How to Exit Profitably
An exit strategy is the plan that an investor develops to realize a profit on their investment. Exit strategies range from selling a property to having a property owner redeem on a tax lien certificate.
The surer the exit strategy and the surer the details are surrounding it, the better off the investor will be and the fewer hiccups you’ll have. One thing to consider on every property before thinking about any of the following exit strategies is what the property type is, what is the value of the property, and what is the condition of the property.
Possible Exit Strategies
If the investor has acquired the property through a tax lien certificate or through a low-priced tax deed, one option for the investor is to sell the property quickly to another investor or property owner.
Ask yourself the question - “What is the condition of the property?” Is it in need of repair or rehab? If it needs repair, then you will have to price the property lower to sell it. There are investors that specialize in fixing homes and reselling them so get connected with them through real estate clubs and sell to them at a discount and let them deal with the repair.
What is the investor’s margin on the investment? If the property is worth $50k and was purchased at a tax deed auction for $25k, then the investor may want to consider selling it for $30k - $35k to sell it quickly to another investor or someone interested in a fixer upper. If the property is in great shape, then the investor can sell it closer to market value.
The best-case scenario would be to have the buyer lined up before the investment is made. So if you have contacts in a specific area that are interested in a fix and sell, show them the property and beforehand and line up the deal.
Maybe you don’t need to rehab the property at all; maybe it’s ready for a homebuyer to live in. Or maybe it’s land that is ready to be built on. Either way you can sell it near or at retail without any work. What now? It’s possible to put the property on the market at retail and wait for a buyer, or you can price it low to sell it faster (sell at wholesale price). A property that is worth $150k that is in good condition, that the investor bought for $50k, could be sold at wholesale price of $100k to sell quickly. An investor would want to do this if he or she wanted to cash out quickly and get their money into another investment as fast as possible.
Fix and Sell
If the property needs work and the investor would like to sell the property at retail, then the investor would use this strategy. Before purchasing, the investor should take a close look at all of the work that needs to be done and get accurate estimates on rehabilitation. The investor needs to work those numbers into the equation when considering the investment. A $25k investment that is worth $50k and requires $20k in rehabilitation might not be worth it. The numbers might be too tight.
Once again, the best way to work this deal is to have rehabilitation contractors, cost structure, and a buyer lined up before making the investment.
Fix and Rent
This is very similar to fixing and selling, except the investor is planning to rent the property. Before making the investment, the investor should know what comparable properties are renting for in the area and what costs are required to rehabilitate the property.
One thing that’s important to consider when you’re thinking about renting is your break-even point, cash flow, and return on investment. For example, if you’re buying a home for $25k, and it will require $15k in rehab, you’re spending $40k total. What kind of return do you need to make for that deal to be worth your time and money?
Let’s say the home will rent for $700 a month. $700 times 12 months is $8,400 a year, which is about 25% of the cost that the investor incurred. It’s fair to say that that is a 25% return on investment. Your break-even point on that investment is about 4 years and then the rental property will be all cash flow forever after.
Collect on Redemption
The standard exit strategy for tax lien investors is to collect when the property owner redeems on the property. When planning for this exit, the investor needs only to consider the interest rate promised by that state and the maximum time that the investment will be out, also called the redemption period.
When the property owner redeems and the investor receives his or her money back plus interest, then the investor has exited. Sometimes the investor’s exit won’t come until after they have foreclosed and executed one of the previously mentioned strategies.
There are other creative exit strategies, but the ones mentioned here are the main ones. So pick an exit strategy that makes sense for any particular investment before you buy.
What is a foreclosure? It is the legal process in which a property owner's right to redeem or retain the property are removed.
Let’s look at a tax lien investing scenario where foreclosure becomes an option. Keep in mind that the redemption period starts on the day of the sale. So if the investor buys a tax lien certificate at the auction, and we will say it has an 18% interest rate and a two-year redemption period. So if the redemption period ends, and the property owner has not redeemed, then the tax lien holder has the right to initiate the foreclosure process.
The first thing that the investor has to do is send out notices to everyone with financial interest in the property. This would include mortgage companies or other lien holders, not necessarily tax lien holders, but mechanic’s lien holders, etc.
It’s possible to have the county help you do this for a small fee, you can hire a real estate attorney, or you can do it yourself if you know what you’re doing.
Note that this is only necessary with tax liens. Tax deeds have already been foreclosed on by the county and redemption deeds as well. The difference with redemption deeds is the deed isn’t filed until after the redemption period has expired.
You are required to send out notices that you are foreclosing to give them one more chance to buy you off to keep their interest. Otherwise they lose out.
A quick note. It’s been two years since you bought the tax lien certificate and nobody has redeemed. Neither the property owner nor the bank. If it gets to the point where you’re sending out notices to interested parties, chances are nothing will happen. They have 30 – 90 days to respond to the notice, and if they do not respond, then they are wiped out.
If you’re foreclosing yourself, the county can provide the steps to complete the process in that state or county. For instance, they will require that you use certified mail for the letters, and the time period that the financially interested parties have to respond may differ.
If there is a mortgage on the property, then the mortgage company will likely respond to the notice with payment of your investment plus interest earned. If they don’t respond, then it’s all yours, free and clear.
Once you go through the foreclosure process and you become the owner of the property, the property does not have any mortgages or any other liens against the property because they were cleared during the foreclosure process. When you send out notices and no one responds, then you show a judge your certified mail delivered and demonstrate that they did not respond during the allowed time period and the judge will issue a clear title.
Types of Foreclosure
There are two types of foreclosure. There are judicial foreclosures and non-judicial foreclosures.
Judicial foreclosures are foreclosures through the court system. Judicial foreclosures require the foreclosure process to be overseen and executed by the local court. Most home loans do not require a judicial foreclosure due to the power of self-stipulation found in the sales contract.
The foreclosure process for tax lien investors is very similar to that performed by a mortgage company that forecloses because a property owner has missed their mortgage payments.
Non-judicial foreclosures were created to free up the court system because so many foreclosures were moving through the court system. It’s the cheapest and fastest foreclosure method and it gives the power of foreclose to the lender. Because it is cheaper and faster, it has become more popular.
The party foreclosing doesn’t need to file a lawsuit through the court system to foreclose on the property. The process still needs to be registered through the county, but the foreclosing party can avoid the courts, which costs more money. A Notice of Default is issued to the property owner and the sale of the property is announced.