Top 5 Ways to Get Out of Real Estate Investments

When entering into a real estate investment, investors should have multiple exit strategies for a variety of circumstances. But sometimes investors run into unanticipated circumstances, or fail to …

When entering into a real estate investment, investors should have multiple exit strategies for a variety of circumstances. But sometimes investors run into unanticipated circumstances, or fail to plan altogether. Here are some tips for leaving a real estate investment or avoiding foreclosure with minimal damage when planned exit strategies have fallen through.

1. Selling

The first and most obvious exit strategy investors should consider is selling the property outright. Investors should calculate the price at which they have to sell the property for in order to break even, including paying off all outstanding liens, commissions and other closing costs.

Once that necessary price is set, investors should look at the selling prices of comparable properties on the market. If the market supports the investor’s price, this exit strategy may work. Ideally investors should aim for being the lowest priced comparable property in the area. Investors may also want to consider home staging, as staged homes tend to sell quicker and for higher prices than un-staged homes.

Investors should consider networking with other investors to find potential buyers| alt=|Networking with other investors|]If a full 5 to 6 percent real estate commission is not in an investor’s budget, they should consider looking into companies such as MLS4Owners that list homes on the MLS for a small fee. While the investor will likely lose out on marketing and consulting services performed by the listing agent, getting the property listed on the MLS is the highest priority.

2. Networking

Additionally, investors should network to find potential buyers for their investment property, including other real estate investors. Associations such as a local Real Estate Investment Association (REIA) may be particularly helpful. To locate a local REIA, use the National REIA website. If the investor had plans for the property, such as remodeling or renovating, they may be able to sell their property to another investor who can follow through on the plans, or look to find a partner who can help them to finish their project.

3. Relocating and renting

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For investors who might have an easier time selling their primary residence than their investment property, moving into the investment property and selling their home might be a worthwhile thought. Another option could be to attempt to rent out both the personal residence and the investment property while residing at a third, less expensive place, such as a cheap apartment. Investors should be prepared to think creatively and evaluate all scenarios that could make the numbers work.

If selling is not an option, or if the property payments are somewhere near prevailing rental rates for the area, or if the investor has extra cash flow from another source to help supplement payments, there are several other strategies to consider: Renting,lease options, corporate housing and vacation rentals are all possibilities.

Corporate housing companies have occupancy rates significantly higher than hotels, according to a 2007 study by the Highland Group. In Chicago, occupancy rates for corporate housing were around 88 percent, according to the Chicago Tribune. While monthly costs per unit are 25 to 40 percent less than comparable hotel rooms, according to The New York Times, rates for corporate housing may still be higher than local rental rates.

Rental and occupancy rates will vary significantly for vacation rentals, so investors should conduct additional due diligence on this option. While those strategies all bring in an income stream, that may not be enough to service the entire property debt. It is important for investors to evaluate their financial situation and determine whether the estimated income generated would be adequate.

4. Talk to the lender

If an investor is unable to use any of these methods, and foreclosure is the only option in sight, they should talk to their lender as soon as possible—preferably before missing any payments.

If an investor has an adjustable rate mortgage that is going to reset and become problematic, they may be able to fix the lower rate for a longer period of time, depending on their lender.

The lender may also be able to set up a deferral, lower a mortgage payment or offer some other option, such as a deed-in-lieu of foreclosure, which is worth considering if the bank will allow it.

Some lenders offer a forbearance agreement to distressed lenders, suspending or reducing payments for a time. After that period is over, investors will have to pay the mortgage plus an additional amount to cover payments not made during that time. The forbearance period is usually less than six months and the repayment period is usually less than one year.

If there is not enough equity in a property for a normal sale, the investor may want to ask their lender about a short sale, which would allow the investor to pay off less than the balance left on the loan to the lender. While the investor will lose the property and the equity in it, if the property is worth less than what is owed on it, this is one way to sell it.

|Investors should thoroughly review state and federal laws regarding foreclosure| alt=|The steps of the United States Supreme Court|]Because of the present market turmoil, lenders are more willing than ever to work with borrowers to avoid foreclosure. Investors should remember that going through the foreclosure process costs lenders a lot of money, and that most lenders will try to avoid foreclosure if at all possible. Try to create a win-win scenario for both parties.

5. Check state and federal laws for investors

It is important to check state and federal laws regarding foreclosure and bankruptcy. While a Chapter 13 bankruptcy filing will halt foreclosure proceedings for an individual’s primary residence, it will not have the same effect on investment properties.

An investor in a desperate situation, such as one who owns multiple properties that are heading into foreclosure, and who has exhausted all other options, might consider ceasing to service the properties. Because their credit is going to be ruined for the next seven to 10 years, there is probably not much point in continuing to pay on property that has no hope of being rescued.

Before doing that, investors need to consider whether deficiency judgments are allowed in their state. Deficiency judgments require an investor to pay off a foreclosed home when the sale price wasn’t high enough to pay off the full mortgage. With deficiency judgments, investors could get penalized even after their property is foreclosed.

Discontinuing payment on a property should be the last resort. Investors should consult both an attorney and a CPA to find out exactly what the effects could be in their particular state.


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