Exit Strategy
Also known as: resolution strategy, disposition strategy, exit plan
An exit strategy is the predetermined plan for how a note investor will resolve an investment, recover capital, and realize a return. Every note acquisition should begin with a clear exit strategy — or multiple viable strategies — because the path from purchase to profit is rarely a straight line. Borrower behavior, property condition, legal complexities, and market shifts all influence which exit ultimately produces the best outcome.
Common Exit Strategies for Note Investors
Note investors have several resolution paths available, each with different return profiles, timelines, and risk characteristics.
| Exit Strategy | How It Works | Typical Timeline | Best When |
|---|---|---|---|
| Loan modification | Restructure the loan terms to make payments affordable; borrower resumes paying | 3-6 months | Borrower is cooperative, property is occupied, borrower has income |
| Discounted payoff (DPO) | Borrower pays a lump sum less than the full balance to satisfy the debt | 1-3 months | Borrower has access to funds, wants a clean resolution |
| Deed-in-lieu | Borrower voluntarily transfers property ownership to the note holder | 2-4 months | Borrower wants to walk away, property has equity, title is clean |
| Short sale | Property is sold for less than the outstanding debt with note holder approval | 3-6 months | Property has a willing buyer, borrower cooperates |
| Foreclosure | Legal process to take ownership of the property and sell it | 6-36 months | All cooperative options exhausted, property has value |
| Note sale | Sell the note to another investor at a markup | 1-4 weeks | Quick capital recovery, better opportunities elsewhere |
Building an Exit Strategy Before You Buy
The best time to plan your exit is before you submit a bid. During due diligence, evaluate each potential exit and estimate the IRR or ROI for each scenario:
- Primary exit — the resolution you expect to pursue based on borrower situation, property value, and loan characteristics. This drives your pricing.
- Secondary exit — your fallback if the primary path fails. If you are counting on a loan modification but the borrower does not engage, what is your next move?
- Worst case — the floor scenario, usually foreclosure followed by REO disposition. Your bid price should still produce an acceptable return even in this scenario.
Modeling multiple exits protects you from overpaying. If a note only works with a single, optimistic resolution path, the risk is too concentrated.
Exit Strategy by Note Type
The type of note you purchase heavily influences which exits are viable:
Non-performing first liens: All exit strategies are available. Loan modifications and DPOs are preferred for speed and cost efficiency. Foreclosure is the backstop, supported by the senior lien position and property equity.
Non-performing second liens: DPOs and modifications are the primary exits. Foreclosure is rarely economical because you must pay off the senior lien to take the property. Note sales are common when the borrower is unresponsive.
Re-performing and performing notes: The exit is often a note sale at a premium once the borrower establishes a consistent payment history. Holding for cash flow is also viable if the yield meets your targets.
When to Pivot Your Exit Strategy
Flexibility is essential. A borrower who initially seems like a modification candidate may stop responding. A property you planned to foreclose on may have title issues that make foreclosure impractical. The market may shift, making a note sale more attractive than a long-term hold.
Monitor each note's progress against your original resolution timeline. If a strategy is not progressing within the expected window, evaluate your alternatives and pivot. The goal is not to be right about your initial plan — it is to achieve best execution regardless of which path gets you there.
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