Flipping Real Estate For Investment
Investors that wholesale or “flip” real estate accomplish the same basic task that real estate agents accomplish. Specifically, the “flipper” investor buys real estate or places properties under real estate contract with the intention of immediate resale for profit. The flipper connects with motivated sellers of real property, and negotiates a contract to purchase the property at substantially less than the going or “retail” rate. Sellers of such properties are generally FSBO (for sale by owner).
Once under contract, the flipper acts as both principal and intermediary, buying at one price, and then reselling the property contract to real estate investors at a higher price. Investors who purchase such contracts are “hard money” cash buyers. The entire time-frame from contract initiation to sale of the contract to close is generally 30-days. A real estate license is not required for these transactions because the flipper is selling their own interest (as buyer) in the contract to a third party.
Flippers generally fall into three categories: Scout, Dealer, and Retailer.
1. Scouts are basically information gatherers. They locate potential deals and sell the information to other investors. The Scout finds a property for sale, gathers the necessary information, and then provides this information to investors for a fee.
2. Dealers also locate real property deals for other investors. They hunt for bargain property and sign a purchase contract with the owner. The dealer has the option of closing on the property and selling it outright, or just selling the purchase contract to another investor. In this fashion, the dealer is actually controlling the subject property. Dealers will deposit earnest money to secure the property like a normal real property transaction, but there is more risk associated. The risk lies with the fact the dealer will not find an investor buyer in time before the contract expires, thus losing the earnest money. On the flip side, there is greater profit potential than a scout. To minimize risk, Dealers often will pre-qualify investor/buyers for certain property types before executing a purchase contract.
3. Retailers are investors who intend to purchase the property as a ‘fixer upper’. They will employ the services of a Scout or a Realtor. The retailers goal is buy low, invest rehab money into the property, then resell the property at a higher price than cost. The downside is the initial purchase money investment, cost to rehab, and time to resell the property.
Following is an outline summary of a typical real property “wholesale flip” transaction:
Offer to purchase is made to seller – Offers are typically below normal market values. Consideration is given in the form of an earnest money deposit. The purchase price is generally below market values. Cost of repairs (if any), comparable property listings (comps), closing fees, and mark-up price of resale (Profit Margin) are additional factors to consider for the transaction. Start Title Work – The subject property must be free of any clouds on title to ensure a quick settlement for the third party investor.
Find a buyer/investor if one is not already in place – In many cases, this process is done before the first step (offer to purchase). The property must be marketed aggressively for a quick resale. Qualifying a motivated investor who is ready, willing, and able to buy is critical. Advertisements can be placed in classified sections of newspapers or listed on the internet. Direct contact with sources of investors should also be employed. Contacting investors directly can be effective in addition to advertising, rather than wait for someone to read the ad and inquire.
Comp values are normally prepared in advance to show how the subject property stacks up in the market. Site inspections can also take place by the investor. Agreement with a prospective investor/buyer – On occasion, there may be more than one interested party. Whatever the situation, the flipper will negotiate a sales price that is marked up from the original contract price. The final resale value of the original contract must factor the profit margin of the flipper and value the investor places on the property.
It is equally important to qualify the new buyer in terms of time-frame to close and available funds to purchase. As mentioned earlier, serious buyer/investors are cash buyers. If both parties agree to a price, the original contract is modified and resold to the new buyer. Execute a new contract with the investor – In most cases, the original contract is assigned to the new buyer. A deposit is collected from the buyer.
Assignment of contracts typically has addendums or added statements of the assignment and deposit. Title and Settlement – The original purchase contract and the assignment of contract are normally submitted to any attorneys involved and the closing agent (usually a title company). The title company will schedule the closing date. At closing, the flipper’s gross fee amount (Assignment contract price less original contract price) will be listed in the closings documents as “other fees”. This is the amount paid to the flipper at closing.
The current real estate market has declined significantly in property values since mid 2008 due to the current U.S. recession. Many properties have devalued and many others have been foreclosed. Mortgage lenders portfolios have increased with many REO properties.
The combination of falling prices, low interest rates, and rising rental rates provides a strong opportunity for investors. For the first time in nearly a decade it is becoming possible to buy “break-even” properties, even properties with some positive cash flow.
Flipping real estate for investment takes time, research, and risk. Be sure to do your homework before venturing into this type of investment.