Multi-family Real Estate Exit Strategies for Creative Financing Deals

Multi-family Real Estate Exit Strategies for Creative Financing Deals

The following is adapted from Creative Cash by Bill Ham.

Know the way out… before you get in! This is a key strategy with creative and seller financing (CSF). A good investor or business owner always has a solid exit strategy before they get into a deal. Ideally, you should have several exit strategies. This is especially important with CSF, when you’re not entering into a deal in the typical or traditional way.

Closing on a property is not the key in real estate—getting out profitably is!

Many people have gone into foreclosure or bankruptcy in past market cycles. Those people didn’t have trouble getting into deals. They had trouble getting out financially intact.

The following are some exit strategies for creative financing deals.

Refinancing

This is one of my favorite exit strategies. It can also be one of the most difficult but creative types of financing, as many possibilities are open for this exit. Typically, to refinance with a traditional lender, the property must no longer be a distressed asset. This means the repairs need to be complete. If it’s multifamily, then the property needs to be stabilized.

Most lenders want to see 90 for 90, meaning the occupancy needs to be over 90 percent for at least 90 days. This will get you the best terms with most lenders. This is the beauty of creative seller financing (CSF). The financing you get from the seller allows you to take over the operations of the property and make the necessary adjustments to make it profitable (exactly how the lenders like them).

If refinancing is an exit strategy you want to use, there are several things you will do.

Get in touch with at least three lenders and get verbal approval for the refinance before you take passion with CSF. I say “verbal” because you can’t get any other kind of approval unless you are in an actual application process.

Show the lenders your plans for the project. Show them the purchase price and the amount of money you plan to spend on fixing it up. Show the occupancy and your plans for management. You want to have a feel for the lending market and which lenders will have an appetite for refinancing the project before you get into a CSF contract.

When planning to refinance a property, don’t forget the “seasoning period.” This is the length of time a traditional lender wants you to own the property. Ask about this when you first contact the lenders.

Refinancing in Action

In late 2008 to early 2009, I bought seven houses with money I borrowed from a private lender. I had been purchasing houses with the backing of this private money for a while. I would close on several houses, and once I had a pack of them, I refinanced with my local bank.

It was going well until the credit market crashed. It crashed while I had the seven houses I paid for with private money. I had planned on refinancing quickly, but it didn’t happen. I went past my loan due date and couldn’t pay the lender back. I was in a foreclosure situation.

The lender was good to me and didn’t foreclose. He did, however, charge me a small fortune to continue the loan! Many months and a ton of high-interest payments later, I qualified for bank financing and paid the private lender back.

This is why you need to know your exit strategy when going into a deal. If refinancing is your preference, then get to know your bankers before you close with CSF. This will increase the chances of a successful exit and keep you from making the same mistake I did.

Flip or Wholesale

Creative financing is a great tool for people who plan to flip or wholesale properties. If you can secure a great price for a property and control it with CSF, then you’ve bought yourself some time to go out and find a buyer.

Be sure to include any of your down payment money and rehab costs into the price of the loan, but don’t get too greedy. Being greedy is one of the most expensive habits you can have.

If you are trying to make some quick cash by selling a property you just took control of, you’ll want to leave some value in the deal for the next person. Keep in mind they may need to qualify for a loan to be able to purchase it from you.

They’ll want to feel they are getting a good deal, too. They’ll have to deal with the same lending parameters and time frames that you did, so allow for this in the terms the seller gives you when you first set up your CSF agreement.

Master Lease Option Assignment

If you are doing an MLO, then you have a tradable item. A master lease can be assigned to someone else if your attorney sets the document up correctly. A person would buy a master lease from you to collect the income stream created by the property. Keep this in mind when you originally set up the agreement.

You can also sell the option to purchase if you have kept the documents separate. You can keep the master lease that allows you to control the property and sell the option to purchase to someone else. This gives them the right to purchase the property for the price you previously negotiated.

The MLO is a great addition to a wholesaling strategy. Wholesaling is when you put a property under contract and then assign the contract to another buyer for a fee. The point of wholesaling is controlling the property with a contract for a short amount of time while you find a buyer to purchase that control from you for a fee.

An MLO assignment is not much different and can follow a similar strategy. Once you take control of a property with an MLO, you will then have time to market the property and find a buyer. You can draft your MLO contract to be assignable. If the seller agrees for the contract to be assignable, then you can sell your option interest to someone else for a lump sum of cash. Have your attorney draft the agreement to be assignable.

Hold and Operate

This is a great long-term exit strategy. If you can get CSF for long enough to hold and operate, great! If not, then refinance the deal and operate it under the new financing.

I mentioned talking to lenders before closing with the CSF. Here is another reason to do so. If you know the general terms in which you’d refinance the deal before you take control, then you know what terms and price to set up with your CSF. Traditional lending should have a longer term and less interest than the CSF. Once you get the loan in place, you can hold and operate the property even more profitably than before.

Get Out Successfully

Regardless of what your long-term exit strategy is, if you plan to hold and operate the property for any length of time, make sure the term of any loan allows you to cash flow. This is part of the analysis that you should be doing for every CSF deal.

Whatever exit strategy you plan to employ, you need to know what it is before you get into the deal. And by implementing these tips you can prevent devastating consequences such as foreclosure or bankruptcy and ensure a successful exit.

For more advice on exit strategies for CSF deals, you can find Creative Cash on Amazon.

Read this article on LinkedIn.

What started out as a conversation at a live event one hot, sunny day in downtown Atlanta has blossomed into an amazing collaboration between Bill Ham, Jake Stenziano, and Gino Barbaro (Jake & Gino). Bill was instrumental in helping Jake & Gino launch their mentoring program and is one of the lead trainers in the company.  With over twenty-five years of experience in operating vertically integrated real estate businesses, and over $100 million in assets under management, Bill, together with Jake & Gino, strive to teach others the strategies that have allowed them to become financially free.

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