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Many investors buy with the intention of holding forever. But things can change and you should have an exit plan. In this episode, Tom and Emil discuss why having an exit strategy is important and how to be thinking of the right one for your property.

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Transcript 

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

Tom:

Greetings, and welcome to the remote real estate investor. On this episode, I'm joined by

Emil:

Emil Shour.

Tom:

And today we're gonna be talking about buying with an exit in mind. So in other words, how to think about the eventual sale and if you're going to sell at the point where you're doing your acquisition. Alright, let's jump into it.

Emil, I am a big fan of this topic. And shout out to Pierre, for identifying this as a discussion point for today. So to reiterate, we're gonna be talking about buying with the exit in mind. And I think what before we get into the specific strategy points, as considerations is really important to think about buying with the exit in mind. Emil, I'd love to hear you riff on this.

Emil:

It is, it doesn't seem like it is when you're buying your first property. And I'll tell you from experience, but years later, you will start thinking about a lot more as you buy properties and wishing you had thought about it a little bit more down the road, even if you know you're going into this and I'm holding forever. That may not always be the case. And you may want to sell down the road, especially when you know, you've done this thing for many, many years, and you're just ready to get out of business or whatever it is, it's always good to think of the end in mind.

Tom:

I, the way my thought processes change, I've always been very, I buy hold forever, all that stuff. But the way I've evolved thinking about it is keep the capital in play forever. So you know, you can sell your property and have an exit in mind. But just roll it over with a 1031 and keep that capital in play. And there's plenty of good reasons to do that. Perhaps you're leveling up into you know, a two for one property is converting that 1031 or perhaps you're consolidating regions, I did that I did that with my first 1031 moving out of one market and doubling down into a different market. So just because we're thinking about the exit in mind doesn't necessarily mean that we're exiting the capital and I just need redeployment. So this discussion is very specific to the exit of the either redeployment or perhaps you have the money.

Emil:

Yep.

Tom:

Alright, so the first topic that I want to talk about with thinking about the exit in mind relates to thinking about who your potential buyers are. So, Emil, why would you ever notice up with a couple of buyers in a start discussion?

Emil:

Alright, so I'm gonna be assuming we're talking about single family homes here. So when you are selling a single family home, luckily, you have two buyers, unlike multifamily, commercial, we're only really selling to investors, but the single family you could sell to an owner occupant, or you can sell to another investor who is like you probably buying it, wanting it to be a rental wanting to collect rent, wanting all that stuff. So you have two options with a single family in place versus a multifamily or commercial property.

Tom:

Yeah. And I think what's a good way to think about that is, you know, how can you maximize, we're going to maximize the value for the various different types of buyers that you have. And I'm gonna reword that just a little bit. So next, I'm gonna start with analogy, a smart mouse has multiple holes to run to. and applying that smart mouse analogy here is one of the great things about SFR is having two different sellers to sell to so I think Emil is gonna talk about example in a minute with related to, you know, nicer homes.

Emil:

So to give them like a good example here of how you are maximizing your sale price by having multiple people, I think that's actually one of those unique things, single families, you can sell to an owner occupant. And so this is something I realized, after I bought properties in areas that, you know, the neighborhood's score, the neighborhood quality isn't as high schools aren't as good. But that on paper yield looks great, right. And so I'm traveling seeing these higher cash flow properties.

And having and having property, they're nicer neighborhoods, probably the less nice neighborhoods, I can tell you, I weigh this a lot more now in thinking about the exit. The property, the nice neighborhoods, they appreciate more, and again, you can sell them to owner occupants, down the road. And the reason that's great is that they are an emotional buyer, right, they feel that your home, they really want it, especially right now you think we're in a bidding wars, you got people bidding up prices, all that stuff, that's the type of person you want to sell to, obviously, you can sell to an investor as well, they're gonna look at the numbers, you know, if you have a tenant in place, we'll talk about how you can sell that. But failing to know document is a great option there emotional if you want to sell to.

Tom:

Yeah, selling to attend in place is a really interesting strategy to implement and adjust within your ownership. So one of the early funds that I worked at, they did a lease purchase option is one of our main products. And what they did with that is they collected a little bit of a premium of rent and also collected a bigger deposit that they eventually converted into the downpayment, should the tenant convert on their lease purchase option. So I think there's a couple companies that are doing that now. They're specializing these lease purchase options, where within the lease the tenant have the opportunity to buy. But I think that's like a really interesting strategy, kind of sub strategy of thinking about the exit in mind having an actual lease purchase option. And if they're able to purchase the property, awesome, then you know, you convert on your exit, and if they're not, yeah, there's a lot more upside of the rent that you've collected.

Emil:

Do you know if you as the owner can, like once you sign that contract with a tenant, like let's say, it's two years by the end of two years? Because it has the option to buy it? Or do you get final say like, Oh, no, the markets gone up? 10 20%? More? I don't want to sell it anymore.

Tom:

Good question. I mean, I think there there is some whitespace, or I guess, flexibility and how these are structured, the way that we had our lease purchase options is they were predefined prices upfront. And it was a little bit of a risk reward for everybody in that if the price isn't appreciated beyond what the predefined prices were on paper, then great for the tenant who's buying the property. If they if they didn't, then I think there was like a little bit of a decrease in the price. I don't even like really meaningful. But eventually as that company got bigger and you know, had more sophisticated investors that were investing in this property management, you know, owner operator, they decided they didn't like that feature of our leases, at least cuz they weren't able to control the exit, you know, they wanted to hold on as long as the candidate and like lease purchase option.

But I think as an individual investor, I think there are, you know, are some advantages for having this type of lease in place with, you know, the premium and renting and that and typically like a better tenant, you know, you could be like, Hey, you know, this is your house that you're buying, you know, you're less likely to have what was the hammer party Michael Zuber talks about, somebody brought hammers and just hammer the house for a party. So that's what's likely to happen.

The other potential seller out there that I think anyone who owns real estate is probably getting hit up is these these institutions or I buyers that are making these offers kind of on the spot. I know I've received them from Redfin, from all these all these other companies. And I think it's, it's a nice kind of validation on the price. I think if I was to sell to one of these companies, I want to really be really thoughtful and looking at what I think the price of the property is compared to what they're offering. And it can make sense. But away at an important thing about the ibuyer pieces, you need to be in a market in which those ibuyers operate. So if you're buying real estate in really little little itty bitty markets, you're less likely to have that as an option into selling to one of these I buyers or, or institutions.

Emil:

Yep. And the other person sending those mailers is maybe not ibuyer, but someone who may be a wholesaler, or they're an investor themselves, right? Like I'm sure you get that I buy houses letters, I get paid like five a week right now. I just wanted someone to buy your house all cash offer. So that's another investor who's may not be an institution or big company, but is, you know, small, private and buying homes for their own portfolio.

Tom:

I'm getting better at explaining I buyers, I think I might just explain it for those who are not familiar with that term. So historically, real estate has been a dealer model, excuse me a broker model, right, where there's someone in between selling to a buyer and a seller. But what's happening in the industry is they're moving to more of a dealer model where there's this ibuyer in between who buys the property, and then, you know, perhaps does make some margin because they have their own title company, they do their own this, and then they sell it. So they take actual ownership. And I'd say comparing the traditional broker versus a dealer model where and ibuyers, a dealer modeling tons and tons of money going into the space and doing that you look at Zillow and Redfin and all those companies.

And it's interesting, I, you know, I don't want to divert the conversation too much. But I would be concerned about nooit, where there's any kind of downfalls in the market, you know, I buyers is holding a lot of inventory on their books. But it was more money moving in space. So anyways, that's the other consideration in with buying with the exit in mind is kind of what are the buyers in the space and having that as an exit, and final thoughts on selling to?

Emil:

Those are the big ones.

Tom:

Alright, so lastly, we're going to talk about considerations with the exit in mind selling the property occupied or vacant. So I think timing is a really important consideration if you do have a very specific exit, timing in mind, monitoring that lease. And, you know, perhaps structuring the leases, so they've ended up in a peak sales time where you want to be a seller could that could be in the summer when School's out and all of that good stuff. So that's an important consideration in with buying with the exit in mind with occupied properties.

Emil:

Yep, good one in that you know, just general property management, you don't want to be having to fill especially if you're in the Midwest or somewhere it's called having to backfill a tenant during during the winter time. And the same thing with with selling right, it's you want to be selling in the summer in the spring, that's just when there's most activity most people buying so lining it up properly can help you maximize a good price as well.

Tom:

I will throw in a little Roofstock plug though. So as a big reason why rootstock was created the marketplace just to make it really efficient to buy and sell occupied property either. For some of those who have an earlier episode, we had Gregor Watson, he was one of the co founders, he had this awesome story where he was working for a fund that owned 1000s of homes and he went into a realtor and in Dallas, he says, hey, I've got 1000 homes I want to sell, do you want to sell them and the broker of that realtor like, you know, his put his hands on his chin was thinking about it. He's like, I can't I can't sell your homes. And Gregor was like, why not? This has gotta be the biggest boon for your business ever. And the guy's like, I don't have 1000 signs. It was that moment that Gregor was like wow, this is a market opportunity to be able to… But anyways, I diverge. If you are thinking about selling, you know, with occupied properties like Roofstock was basically built for that to, to do that make it really efficient. So you don’t have to vacate the tenant and all of that good stuff. So…

Emil:

Have you had you sold a property? I know you and I both bought to Roofstock?

Tom:

Yes.

Emil:

I have actually sold as well have you?

Tom:

I have, I've sold occupied and vacant.

Emil:

Nice. I sold only occupied, one last year.

Tom:

One last year, nice. 1031s are real 1031s are real. Got some exciting content coming up around the pike related to 1031. We will share probably in late September, early October. So lots of fun, fun things around that. I think a key takeaway from this session is, you know, you should buy with the exit in mind, even if you plan on holding forever, because it could be just a matter of redeploying capital. Because you never know necessarily as your strategy evolves and to have those that optionality is really important to think about.

Any final thoughts Emil?

Emil:

No, you know, just again, think about even if you go in, I had the same kind of I'm gonna hold forever, life happens things change. Yeah, you may feel differently. Always think even if you don't plan on selling, think about if I were to sell just take those considerations in mind. It'll it'll help you make a smart decision long term, I think.

Tom:

Totally. Yeah, I think it's been an evolution for me as an investor is thinking kind of ahead of that next step. like okay, what does an exit look like this property? Yeah, like that. Definitely.

Alright, guys. Well, thank you so much for listening. I hope you enjoyed the episode and please like, subscribe, wherever you're hearing us and as always, happy investing.

Emil:

Happy investing.