How Do I Find a Property I

Can Flip? That’s the big question everyone wants answered. If you’re looking to buy a home to live in, my suggestion is forget about it. You’ve got enough to worry about in finding a good property. On the other hand, if a flipper falls into your lap, don’t let it go. Take full advantage of it.

How Do I Actually Flip a

Property? The mechanics of the deal can be complicated, particularly for novices. Basically, it goes something like this. Once you locate a suitable property, you present a below-market offer. If the seller accepts, you now must quickly resell. Depending on how your offer was structured, your time period can be anywhere from a minimum of about 30 days to a maximum of about six months. You then bring in a rebuyer (one who actually purchases the property) who concludes the sale with the original seller. The rebuyer puts up the cash down payment and closing costs and gets new financing. A portion of the purchase price goes to cash out the original seller. And you get the remainder, usually in cash, but sometimes in the form of a second mortgage, for yourself. There are basically two methods of structuring your purchase: the assignment and the option.

How Do I Offer an Option? Real estate options are not much different from stock options. For the buyer, they are an opportunity (but not a requirement) to purchase for a set price at some future date. For the seller, they are a commitment to sell for a set price at a set date. Note, an option is not a purchase. Rather you are buying an option on the property getting the right, but not the obligation, to purchase sometime in the future. For this privilege you would normally give the seller some option money, perhaps $1000 to $5000 or more. (The further out the option date, the more money is usually required.)

TIP IT’S AT YOUR OPTION Note that in an option, you the buyer are not committed to purchase. It’s at your discretion. The seller, however, is committed to sell. He or she must go through with the transaction, IF you execute your option.

Why would a seller agree to such a thing? Cash! Remember, you usually put up some option money, which the seller gets to keep if you don’t eventually make the purchase. The term of the option is likewise negotiable. Usually they run from 30 days to six months or longer. When flipping a house, a term of 30 to 90 days would not be uncommon.

Pros and Cons of the Option  You’ve tied up the property at a fixed price.  You don’t have to qualify for or obtain a mortgage. You also don’t have to come up with a down payment.  You don’t own the property, so you’re not responsible for mortgage payments, taxes, insurance, maintenance, or repairs.  You’ve got a relatively small amount of cash tied up.  But the money you put up is at risk if you can’t find a rebuyer and exercise your option. If you don’t exercise your option before it expires, you lose your option money (the amount you put up).  If property values go down during the option period, you’ll have trouble finding a buyer.

How Do I Assign My

Purchase? Assignment is the other method of flipping, often preferred by professionals. Here you make an offer to purchase, usually for cash. However, when you make your offer, you state that the buyer is your name “or assigns” or whatever language is appropriate in you state. What this means is that either you can buy the property, or anyone else you assign the contract to can buy the property.

Unlike the option, the assignment only runs for as long as a normal closing, typically 30 to 45 days. That means that you’ve got to find a buyer and conclude your other end of the deal very quickly. Hopefully you have done your homework and have a rebuyer waiting in the wings. You now sign a separate agreement for the property with the rebuyer, but of course your sale is for a higher price. When the deal is ready to close, the rebuyer’s name goes on the deed. Again, you never actually make the purchase. The transaction is basically handled in escrow. At the end of the deal, you get your money out, typically in cash The biggest problem with using an assignment is often getting a seller to accept. Savvy sellers won’t always agree. The reason is that they don’t know who will eventually purchase the property. They are afraid that you might not be able to get a needed mortgage and want a back door out, or that you’re planning to sell your contract to someone else (which is, in fact, the case!) and that person may not qualify for a needed mortgage. In order to calm the seller’s fears, you may need to put up a bigger deposit, or avoid putting many escape clauses (contingencies) into the contract, which can increase your risks.

Pros and Cons of the Assignment  You only have to put up the original deposit when you buy the property from the seller, and you get this back from your rebuyer.  If it works, it’s a quick deal.  No mortgage, property taxes, or insurance to worry about.  But you actually do commit to purchasing the property. To protect yourself from having to complete the purchase in case you can’t find a buyer (or your rebuyer falls through), you’ll want lots of escape clauses (contingencies see Article 10). But escape clauses weaken your offer and lessen your chances of getting it accepted. So to make the deal, you may have to take a big risk.  If not handled properly, you can make the seller seriously mad at you and you can land yourself in a lawsuit.  The seller may not be able to complete the sale for any number of reasons, so you’ll again need lots of escape clauses to protect yourself from the rebuyer. Again, such clauses weaken your resale agreement.

The Big Problem with

Flipping Almost all sellers have a kind of personal relationship with the buyer. They want to know who’s buying their property. (This is even the case with lenders, which almost always insist on knowing exactly whom they’re dealing with.) When you assign the purchase agreement, you break that bond. Many sellers, nevertheless, are willing to go along provided the deal concludes in a reasonable fashion. After all, they’re still getting a sale out of it. Many lenders will not, so your rebuyer may have trouble getting needed financing. Another problem occurs when the sellers discover that you’re reselling the property at a substantial profit. This can make a seller most unhappy. After all, they conclude, what are you bringing to the deal? They feel that your profit should rightly go into their pocket. As a result, you could have an angry seller on your hands who at the least refuses to sign off on the deal unless he or she gets more money, or at worst, wants to take you to court. Thus, to oil the waters, many investors who flip in this manner foolishly don’t tell the seller. They think that what the sellers won’t know won’t hurt them. Something similar happens in the case of the rebuyer. Will he or she get mad if they discover that they’re paying much more for the property than you are? Therein lies the rub. There shouldn’t be anything illegal or even unethical in flipping property, as long as all parties involved are made aware of what’s happening. However, when one party doesn’t know what’s going on, there’s all kinds of opportunity for things to go wrong.

Making the Hard Choice Therefore, to avoid ethical and possibly legal problems down the road, it’s a good idea to let both rebuyer and seller know exactly what’s happening early on in the deal. In other words, no matter how painful, lay all your cards out on the table let them know how much you’re making. And get their agreement in writing in case either party should later on have a failure of memory.

Of course, this is hard. Once either party knows, they may not be willing to move forward. However, it’s better they find out beforehand, rather than afterward.

Adouble escrow can be construed as having the purpose of deceiving the seller or rebuyer or both. The reason is that each party only sees his or her one escrow and, as a consequence, doesn’t see the entire deal. This is another reason to be sure that all parties to the deal understand exactly what’s happening.

Won’t Being Above Board

Squelch the Deal? Maybe yes, maybe no. If the deal is right, it should all go well. If someone is being tricked, then letting them know will definitely squelch the deal. But then again, why would you want to trick anyone? It will only land you in hot water later on. The right way to handle a flip is to be sure that all parties know what you’re doing. Sometimes when they learn of it, they’ll admire you for it. After all, remember that you’re providing a sale for a seller who wants to get out. And you’re providing a home for a buyer who wants to get in. Why shouldn’t you be entitled to a profit for that? It’s a win, win, win situation!

Beware of Manipulation What’s given flipping a bad name more than anything else over the past few years are unscrupulous buyers who have manipulated mortgages, appraisals, and rebuyers. Rather than do the real work of the transaction, namely finding properties that are selling below market, they have purchased properties at actual market and then, through manipulation, sold them for above market to unwary buyers. This sometimes has been done in apparent collusion with lenders who secured higher appraisals than were warranted and made bigger loans than were justified. Sometimes these properties were sold to poor minority rebuyers who really didn’t understand about market value or how high their payments would be. Subsequently, when these rebuyers couldn’t make stiff payments, the houses were lost to foreclosure. That’s where the real trouble started. Almost all home mortgages are one way or another insured or guaranteed through the government or a government-related agency (FHA, VA, Fannie Mae, Freddie Mac, and so forth). When the government began taking these properties back, it found out what was happening and launched criminal investigations into the flippers. This is not something you ever want to have happen to you.