What to Do When Your House Isn’t Selling A Guide for Real Estate Investors
January 22, 2012
What to Do When Your House Isn’t Selling
Kevin O’Leary is a money focused investor. He’s entertaining, obnoxious and single minded in his investment strategies on Shark Tank and Dragons Den. Or, at least the character he seems to play is all those things.
He acknowledged in a recent episode of Dragons Den that he considers his dollars to be soldiers. He sends them out to battle ONLY in the highest likelihood they will win and return with more soldiers. As in any battle, it’s inevitable that a few will die, but he wants to kill as few as possible. That’s murder in his mind.
Maybe he’s a little too single minded in my view but his point is clear for all investors: focus on the end when you start. What’s the likelihood that you’ll get your money back with a return at the end?
What could happen that could cause your soldiers to die at war?
As a real estate investor, one such tragedy could be a situation where you have to sell but your property is not moving. Or maybe it just won’t sell at the price you need it to sell at.
Prevention is the best remedy for this situation:
You are making an investment only if there is a reasonable probability that you will be able to make money when you sell. Buy every property with that in mind.
How to Exit Your Real Estate Deal When Selling Doesn’t Work
But, if it’s too late for prevention here are three other exit strategies to consider if selling doesn’t work for you:
1. Rent to own
2. Partner with someone who will take over the deal – you can structure this however you want. Some people sell off 50% of the equity to an investment partner while others might find someone to take over active management in exchange for 50% of the cash flow.
3. Sell it unconventionally offering an investor the opportunity to do a wrap mortgage, a sandwich lease or with you carrying a VTB for a term.
The rent to own strategy is just like how it sounds, a tenant rents your property with the intention (and option) to buy the property at some point in the future (and at a pre-determined price).
To help your tenant prepare for the purchase you charge them a deposit today and a rental rate over and above the market rate with a portion of their rent building up as a rent credit. You set the sale price today that they have the option to buy the house at in a year or two.
As an exit strategy, rent to own has a few advantages including the opportunity to help someone become a home owner that might not be able to make it happen without some support right now. It also is a way to sell a property without using a realtor (saving commission) while making higher than usual cash flow each month thanks to lower maintenance costs and higher rent. The drawbacks are that you can’t exit the deal completely for a year or two (or longer depending on your term) and there is always a chance the tenant you put in the property does not buy. Here’s a quick rent to own example to show you how it works for you and your tenant. Let’s say a typical single family home (3 beds, 2 baths, 2 storeys, good neighbourhood) in your market rents for approx. $1,300 per month as a standard rental unit. In a RTO, the tenant may pay $1,700 per month and $400 of that $1,700 goes towards the purchase of the property (when and if they buy).Thus, if the renter (known as a Tenant-Buyer) elects to purchase the property after 1 year, they will have $4,800 ($400 times 12 months) towards the purchase of the property. This, coupled with an Option Fee (similar to a down payment) which the Tenant-Buyer (TB) pays to the Landlord at the beginning of the rental period, goes towards the purchase price.
Here’s a quick look:
Purchase Price for Tenant-Buyer:
Option Fee from the TB:
Monthly Rental Credits from the TB:
Net Cost to TB when they Purchase:
In essence, the TB no longer has to come up with $350,000 when they buy the property, they now have to come up with only $335,200 (plus standard closing costs). And, if the Tenant-Buyer is able to obtain good financing, they may only need to put down a few more thousand to make-up the difference between the purchase price and the mortgage amount. This effectively helps the Tenant-Buyer to get into a home and start building equity right away (it’s like forced savings) instead of having to put aside $500, $600, $700 per month into a crappy (low interest) savings account. And, it allows you to exit from a property that you’re having trouble selling.
Partner with Someone
If you have a great cash flowing property and your reason for exit is simply to pull funds out of the deal, finding a partner to buy 50% of the equity in the property might be the solution.
This type of partnership can be done with Rent to Own’s, a regular Buy and Hold, on a commercial property, or even on a flip.
For this to work, both sides of the partnership have to have to bring something of value to the table. If you have a positively performing property with good future potential, you could sell half of the deal to a more passive investor and continue to run the property. That would allow you to pull your cash out.
If you are going to approach anyone about taking over 50% of your deal – whether you’re looking for expertise or money – make sure your deal has something of value in it for them.
Sell it unconventionally
There are lots of investors out there looking for a way to get into a deal without a bank or without using a lot of their funds. Usually they are willing to pay a slight premium on a property in exchange for a creative way to purchase the property. Or, at a minimum, it will help you move a property when selling isn’t an option.
Of course, like rent to owns, the creative strategies for sale do mean a delayed exit from the deal, but it can also mean more profits.
Here’s three potential ways to sell creatively:
– WRAP MORTGAGE which is simply selling the property with existing financing in place and “wrapping” additional financing on top of it. Essentially, the buyer would pay you 1 payment which covers your existing mortgage payment and includes additional funds to go towards a VTB. The buyer does not need to come up with new financing and they can put less money down as you are including a VTB that’s wrapped together with your current financing.
– A SANDWICH LEASE which is where you sell to an investor on a rent to own and allow them to do a rent to own of their own (that’s what creates the sandwich).
– VTB– offering to carry financing on the deal. Not only can this help you sell faster, and at a higher price, it can also result in a higher overall return because you’ll earn interest. For example if sale price is $300,000 but there is a two year VTB (for 100% of the price) at 6% interest-only, you’re actually getting $336,000 for the property (after 2 years of mortgage VTB payments).
There are also potential tax savings if the home was not your primary residence of the whereby you can defer some of their capital gains to future years.
The lowest risk VTB for a seller to hold is in a 1st mortgage position, but the challenge with that is you pretty much have to own the place free and clear from any current debt.
The best time to plan your exit is before you even buy. Considering who will be your buyers, what concerns they will have and what kind of supply and demand you’ll be facing for that type of property in the future are pretty important considerations when planning an exit. That, coupled with having multiple exit strategies in mind, will help you to become a more savvy investor and prevent you from buying properties that could hurt your wallet rather than filling it.
Karysa is a millennial Investor who didn't understand the normal career choice lifestyle. Discovering real estate investing, she is now CEO of a national award-winning real estate company. Karysa strongly believes this is the way to financial security and even financial freedom! She hopes to inspire young adults to consider this method to help create a life they desire and enjoy.
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