Exit Strategy

An exit strategy is how a short-term loan will be paid off. Most bridge loans, fix-and-flip loans and construction loans aren't designed to be paid down over time. They end with a balloon payment of the full balance, so something has to happen before maturity to produce that cash.

The common exits are:

• Sale: the borrower sells the property and repays the loan from the proceeds. This is typical for fix-and-flip projects and homes built for sale.
• Refinance: the borrower replaces the short-term loan with permanent financing, such as a bank loan or a DSCR loan on a rental.
• Other cash: money from another sale, new investor capital, or business cash flow.

A sound exit is specific and testable. Instead of "refinance," it says: "Refinance with a bank once the building is 90 percent leased and its income covers the new payment 1.25 times, expected by month 14." Then the lender can check whether the numbers work today and how much room there is if things go wrong.

Why it matters for lenders

For short-term lending, the exit is the main source of repayment. US bank regulators expect lenders to identify the repayment source for every loan and to set construction loan terms long enough to cover building plus lease-up or sale. Private lenders apply the same logic. If the exit depends on a value or rent level the market doesn't reach, the borrower can't repay at maturity, even if every monthly payment was made on time.

Lenders test the exit by asking what happens when things go wrong. What if the sale takes six months longer? What if rates rise before the refinance? What if the after-repair value (ARV) comes in 10 percent low? A loan that only works in the best case is a risky loan.

How it works in practice

At underwriting, a private lender's analyst records the exit on the loan: refinance into a DSCR loan, with target rent, expected refinance amount and target date. During servicing, the asset manager updates those figures each quarter using the latest rent roll and market data.

Four months before maturity, a report lists every loan whose exit looks behind plan. The team calls those borrowers early to discuss extensions, partial paydowns or a sale. When the exit lives only in the original credit memo, nobody revisits it until the loan is already past due.