A fireman once commented how unsafe it was to enter a burning property without knowing where all the exits were. This same logic applies to the real estate sector. While making any offer, at the back of one's mind, the exit strategy should be decided preferably incorporating means to generate wealth at the same time. The exit strategy plays a major role in deciding the financing options required. One needs to think of questions like whether one wants to use the profits to buy a new property or invest it somewhere else, how much money is one hoping to make, when will the money be required?
Short term financing is a temporary source assuming one will refinance or resell the property quickly. This usually involves a higher rate of interest with a payoff deadline within a year. This can be sourced through commercial banks or private hard money lenders. Short term financing is a viable option because of its availability and speed in transactions.
Long term financing on the other hand gives you a variety of options provided one is not hard pressed for time, renting the property is an option or loan - to - value isn't an issue. These include the likes of fixed rate, option adjustable rate mortgage, interest only payment loans, and adjustable rate.
An alternative financing method is Seller financing. In this case, the owner/seller lets their existing loan remain and the buyer takes over the payments. In most of the cases, the buyer gives a down payment and continues to pay interest each month.
Interest rate swaps and caps are also increasingly becoming an important component of real estate financing transactions.
One can consider any of the following three exit strategies -
-Sell subject to - This implies offering the property to sellers under the existing terms of the mortgage. Since it is difficult getting financing in the current market and you are offering a down payment, the property seems really attractive.
-Offer owner Financing - This is similar to the above exit mode except that you get to hold onto the property until it is completely paid off.
-Lease options - This route can help reduce stress on the budget and in time sell off the property entirely. In such a situation, a portion of the monthly rent is attributed to a larger payment made to the owner at the end of an agreed term.
-Selling - One should calculate the price at which one would break even including commissions and other closing costs. One should also consider selling prices of comparable properties.
-Networking - It is important to network to find potential buyers and other real estate investors
-Relocating and renting - One could even consider renting out the property and residing at a less expensive place.
-Renting, lease options, corporate housing, and vacation rentals can all serve as viable exit strategies
-Discontinuing payment for the property should be a last resort and legal nuances of the same should be kept in mind in such a scenario
Luis Pezzini
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