumstance occurs, or a transaction is finalized. Sound business acumen dictates a real estate investor must have an exit strategy or strategies whether or not he or she is seeking a certain deal or planning to pursue a chosen real estate niche. Equally sound business judgement requires a consideration of all contingencies, positive and negative, within any business planning and prior to any acquisition or obligation incurred.
Last year, I wrote “Choosing an Exit Strategy” focusing on the three strategic exiting components of personal finances, market conditions, and deal structure. I spoke of having a grasp of the “big picture” and that the sound way to proceed is to analyze each component separately and then in concert together. After that considered analysis, you focus on and choose from the exit strategy most applicable to the situation and you.
This is certainly true before you invest in any particular piece of real estate. You must develop an exit strategy before you act. To be sure, every deal is driven by cost, risk, and reward, and the three components of personal finance, market conditions, and deal structure. You prepare for the expected as well as the unexpected. Surprises and game changers do happen. There can be errors of omission and commission. It is always best to rely on multiple exit strategies as circumstances do change.
There remains another “big picture” consideration when discussing real estate exit strategies. When you are developing your business plan and choosing your real estate niche, you will be well served by planning your exit strategies accordingly and being appreciative, educated, and knowledgeable about those strategies as applied to your niche. Choose your niche and choose the appropriate end game or strategies as you do.
The importance of having a firm understanding and grasp of exit strategies cannot be underestimated. Your vision and real estate business plan must include your expected end game. Your exit strategies determine where, how, and when you buy. Seasoned investors and mentors will advise you to never seek any deal without first evaluating potential exit strategies when drilling down to choose a particular niche to pursue. This is the other side of appreciating the importance of exit strategies. One side is having multiple exit strategies with each deal to be pursued. The other side is part of your overall business plan and vision of where your journey as a real estate investor shall take you.
Take the niche of single family wholesaling as a singular example. The investing wholesaler must visualize what his or her game plan is, picture and plan for its implementation, and then be well versed in the applicable, sensible, and practical exit strategies to consider and choose from. The investor wholesaler may elect to leverage an assignment of contract from the seller to the end buyer and then the investor wholesaler steps out of the picture. When the seller and end buyer close on the deal, the assignment fee is paid to that investor at closing. Serving as a financial intermediary and being awarded an assignment fee is an exit strategy. Another variation strategy may include a double closing, commonly called a simultaneous closing, if circumstances make sense. State law and operative lender stipulations may directly impact or even prevent a given strategy to be considered.
The key takeaway with any business planning, niche choosing, or deal to be pursued, is to know your exit strategies and be certain of their viability before you act. Now take action and do the deal.