Wise investors know that things don’t always come up roses. Thus, they have a plan for getting out of a property if things turn bad, which happened, for example, during the real estate recession of the mid 1990s when prices in many areas of the country dropped as much as 30 percent. When prices fall, if you are highly leveraged, you can quickly become upside down. That means that you owe more than the property is worth. Here are some typical escape plans that investors have used.

Escape Plans

Dump It.  

When prices level off, before they begin to decline, the investor quickly sells the property, even at just break-even or a slight loss. The idea is to avoid waiting too long—sell before you get upside down.

Hold It.   

If the property comes close to breaking even (not an alligator as explained above), the investor forgets about flipping, forgets about reselling, and hunkers down for the long haul. Over time, real estate has always rebounded and the property will undoubtedly go up in value, eventually.

Second It.   

Sometimes, in order to facilitate a sale in a down market, the seller/investor can offer a second mortgage to allow a weak buyer to come in with virtually no down payment. 
     
Wrap It.  

It may be possible to wrap this second mortgage around an original first, so there is no need for a very weak buyer to qualify for any new mortgage. Most first mortgages, however, have “due on sale” clauses that prohibit wraps, so you must be careful.

Lease-Option It.   

Here, you essentially rent the property to a tenant who has the option of later buying it (see below). It can be an effective way out. Be aware that lease options are restricted or prohibited in some states.

Contract It.   
A contract for deed (also called a land contract of sale) allows you to retain title while the buyer has time to gather up enough money to make the purchase. Be aware that land contracts are restricted or prohibited in some states.