Exit Strategies: begin with the end in mind
Sam Schneiderman, Broker-owner of Greater Boston Home Team continues his Monday series.
Last Monday and the Monday before, we’ve been discussing the market forces that concern buyers and sellers. We wrapped up the last discussion by briefly discussing the concept of an “exit strategy” for buyers. In other words, before buying a home, condo or investment, the buyer should plan for her “exit” from the property.When I sit down with a prospective buyer one of the questions that I usually ask is: “What are you going to do with this property when it’s time for you to move on?”
Most buyers figure that they’ll just sell when it’s time to move on. That works if the buyer believes that values will appreciate enough to cover sale costs and/or improvements. It also works if a buyer is not concerned about breaking even or making a profit. That can take time. Even in the best of markets, I rarely recommended buying if the term of ownership will be under five years. In the current market, seven to ten years makes more sense based on my experience with market cycles over the past 25 years. Longer is better.
Here are some examples of exit strategies:
When I bought my first condo, I knew that the mortgage payments would disappear after 30 years and if my circumstances changed, the condo could be rented to cover most of my monthly payments. My exit plan was to move on and rent. (I still own that condo and I’m living in my second single-family house.)There are buyers that have committed to staying in their homes for at least 15 years. They have 15 year fixed rate mortgages. They plan to have paid off mortgages when they exit so long term value is not a big concern for most of them.
In today’s market, condo buyers could buy a two-family with another condo buyer and convert to condos when one of them wants to move on. The right two-family would give them an instant increase in equity if they’re concerned about declining values. If they can’t sell, they can rent.
Single-family buyers often overlook the idea that they can rent instead of selling it when it is time to exit.
Some single families can be converted or expanded to two family properties or can benefit from the addition of a legal accessory apartment (in some towns). Increasing property values by improving the property in a financially feasible way can result in higher rents or a higher sale price when it is time to exit.
Today’s potential buyer who is concerned about tomorrow’s values might be advised to buy a smaller home in less than pristine condition, but in a strong location. Well planned improvements could add value to the property and the location would certainly help on resale/exit.
PERSPECTIVE:
There is no “one size fits all” exit strategy. Each buyer’s situation is different enough that all of their priorities and concerns need to be examined thoroughly before deciding on an exit strategy and a property that will work for that buyer.If a buyer can not develop a viable exit strategy that will work for his situation and risk tolerance, the buyer should think long and hard about whether committing to home ownership makes sense because it may not be the right time for him to buy.
