Tuesday, June 12, 2012

What's the Best Exit Strategy Today?

Exit strategy is something that many investors take for granted and unfortunately for many, this isn't a priority before buying the asset they want.  They see what they think is a deal, and then buy.  It's not enough to think it's a deal.  You have to know it's a deal and this has to be based on real facts and not blind faith.  Many investors buy real estate and stocks with this blind faith or gut feeling method and it doesn't work over the long term.  They may get lucky, but then again, that person could just go to a casino instead and have more fun losing their money than losing in real estate or stocks.  Declining markets present opportunities just as rising markets do.  The key is making adjustments to your approach to take full advantage and being on the very right side of the deal, by systematizing it and adhering to those standards.

Let me give you an example:  Time and again, I am contacted by people claiming that they have a deal.  In so many instances, this so-called deal is not a deal because they are looking to sell me on the fact that the pro-forma is such and such!  Ladies and Gentlemen, we do not buy based on some hypothetical future value.  We buy taking into consideration today's value.  What's it worth today?  Then we buy for much less than what it's worth today to ensure that we can make a profit.  If you have a different philosophy, then please tell me how it's better in a declining market?  Buying at or near market value is not a prudent approach and is very risky for the buyer. 

In a declining market, the best strategy depends on what your short and long term goals are.  Buy and hold may not be a prudent idea unless you have a long term strategy that can absorb equity losses in the short term while giving you cash flow.  Standard and Poor's released this article on May 29 that shows facts, and facts are what we need to base our decision making on: 

S&P Indices - Press Release May 29, 2012

According to Standard & Poor's / Case-Shiller Home Price Indices, "...all three headline composites ended the first quarter of 2012 at new post-crisis lows."

Further, Atlanta, Chicago, New York, Las Vegas and Portland all saw average home prices hit new lows.  Three cities...Atlanta, Chicago and Detroit saw annual declines worsen in March, 2012.

Source: S&P Indices and Fiserv - Data through March 2012

Does this mean that those folks in Atlanta, New York, Las Vegas and all the other cities that are seeing price declines can't profit as much as those in other markets?  Well, that depends on your exit strategy.  If you are buying and holding, then in the short term, you may be a loser or a winner, depending on your price to enter and service the deal.  Maybe you are looking to wholesale or a buy-fix-flip?  To successfully do so requires that you buy well below the wholesale level for wholesaling and well below your ARV after taking into consideration your repair and buy costs for flipping.  There is no need to consider deals that do not have sufficient padding for your market, especially in a declining marketplace.  Moving your money by turning it over quickly is a very good philosophy in today's declining markets, but buying right has got to be your primary objective to make this happen consistently and profitably for you.

Regardless of the market you're in, declining or appreciating, exit strategy is of prime importance.  So what is the best exit strategy in a declining market?  This depends on many factors, but the first consideration you need to have is what we have already discussed and that is to buy well below current real market value, regardless of what it is that you're could be a single family home, an apartment complex, a non-performing note, whatever.  You need to know the real true market value of the asset you intend to buy.  By buying well below market and understanding your market well, you will position yourself with options to exit in whatever manner you decide is best "before you make the decision to buy" and improve your odds for short term and potentially long term profitability.  There are other strategies of course, but I temper this with the fact that they have more risk than our discussion focus does.  

Regardless, real estate is not that complicated.  If you buy low enough, you will be well positioned.  It's more difficult to find these real deals, but they are out there and well worth the expense and effort to find.  

Until next time....

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