I’ve seen too many operators—and LPs—get blindsided by one simple truth:
Just because you plan to refinance or sell in 3–5 years doesn’t mean the market will let you.
Pro forma says we’ll refi in 36 months, lock in better terms, return capital, and ride off into the cash-flow sunset. That’s great on paper—until rates double, cap rates expand, buyers disappear, and your deal is worth less after all your work than it was on day one.
And here’s the kicker: most people think the last 10–15 years were normal.
They weren’t.
Between 2010 and 2021, we lived through a freakishly low interest rate era. Everyone got hooked on 3%–4% debt like it was normal. It wasn’t.
Here’s reality:
- 45-year average mortgage rate (1980–2024): ~7.75%
- 45-year average Fed Funds Rate: ~5.0%
- In the 1980s, rates hit 18%
- In the 1990s, 8–9% was standard
- Even in the 2000s, 6–7% was normal
So when sponsors assume a 5.5% refi rate on a short-term bridge loan, they’re ignoring history. You don’t get to control what rates are when your loan matures. Neither do I.
And when rates rise, the entire market shifts. Buyers run for the hills, banks tighten up, loan covenants get triggered, and rate adjustments hurt more, Worse still is if the business plan was not completed, you didn’t hit pro-forma figures, you cant hit your expected Cap Rate, or your loan comes due. It can be a perfect storm if not properly planned or prepared for.
What Is Exit Strategy Risk?
Exit strategy risk is the possibility that your planned sale or refinance doesn’t happen on the terms you expected—or doesn’t happen at all. It’s the risk that market conditions, debt terms, cap rates, or execution failures derail your exit and leave you stuck holding the bag.
And it happens more than you think. Not all the time, but it happens.
A Real Deal That Came Full Circle
I had a deal come across my desk recently. I knew the park well—because almost five years ago, I tried to buy it myself. I was new to the space, didn’t have lending lined up, and asked for seller financing. My offer was 10% down with a 3% rate—not unheard of at the time. Seller rejected me and went with a buyer using bank financing.
My rebuttal then?
“How will a bank even loan on this? The DSCR doesn’t pencil.”
It was rough—needed a lot of capital. I knew I needed to put money into improvements, not a fat down payment to make up for the poor performance. I couldn’t compete. But the buyer could with bank financing.
Fast forward: the park’s back on the market. The five-year balloon note is coming due. Interest Rates have doubled. From what I can tell, not much has changed—rents were raised significantly, but only on the existing tenants, the real improvements seemed to have never happened. It appeared only a few homes were rehabbed, but the roads are still bad. Vacant homes still rough and the lots are still vacant. Infrastructure untouched. Yes they cleaned up and stabilized what was there, but they didn’t add the real value to give them the boost they would need to refi or sell in a market that took a bad turn.
Maybe had they completed the full turnaround, they could have survived the market crunch, possibly turned a good profit. But with only a partial improvement over the past 4 years or so, I don’t see how they are getting out this one. I don’t know what they will do, sell for a loss, try to restructure their debt, get an extension from the lender, or find a short term lender to help them get over this market hiccup. But it’s a perfect example of the risk that comes with exiting your investment when not properly underwritten or stress tested.
Common Exit Strategy Risks (You Need to Know)
The Market Softens and Buyers Aren’t Paying Top Dollar
You can have a fully turned-around asset and still struggle to sell it—not because the deal is bad, but because buyers are soft. I’m not talking about bad buyers. I’m talking about hesitant buyers. Nervous buyers. People sitting on dry powder, waiting. Buyers who now have more options, tighter lending terms, and no urgency.
And here’s the thing operators don’t want to admit:
Price is a function of buyer appetite—not just asset performance.
You might’ve bought the park at a 9-cap, executed the plan, and now expect to exit at a 6.5-cap. But if the buyer pool is thin, debt is expensive, and capital is sitting on the sidelines? That 6.5-cap becomes a ghost. No one bites. No one tours. You’re stuck.
When the market softens, even the best pro forma can be tossed in the trash if it hasn’t been properly stress tested. Most sponsors test for normal or slightly bad conditions. Few test for worst-case. What if the buyer pool disappears? What if refi terms tighten? What if the cap rate jumps and the LTV drops?
Even in a soft market, there are still buyers—money doesn’t sit idle forever. But those buyers are cautious, and they’re not paying peak pricing. Can your deal still pencil if it trades at a discount? Can it sell without asking LPs to bring more capital to closing? Is there any equity left to shave to get the deal done?
Deals close when someone says, “Yeah, I’ll write that check.”
When rates were low and yield was king, that was easy.
Today?
- Buyers are cautious
- Debt is expensive
- Returns are compressed
- Everyone wants a “deal”
- Sellers are stuck between pro forma and reality
If you didn’t leave margin to meet the market, you’re not closing—you’re holding the bag.
Value-Add Didn’t Materialize
Not every value-add plan pans out. Sometimes the turnaround takes longer, costs more, or hits unexpected walls—bad contractors, tougher tenants, city delays, or just plain market resistance. If the NOI never climbs to where you projected, the equity never materializes. You can raise rents all day, but if collections are weak, homes stay vacant, or the park still looks rough, the value just isn’t there. You need more than just rent raises on existing tenants on a Value-Add investment. You need it all to really squeeze the value out of it. And when it comes time to refinance or sell, banks and buyers aren’t paying for your effort—they’re paying for results. If the NOI is flat, there’s no equity growth. That means no big loan proceeds, no investor return, and no shot at hitting your projected multiple. The value-add story only works when the income justifies the new valuation. Without it, you’re left holding an asset that didn’t move the needle..
No NOI = no equity growth.
Cap Rates Expand — Valuation Gets Hammered
Cap rate expansion is one of the fastest ways to destroy projected returns—and it doesn’t get nearly enough attention. You might’ve underwritten your exit at a 6-cap, expecting a clean sale in five years and a strong equity multiple. But if cap rates move to 7.5% or 8%? Your valuation drops overnight—even if your NOI hasn’t changed a dollar.
Let’s break that down:
- $300K NOI @ 6-cap = $5M
- $300K NOI @ 8-cap = $3.75M
That’s $1.25 million gone.
A 25% hit to value without touching a single expense line or rent roll.
And when that happens, you’re not just fighting lower pricing—you’re competing with other deals that are newer, cleaner, in better markets, or easier to finance. That buyer who might’ve overpaid a year ago? Now they want a discount. Now they’re offering on a 7.75 cap.
Suddenly, your 2x equity multiple is vapor. The exit doesn’t work. The profit is gone—and in some cases, the investor principal is at risk.
If you didn’t leave margin for cap rate expansion in your underwriting, then the market doesn’t need to kill your deal. Your assumptions already did.
Interest Rates Double Before the Exit
Another brutal exit risk? Rising interest rates. You might’ve locked in a short-term loan when rates were 3.5%, planning to refinance in year three. But now it’s year five, the loan is due, and rates are sitting at 7.5% or higher. That one change alone can wreck the entire plan. Even if you hit your NOI targets, the cost of new debt slashes loan proceeds and crushes cash flow. Banks tighten up LTVs, raise DSCR requirements, and suddenly your refi doesn’t look anything like your pro forma. You’re left with smaller proceeds, higher monthly payments, and a decision to make—raise more capital, sell into a cold market, or eat the margin hit and hold longer. Rising rates don’t just affect buyers. They directly impact whether you can keep your own deal afloat.
Refinance Covenant Risk
This is one of the more misunderstood risks in real estate syndications—and it’s the one that shows up quietly and kills the deal in slow motion.
You’re at year five. The business plan is mostly done. You’re not trying to sell—you just want to refinance. You go to the bank expecting a decent term sheet. But instead of what you underwrote (70% LTV, 1.25 DSCR, 6% rate), the lender comes back with something entirely different—or worse, nothing at all.
Here’s what changed: the covenants.
Lenders don’t care about what you hoped to get. They care about what the asset can support today, under today’s rates, with their new underwriting standards. And here’s what they’re seeing:
- Your DSCR is below 1.20
- Your NOI is lower than projected
- Your rent roll isn’t fully stabilized
- Your collections are inconsistent
- Insurance or taxes have crept up
- Rates are 200–300 bps higher than when you modeled
Now the new loan proceeds come in way below your current payoff. The lender might still offer a deal—but with ugly strings attached:
- Requiring a large principal paydown
- Dropping LTV to 60% or lower
- Demanding additional collateral or guarantees
- Forcing you into a bridge loan or short extension at a much higher rate
This is refinance covenant risk in real time:
The bank’s terms no longer match your model, and the gap has to be filled—by someone.
If you don’t have cash in reserves, that someone is your investors.
If you can’t raise capital, you’re forced to sell—fast.
If the market’s soft, that sale likely means a discount.
And if no one buys? You’re now in default territory.
It doesn’t matter that you made progress. The bank is underwriting their risk, not your story. And if your deal only worked under last year’s terms, then you were never set up for success to begin with.
Extension Risk
A lot of operators assume they can just “get an extension” if the exit doesn’t go as planned. But that’s not always how it plays out—especially in a tightening credit market. Extensions aren’t automatic. Lenders will want to see performance, updated financials, and in many cases, they’ll require something in return: higher interest, an extension fee, increased reserves, or even a partial loan paydown. And if the asset isn’t stabilized, or the DSCR is weak, they may just say no. That’s when panic sets in. You thought you had five years. You’re now out of time, options are limited, and you’re making decisions under pressure. The real risk isn’t just that the exit takes longer—it’s that you don’t get the time you thought you had to fix it. Betting on an extension is not a plan. It’s a backup that may not come.
Pro-Forma Risk
One of the most painful exit risks shows up when the property simply doesn’t hit pro forma—and the bank won’t lend. Similar to when the value-add deal doesntThe underwriting assumed NOI would be $300K by year three, allowing for a refinance at 70% LTV that would return all or most of investor capital, hitting a clean 2x equity multiple over five years. But then the real world kicks in. Occupancy takes longer, rehab runs over budget, delinquency stays higher than projected, and rent increases don’t move the needle fast enough. Now you’re sitting at $240K NOI instead of $300K, and it’s time to refinance. But here’s the part most LPs don’t realize until it’s too late: the bank doesn’t care what your pitch deck said. They care about current DSCR, actual NOI, and today’s interest rates. And if those don’t align, loan proceeds come in far lower than expected. That might mean a capital call just to close the refi, or a term sheet with a forced paydown, a lower LTV, or even a personal guarantee. If the team can’t raise that capital, the next move is to try to sell. But in a soft market, that sale may fall short—or not happen at all. And if neither refi nor sale works? You’re stuck renegotiating an extension, often with worse terms and a ticking clock. This can happen even when the operator genuinely “did the work.” Because if the business plan never truly delivers on pro forma assumptions, the deal won’t appraise where it needs to—and the exit door slams shut.
A Real Stress Test From One of My Own Deals
So what does all of this look like in reality? Let me show you.
We bought a deal for $1.9 million and raised roughly another $1.9 million to cover closing costs, capex, reserves, and fees. The loan we placed on the deal had a principal balance of $1.425 million. The underwriting projected a 2.21x equity multiple—solid numbers, with plenty of potential. This was mostly a TOH and RTO community, so we assumed a five-year exit based on a stabilized valuation of $7.3 million (about $80K per lot), using a 6% cap rate, a 7% interest rate, and 65% LTV—coming in around a 1.3 DSCR.
But to understand how quickly this can shift, I ran a simple stress test.
If we keep everything else the same but assume the market softens and the deal trades at an 8-cap instead of a 6-cap, the valuation drops to $5.7 million. That change alone wipes out nearly $2 million of projected value—and our multiple drops from 2.21x to 1.64x.
Now let’s tighten LTV assumptions to 60%, which many lenders are requiring right now. That takes our equity multiple down to 1.48x.
Those two changes—cap rate expansion and more conservative lending—removed about $1.3 million in projected investor distributions. On a great deal.
There are two ways to look at this:
We can say the deal still held up, even under pressure, and managed to return capital and provide a decent gain. Or we can say the original expectations were inflated and the stress test simply pulled them back down to earth.
Either way, it proves the point: even great deals with clean execution need to be stress tested. Nearly 50% of projected profits were wiped out from just two market shifts. Had the deal been any thinner—or had the business plan been delayed—we’d be talking about capital calls and negative equity, not just missed upside.
How to Protect Yourself
Look for deals that still work even if the exit takes longer—or happens in a tougher market. That means the business plan needs to be executable well before the loan matures. A three-year turnaround with a five-year loan gives you optionality. You can exit in year three, or hold if the economy softens and ride it out to year five. That flexibility matters.
Verify the exit assumptions. Don’t just look at the projected multiple—run your own napkin math. What happens if cap rates go up 100 basis points? What if LTV drops from 70% to 60%? Even using the basic numbers from the pitch deck, you should be able to ballpark how much room there is before the deal gets tight.
Talk to the sponsor. Ask them how they feel about their exit assumptions—do they seem confident or like they’re reaching? What actually needs to happen to hit that final valuation? Is it just rent raises, or are we talking about new homes, major infrastructure upgrades, and stabilized collections? Are the budgets and timelines lining up?
And most importantly, ask yourself: Does this team have what it takes to get it done? Because if they missed something in the plan—or they’re not capable of executing—then even if the market holds steady, the numbers won’t. Projections get missed, banks won’t lend, and the whole thing unravels.
All these risks can be scary, but in truth, risks exist in every investment. There is no sure thing. The stress test doesn’t need to make sure you end up hitting a home run still. It needs to make sure you get on base. Ensure you won’t lose your money, that is the how I look at stress testing.
Wrapping It Up: The Exit Isn’t a Guarantee
Exit strategy risk is real. And it shows up when rates spike, cap rates expand, buyers go cold, and the deal doesn’t hit pro forma. Sometimes the operator misses the mark. Sometimes the market just moves. Either way, the refinance or sale doesn’t go as planned—and now someone’s paying the price.
If you’re a passive investor, your job is to ask better questions. Understand the business plan. Ask when it’s supposed to be completed, and how much room the deal has if the market shifts. Do your own napkin math. Push back on rosy assumptions. Figure out if the operator has a real plan—or just hopes to be bailed out by perfect timing.
As for me?
Here’s what I do differently now:
- I underwrite assuming a refinance might not happen at all
- I model 7%+ refi rates, not 4–5%
- I use 65% LTV as a baseline and stress it down to 60%
- I assume exit cap rates expand, not compress
- And I always ask myself: What happens if we have to hold this for 10 years instead of 5?
Because if the deal only works with a perfect exit?
It’s not a deal—it’s a bet.
LOCK N’ LOAD
-The MHP Operator
Disclaimer:
This article is for informational and educational purposes only. It is not an offer to sell or a solicitation of an offer to buy any securities. Any investment opportunity will be made only through official offering documents provided by Realovative Asset Management LLC in accordance with applicable securities laws.I’m not a financial advisor, CPA, or attorney. Everything shared here is based on my personal experience and opinions. You should always do your own due diligence and speak with licensed professionals before making any legal, financial, or investment decisions
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