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Flipping Houses and Other Real Estate

By - 2005 - 2013

When we talk about flipping properties we have to clarify what that means. Some investors consider any fast purchase and resale as "flipping," even if it involves making repairs and improvements. Using that definition, my wife and I can say that we flipped the condo above us recently (we sold it in the spring of 2013). That story (in four parts) starts on this page: Renting a Condo (we originally thought we were going to be landlords).

But flipping can also mean simply buying and selling properties without ever actually taking possession of them. Can you make a profit from real estate without ever owning it? Yes, and it's done commonly in some areas (although it was much more common at the top of the bubble years). This can be a good way to use your real estate knowledge to make a profit when you have very little money of your own to invest.

A Flipping Example

Years ago, at a local real estate investor's meeting, an investor told me he found a fixer upper, but couldn't arrange financing. He had an accepted offer, and there definitely was a profit to be made in improving the place and selling it. Fortunately, he had a financing contingency in the contract, so he would get his $500 earnest money deposit back if the deal didn't go through. But he really didn't want to pass up such a good opportunity. What could he do? What did he do?

What he did is find a way to make a profit without actually buying the property. There are always other investors at these meetings, and many of them are looking for a profitable project. In this case one of them was willing to pay to take the original investor's place. The original investor sold or "assigned" the contract to him for $6,000. Since all he ever had into the deal was a $500 "good faith" (earnest money) deposit, he made a $5,500 profit. This is flipping without any of the hard work of renovating and repairing.

You might have noticed that he didn't even have a down payment. He didn't even have to buy the property to make money. There was enough potential profit in fixing and selling the property that other investors were happy to pay to take his place. But there are some important factors to point out here:

First, this guy knew how to find a good deal. He understood the basics of how to determine the ARV (after repair value) of a property. He knew how to figure the repair costs.

Second, he put in his offer the right to assign the contract to another investor if he wanted to. This is usually done by writing "or assigns," "or my assigns" or something similar after your name as the buyer. Find out what the most acceptable language is in your area.

If a seller takes issue with this clause, explain that it's there in the offer so you can bring in a partner if you want, or let your partner take your place. All the terms of the contract remain the same in any case. In fact, it means that if your financing isn't approved, as in the above example, you will likely save the seller the trouble of finding another buyer by doing it for him.

You might have noticed that you can do these deals with no money down. In the example given, if the original investor had put the $500 deposit on a credit card, it truly would have involved none of his own money. Of course, that outrageous 3% cash-advance fee and 18% annual interest for a month would have reduced his profit by $22 or so. Obviously zero down is possible and profitable if you start by flipping real estate.

Another thing to keep in kind though, is that buyers of contracts in a situation like this will usually not pay you until the deal is closed. This is only fair, as there may be issues that show up during inspections, or other things outside of their control that prevent the deal from closing. The language of your deal should include the return of your deposit if the contract is canceled.

This example is a fixer-upper, but any property that can be bought cheaply can be flipped in a similar way. Even if bought at a price closer to market value the right buyer might pay you something to take your place. He might have a way to increase the value significantly (changing the use, for example). The main thing you need for real estate flipping of this sort is the courage to try it, and the persistence to keep trying as you learn what works and what doesn't in your area.

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Houses Under Fifty Thousand | Real Estate Flipping