Unless a property investor intends to pay cash on a new acquisition, financing of some sort will be involved. And with financing comes an exit plan. Exit plans, also known as exit strategies, are a requirement among lenders. Investors need to give them serious thought before applying for loans.
What is an exit plan? Salt Lake City hard money lender Actium Partners says it is the strategy a borrower intends to utilize to pay his loan at maturity. In theory, an exit strategy could be anything a lender and borrower agree to. But practically speaking, lenders tend to be very cautious with exit plans.
Why Exit Plans Matter
Exit plans matter to lenders because they tie directly into a lender’s risk. Let us go back to Actium Partners. Actium wants to know how a loan applicant intends to make final payment at the end of the term. Whatever the plan might be, it needs to be reasonable and relatively low risk.
An unreasonable or high-risk exit strategy only increases Actium’s risk. The higher the firm’s risk, the less likely approval becomes. Therefore, it is in the best interests of the investor to come up with a solid exit plan capable of setting the Actium team’s mind at ease.
As a side note, an unreasonable or excessively risky exit plan also puts the borrower at risk. Assuming he can still secure funding from a hard money lender, not making good on the loan when final payment is due jeopardizes whatever asset the lender puts up as collateral.
Typical Exit Strategies
As previously stated, lenders and borrowers can agree on whatever exit plans make them both happy. Given that most hard money loans fund property acquisitions, here are the most common exit strategies currently in play:
1. Refinancing
The most common exit strategy is arguably refinancing the property. For instance, Actium provided a hard money loan for one of its clients to purchase a multi-unit apartment property. The borrower made interest-only payments while he went about securing conventional financing from a bank. He was able to refinance the property in order to repay his hard money loan at maturity.
2. Property Sale
Another common exit strategy is to sell property. In one case, an investor might turn around and sell the very property he purchased with the hard money loan. In another case, the investor might already have plans to sell other property in his portfolio. Either way, funds from the sale provide a reasonable exit.
3. Leveraging Cash Assets
It is possible for an exit plan to rely on leveraging cash assets. Perhaps an investor owns multiple properties already generating significant rental income. The income from those properties could be deposited into a dedicated account and ultimately used to exit the hard money loan. Even the property being acquired could generate enough income to make exit possible.
Requesting a Principal Discount
Even the best laid plans sometimes go awry. What does an investor do if his exit plan doesn’t pan out? One possibility is to request a principal discount. Although hard money lenders are less willing to offer such discounts compared to banks, asking for one is worth a try. Offering immediate payment in exchange for a discount can allow both parties to exit the deal with minimal damage to either one.
An exit plan is critical to protect both lender and borrower. Without a solid plan, it’s unlikely an investor will be able to secure a hard money loan. On the other hand, a reasonable and low risk plan makes hard money lenders comfortable enough to lend.
