Why is exit risk considered higher in certain transactions?

The reasoning behind why a narrower buyer pool contributes to higher exit risk in certain transactions revolves around the fundamental dynamics of supply and demand in real estate. When there are fewer potential buyers interested in a property, the seller faces greater challenges in exiting the investment at a favorable price or within a desired timeframe.

A narrower buyer pool could arise due to various factors, including property type, location, or market conditions, which all influence the desirability of the asset. If the property appeals to a limited segment of buyers, potential offers may be lower, and it may take longer to sell, increasing the risk associated with the exit strategy. This situation often forces sellers to accept less favorable terms, which can negatively impact overall returns on the investment.

In contrast, while higher operational costs, increased competition among sellers, and rising interest rates can affect real estate transactions, they do not directly limit the number of potential buyers as significantly as a narrower buyer pool does. Higher operational costs may impact cash flow but are less about exit risk. Increased competition among sellers could suggest a more active market, which may actually lower exit risk if buyers are numerous. Rising interest rates typically affect mortgage costs and can shift buyer dynamics but do so in a way that does not inherently reduce the number of