How to Prepare a Real-Estate Exit Plan
Investing in real estate is a risky venture, and without an exit plan you could have a financial disaster. A real-estate exit plan is a backup for investors to dispose of their properties quickly to make money from their investment. In some cases, this plan will help you to avoid foreclosure or bankruptcy. According to RealtyTrac, 3.1 million foreclosures were filed in 2008. An exit strategy is an important part of an investor's business plan and should be created before real estate is purchased.
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Instructions
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Review all possible ways to dispose of your real-estate investments. The most common ways that investors get rid of their property is to sell it, rent it or lease with an option to buy.
If the right market conditions exist and you are able to find a buyer to purchase at a profitable price within approximately three months, then this would be an ideal exit strategy. However, if selling is not the right option, then leasing your property and receiving rent from a tenant will help you to maintain a steady cash flow from your investment. Also with leasing, if you find a suitable buyer with satisfactory credit, you can lease with an option to purchase, enabling the tenant to buy the property at the end of the contract. With this strategy you lock in the purchase amount at the time the lease is signed and have a ready and able buyer who already has a vested interest in the property.
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Find out the value of your investment property. A comparative market analysis (CMA) is a report that compares the value of your properties with similar real estate that is located within a close proximity. Ask a local real-estate agent to prepare this report you. He will usually give it to you free of charge.
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Consult with your accountant or financial advisor to determine which exit strategy fits your financial situation. These professionals will help you to develop a formula to determine your return on investment (ROI) and how much income you must derive from your properties to maintain your portfolio. If you decide to sell, an accountant and financial advisor will develop a seller's net spreadsheet, a document that lists how much you will gross from a real-estate sale, to help you calculate how much you will profit or lose. With a lease, an accountant or financial planner will use the cap rate or capitalization formula, which is a method to compute how much money you will receive from your income properties.
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Write your exit plan. Detail a marketing plan and determine how you will execute your strategy. Your marketing plan should include ways to find buyers or tenants, such as through advertising or networking. Also describe how you will prepare your properties for sale or rent by either cleaning or repairing them.
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Create a backup plan. There are no guarantees with real-estate investments, and you should have an alternative exit strategy. For example, if the property does not sell quickly, then perhaps you can promptly lease it because you have already developed a plan for finding a tenant. Having a second option will save you time and help you to move faster as opposed to not having a backup and starting over to develop another plan.
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Implement your exit strategy. Set deadlines for yourself and designate a date for the plan to be completed.
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Tips & Warnings
Ask your real-estate attorney to review your exit plan to ensure you are complying with state and federal laws.
Consult with a tax specialist to review compliance with federal and state regulations for reporting investment income.
References
- CNNMoney: Flood of foreclosures: It's worse than you think
- The Mortgage Professor's Web Site: Lease-to-Own House Purchases
- NOLO: Alternatives to Selling: Benefits to Becoming a Landlord
- HomeGain: HomeGain Library - Seller Resources. What is a CMA?
- CREOnline: What's it Worth? Deriving Your Capitalization Rate
Resources
- Photo Credit key on indicator image by Orlando Florin Rosu from Fotolia.com
