How Will You Get Out Of It?

Know your exit strategy before you buy

By Jacquelyn Lynn

You've put together a great real estate deal—the property's in a good location, the seller has agreed on a below-appraisal price, and you've got excellent financing lined up. Are you ready to close? Not yet. There's still one more very important thing you need to do, and that's plan your exit strategy.

Never get into a property unless you know three things: what you're going to do with it, how you're going to get out of it, and what you'll do if your first plan doesn't work. In other words, you need both a primary and secondary exit strategy. This rule applies even when you're buying a property to hold for cash flow. Remember, life doesn't always go as we expect, and if you have a sound exit strategy in place, you'll be prepared if the unexpected happens.

When determining your exit strategies, consider your market, your resources, and your own investing style and preferences. You should also understand the tax consequences of each strategy so that you don't have to deal with any unpleasant surprises when you file your tax return. Some exit strategies for single family and small multi-unit resident properties include:

• Assign the contract. Don't even bother to buy the property yourself; simply sell your rights to make the purchase to someone else. Other investors and even end users may be interested in buying the rights to your purchase contract and taking advantage of the fact that you've already done all the work of finding the property and negotiating the deal.
  
• Quick turn the property. Also known as flipping, this is when you buy and sell in a short period of time, usually after doing some fix-up.
  
• Rent and hold. Add the property to your inventory as a rental and plan to keep a tenant in it for the long-term. While this isn't exactly an exit plan, it demonstrates that you have thought about what to do with the property. Also, if your primary strategy was to quick turn and you couldn't find a buyer, rent and hold could be a viable backup plan.
  
• Lease-option the property to another investor or an end user. You can retain the benefits of owning the property without many of the hassles of being a landlord by leasing the property to a tenant/buyer with an option to purchase after a specified period of time.
  
• Renovate and either sell or rent. When a property needs a major renovation rather than some quick cosmetic repairs, you may opt to do that work and then find a tenant or put the property on the market to sell.
  
• Buy, rent, and sell. This is a more common strategy when used for multi-unit buildings, but it also works with single-family homes: buy the property, get it rented, then sell it to another investor.
  
  
• Condo conversion. Convert a multi-unit property from rental to condominiums. When the final unit is sold, turn the management of the property over to the owners.
  
• Give the property away. You may decide to give the property to a child, grandchild, or other family member as an alternative to passing it down as an inheritance, or you may want to give the property to a charity.

If you are investing in land or commercial property, these strategies will also work—and you'll have some additional options as well. For example, you can buy raw land and quick turn it to a developer or builder. Or you can buy land, get it entitled (meaning you do the work related to zoning, roadway access, property tax matters, economic incentives, and other related benefits, restrictions, and designations), then sell it to a builder. You may even want to do the development yourself—you can subdivide the parcel into lots, put in roads, utilities, and other amenities, then sell the lots to builders or end users.

Don't write anything in stone

While it's important to go into every investment with a primary and secondary exit strategy, it's equally important to be flexible. Once you own the property, you may encounter some exit strategies that hadn't occurred to you. For example, you may have purchased with the idea of holding the property for 15-20 years, and 5 years later a developer wants the land and is willing to make it worth your while to sell. Or you may have a property that gets damaged by a fire or natural disaster and you decide to sell rather than deal with the restoration. When exit opportunities appear, always be ready to consider them, even though they may not be something you planned.

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Jacquelyn Lynn (www.jacquelynlynn.com) is a freelance business writer and the author of the upcoming Entrepreneur's Almanac.