Know Your Exit Before You Buy
By Marko Rubel
Published 11/14/2007 | Real Estate
One of the crucial mistakes I have seen newer foreclosure investors make is failing to analyze each deal all the way through the process, including the selling or exit strategy. They get excited about the deal and sometimes forget that as soon as they own the property, expenses begin, so you must invest with the end in mind. How you exit, or sell the property will often determine how you should buy!
Here are the basic exit strategies you need to know and understand the implications and expenses, if any, of each
- Flip the property, either wholesale or retail, to a quick buyer or an investor
- Reinstate the foreclosure and retail to an outright buyer who gets a bank loan
- Reinstate and sell by you acting as a bank using owner financing instruments
- Reinstate and keep the house, then rent it out.
You must make every effort to learn as much about each of these strategies as possible, because each has its own risks and benefits attached. If you are thinking of the reinstate and rent as your exit strategies, you are going to look at the deal entirely differently than if you planned to flip wholesale to another investor.
There are five basic ways for you to construct a deal during the foreclosure process:
- Acquire an Interest. You can control a property by acquiring an equitable interest by a Purchase Contract or by an Option Agreement. You do not have to have the legal title to the property, and you can profit by selling your position in that contract. Please be aware that all your activities here are still subject to the foreclosure threat and its rigid timeline.
- Acquire Ownership By Bringing The Loans Current. You can buy property by taking over the existing debt on the property (also known as a subject to purchase), and stopping the foreclosure process by curing the loans using cash. You become the legal owner via the deed. The earlier in this process you get involved, the less cash you will need to reinstate the loan.
- Acquire Ownership By Paying Off The Loan. You can get full ownership via the deed, that is getting the legal title, by paying off the existing loan, like a conventional purchase. As soon as the new loan pays off the loan in foreclosure, that threat and the pressure it causes is GONE.
- Acquire Ownership Without Stopping The Foreclosure. Like gambling in Las Vegas? You can get the deed and ownership of the property without paying off or reinstating the loan, but subject to the foreclosure threat and its time line. It is very important that the seller understands the real risk and your plan and agrees to it in writing! You will be disclosing to the seller up front that the only way the foreclosure will be avoided is if you can find a buyer who can cure the foreclosure prior to the foreclosure sale, or if you can get the lender(s) to work with you and accept a lower payoff, and give you some time to arrange financing. If you cant get either of these things done, the seller will lose the house.
- Acquire Ownership Via Deed In Lieu. This is sometimes called the back door approach. To avoid having a foreclosure on their record (the mark of death, as far as their credit is concerned) the borrower may make an arrangement with the lender to voluntarily deed the property back to them. This process is called Deed in Leiu Of Foreclosure. Now you can try to be that lender! If you focus your effort on buying junior liens, you will be stepping in the junior lenders shoes with the right to start foreclosure yourself. You can approach the borrower with the Deed in Leiu proposal once you have initiated the foreclosure. This is a great back door approach you would be reinstating the senior loan and getting the property subject to those loans.
The important thing to remember is that you must have the right exit strategy prepared foe each of these deals. Its not mix and match! You must thoroughly evaluate every deal that you get involved with and understand the risks and benefits of each if you are to be a successful real estate investor, especially in the foreclosure arena. Making the wrong move can bankrupt you and sour you on real estate investing forever. Making the right moves will make you a lot of money, and create real wealth for you and your family over time, often a very short time! The knowledge is power, get armed!
Marko Rubel is a prolific investor living and working in the Phoenix, AZ area. He is much in demand as a speaker at many real estate events, and has taught thousands of investors his extremely effective strategies at his seminars and home study courses. To learn more, visit http://www.niche2wealthsystems.com or http://www.freewealthcoaching.com or http://www.profitgrabber.com