Questions About The "sticky Aspects" Of FLIPPING
I have a couple of questions about flipping. I started flipping properties several years ago, and eventually got into rehabs. Now I'm starting over again as a flipper. My question is about the sometimes-sticky issues involved with being a flipper... Usually when you sign a contract, you don't tell the seller you'll need to bring several "partners" through to look at the house because that can be an automatic deal-killer. If the seller doesn't think you're a solid buyer, they don't want to sign. I wonder if you have any tips on handling the contract, bringing over partners, and dealing with the sticky aspects of the flipping process
overall.
Also, do you have any thoughts on how to handle it if you have to walk away
from the deal, since another issue that usually isn't brought up verbally at the contract signing is the fact that your contract does include an "out clause" (something else that -- if verbally discussed -- can easily kill a deal). I'd appreciate any thoughts you have on this, as I find it very frustrating and demotivating to feel like I have to be a professional BS'er to make flip deals happen, walking the fine line between pretending to be the end-buyer and not screwing people. (Thanks in advance for any thoughts.)
[ Edited by mbradford101 on Date 04/12/2004 ]
Very simple process.
You open up escrow as an "assignment"
You then find your wholesale buyer and
simply assign your escrow after you collect your fee. You tell the seller you are closing in your partners name for tax reasons. They wont care, they just want their money!
Best Riches,
Jeffrey Adam
[addsig]
To the reply above: Yeah, I understand the assigment process completely. But where I find the difficulty is BEFORE I find the end-buyer.
After you "sign up the deal" you have to tell the seller you need to bring one or more "partners" over to look at it. That instantly concerns them because they realize other people are involved - and they have a clue that you may not be the real buyer. This can give them cold feet, and makes the flipper look a little deceptive and amateurish (especially when you have to bring two, three, or more "patners" over to look at the house - and you need the seller to give you access).
Then, when you sometimes have to walk away from the deal 'cause the numbers just don't work - after bringing multiple investors over to look at the house - you look like a real scumbag, saying, "Sorry, we couldn't make it work. Either take less or I have to cancel" (after the seller has waited on you for days or weeks to close). Just wondering if any experienced flippers have found successful ways to make any of this easier or more professional, without jeopardizing the deal.
Besides including an inspection period in the contract, I have not found any "good" ways to handle these problems, and I hate looking like a schmuck or disappointing sellers - after I've done my best to handle the deal professionally and win their trust initially...
Again, any thoughts on this are appreciated.[ Edited by mbradford101 on Date 04/12/2004 ]
In your case, I would keep a very detailed Buyer's list. This way you will actually know by looking at a house which buyer would want it.
This would eleimate all the traffic.
Lori
[addsig]
I am not a wholesaler. My experience comes from brokering land deals (with and without existing houses involved) where assigning is not unusual. So take my reply in that context.
Instead of using a contingency for a home inspection, why not use a contingency for an upfront feasibility period? The deal goes hard at the expiration of this period (of whatever length of time--60, 90, 120 days) unless notice of termination is given. This would give you a stated period of time to do whatever is necessary--show the property, do due diligence--to determine if the deal works for you.
By including an unconditional right to assign provision in your purchase contract as well as the right to access the house on reasonable notice to the seller, it seems to me you would in essence be telling the property owner that you may not be the one closing on the property and may be showing the property to others. No 11th hour surprises. If you're dealing with a seller who won't sign a contract that gives you the right to assign, access to the house and a feasibility period contingency, then maybe that's not the right property to try to wholesale and maybe that seller's not motivated.
I appreciate that you don't want to lie to the seller. I'm not fond of recommendations or suggestions that people should lie to anyone in the transaction. That can backfire and besides, what about the ethics of it? [ Edited by NancyChadwick on Date 04/12/2004 ]
The idea is not to tell the seller you are wholesaling. Never!
You need to run the numbers correctly and make sure there is room in the deal for your wholesale buyer based on:
-Purchase Price
-Acquisition Cost
-Rehab Cost
-Carrying Cost
-Sales Cost
You should learn how to run comps and also learn your playing field that you are working in. When I first started out I had a network of realtors I would call and ask
their opinion on what a house would sell for in a specific area. If you know your market and area, once you tie up a property there is no reason to back out
or have to tell the seller you are wholesaling the property.
Best Riches,
Jeffrey Adam
[addsig]
I am exactly in your boat. I usually like my sellers and want to do right by them. But at the same time I am in it to make a buck and do not feel that I can always be totally honest. Lets face it. If I wanted to be totally honest I would tell them to get a realtor and put it on MLS. Real Estate can make you feel like a used car salesman. Guess all sales jobs are a bit like that.
I do tell my sellers that I work with many different people and will have to see which one wants to partner on this deal. Tell them that either I bring the money to close or I fund the money for the rehab. I never do both. Right before the close I tell them that my partner Scott will be buying the house and going to the close. My assignment fee is written up on the HUD as a contract premium, consulting fee, or something else and it is payable to BBH LLC, not to me personally.
Have not been successful with occupied houses. One occupied house I had to cancel the contract. I have an occupied house now that is a mess to show and the obnoxious tenants are adding to my stress. I think occupied houses need to be just rock bottom priced to move really quickly. If the house is vacant I tell them that I need unlimited access and will put it on lockbox.
If I had a really good buyers list wholesaling would be easier. Something to work on.
Brenda
I have heard JohnLocke say more than once something to the effect that the reason REI gets a bad name is because of people who play fast and loose with the truth, and that if people have to lie to make deals, they're not skilled investors or negotiators.
If you present your offer in the right way to the seller, you shouldn't have to lie. You and the seller agree on price in exchange for certain terms. One term is the right to assign. Another term is a feasibility period. You need the seller to give you some time so that you can determine if the deal makes sense. Since you're not planning to live in the house, you're looking at the property strictly as an investment--either to close on the property yourself or to assign the contract to the person who will close.
If the deal makes sense as an investment, the seller will be getting his price regardless of whether you or your assignee takes title. If you do assign the contract, you'll get paid when your assignee closes with the seller.
You will need to access the property so that your potential investors can see the house. These are not tire-kickers but people you have pre-screened. You will coordinate showings with the seller's schedule and only with advance notice.
You do not want to waste the seller's time or your own, and you want to be upfront and not lie to the seller. The deal has to make sense in order for either you or your buyer to close with the seller. If the seller is motivated, why would your telling the truth kill the deal?[ Edited by NancyChadwick on Date 04/12/2004 ]
Ms. Chadwick:
With all due respect. Are you speaking from experience or from something you
read in a book somewhere?
I have one question and one question only. How many houses have you successfully "wholesaled" for a fee?
You stated: "You need to have the seller give you some time so you can see if the deal makes any sense" -If it is a wholesale deal, it will be long gone!
Do you really think a seller is going to let you tie up a house and then bring a parade of your "wholesale buyers" thru and make a killing off of them? I dont think so.
The advice you are giving from an investors point of view does not make any sense? Please answer my question on how many houses you have
"wholesaled" successfully for a fee.
Best Riches,
Jeffrey Adam
_________________
"The only place success comes before work
is in the dictionary."[ Edited by JeffreyAdam on Date 04/13/2004 ]
Note to Nancy - about that last post: That sounds good in theory, but it kind of sounds like you may not have done many flips personally... Having done over a hundred myself (from '96 to 2001), I learned that no matter how good I was at it, I still signed-up deals I couldn't close ('cause the numbers didn't work in the end), and I oftentimes had to bring a slew of investors over to look at the house to find a buyer.
So many wholesale deals are tight (in a competitive market) that you're lucky to sqeeze out a grand or two sometimes - if you can even find an investor who will do the deal. And when you're often competing with a number of other investors, you have to play the part of a serious investor - with CASH to close QUICKLY. Otherwise, sellers have no problem telling you to take a hike, knowing they can call another dozen "We Buy Houses" ads in the paper - if you're not ready to close in 2-3 weeks max - and you at least SEEM to have all your ducks in a row BEFORE they're willing to sign. At least that's been my experience (with the exception of the occasional moron who couldn't care less).
Getting back into flipping has me scared (after a few year hiatus) because I don't like "playing the game." Financially, it's just something I have to depend on now (again), and I wish I knew of some ways to make it easier - or less stressful. At times, I've had 3-10 deals signed up, knowing I have to get MORE investors over to certain properties to TRY to find buyers for them - and that a few simply won't close because they're too high.
More than once I've had furious sellers tell me "where to go," and more than once - in the intial stages of the deal, I've mentioned things like the (slim) possibility of not being able to close (my "out" clause), or having to bring a partner over (after signing it up) to make certain we can close (so you don't drop the bomb at the last minute - on tight or uncertain deals). In a competitive market, these disclosures to the seller CAN KILL THE DEAL. If you don't play the game "COOL" you do lose deals, and playing it cool - then not being able to perform - sometimes leaves the sellers high and dry. I figured there had to be some flippers out there who found ways to navigate around these otherwise-inevitable minefields (without blowing deals OR having to be deceptive).
ladies and gents;
I read all the replies. There seems to be ideas about how to do flips, justifications, qualifications and being straight with sellers and finding
ways to march prospective buyers into the house[s].
A guy I know studied the AZ market for 3 mo
as intently as a heart sergeon. HE spent
hours and days and did proformas and
on and on and on. AFTER 3 mo, he flipped zero houses.
I advised him and others to do some simple math: ONLY one person has ever stayed
with flipping after doing the math:
flipper; 12 houses a yr, and in 4 yrs,
nets thusly=
average house, has 25k equity in it.
flipper gets 5k per assignment. HIS own
time and gas, ec, come out of the $5k
but he claims no othe rexpenses.
in 4 yrs, he has HAD 48x5=$240,000.
he invests perhaps 40 hours a week,
x52x4= 8320 hours
240,000 divided by 8320 = 28+ an hour
not bad.
now, the non fliping way--
48 houses at 25% equity at 100k value
per house [but only able to extract 90% of house value] = 100-10=90 minus
cost \= 75,000 = $15,000 each house.
15,000 x 48 houses = 720,000 cash
[not counting maintenance costs]
plus rental over mortgage figuring
$150 per property.
each prop averaged minimum 6 months rent per yr gained
[12 props x 150 x 6=
$10,000
2nd yr,
10,000 min plus 21,000 [first year's houses]
3rd yr,
10,000 plus 42,000, first 2 yrs houses
last yr
10,000 + 63,000
=
73,000
+ the equity
720,000 cash
yes, one needs to keep top maintenance
on the houses
yes, one needs to use the services of
their own prop mgt company
yes, some tenants will not pay and skip out
so, subject 15%
FROM
any of it.
no contest, flipping is a waste and
an expensive one.
U can quality and justity all you want
**Please See My Profile**
==============================
tell U what; I love numbers
flip to me all day long as long as I get 20% equity in each property.
**Please See My Profile**
________________________________[ Edited by sammye on Date 04/13/2004 ]
The key reason for one's desire to "flip" wholesale is thew time saving the process provides. Plus you deal not with properties you do not want to deal with. However, you still do make few bucks. The key to success is to do both. The real estate salesman and teachers don't know that because they do not invest themselves so I'll be very cautious to take their advises seriously. 8-) [ Edited by John29 on Date 04/13/2004 ]
mbradford101,
You said that "so many wholesale deals are tight (in a competitive market) that you're lucky to squeeze out a grand or two sometimes - if you can even find an investor who will do the deal", and that some deals didn't close because the numbers were too high.
If the deals are that borderline because the spread is so tight (netting you perhaps only $1-2K or making it so difficult for you to find a buyer), then maybe the properties weren't candidates for a flip in the first place. You didn't indicate how many of your 100+ flipping encounters fell into this category. By the way, I told you right upfront what the nature was of my experience with deals that involved wholesaling. If in fact these sellers have buyers who are willing to pay their price and close in 2-3 weeks with no contingencies, it doesn't sound like they need to deal with you.
You also said that you were scared to get back into flipping because you didn't like "playing the game," the game being lying to sellers about having the right to kick out of the deal or assign it to someone else. Contracts in land deals have many more "out" clauses than what you're talking about, and it is fairly common for the buyer to have the right to assign.
I explain the risk and reward thing plainly and candidly to owners. It's a waste of everybody's time, effort and money to paint a picture that isn't realistic. Aside from the ethics of it, it just doesn't make sense business-wise to expose yourself to grief because you pulled or tried to pull an 11th hour surprise on the owner. If the owner wants a minimal risk deal, top $$ and I don't feel it's a realistic selling scenario for that property, I don't lie to the owners. I explain why that's not realistic. If they disagree, I don't spin my wheels. I walk.
I think Nancy makes a valid point. Scott Rister who writes a course on wholesaling says that he is always upfront about it to the sellers. It is probably how you present it that matters -the negotiating. There is being honest, and then there is brutally honest. For example, I tell them that I have an inspection period of 25 days in which I can cancel the contract. But I do not tell them that I am using the 25 days to find a buyer and if a buyer does not materialize I will cancel the contract.
But other points are also valid. There are some very sliim profit margins out there. In the last two weeks I have done a $2800 short sell and a $1000 wholesale. My REI club will not be bringing up to the microphone for those two - but they pay the bills. And yes maybe I could have turned them both down, but mama needs new shoes.
Brenda
sammye
Fipping certainly has a place. Currently, I have two houses for sale on MLS, two houses I am rehabbing, three houses trying to rent to own, and one short sale. Yet every night I still pour over the tax rolls and records. If any of those letters turn into anything, I will only flip it at this point. Flipping gives me some quick cash without much out lay of money. And I do know people who flip at least 4 a week. Now they make some serious cash.
Brenda
Nancy:
I think Mr. Bradford is speaking from experience as well as myself!
Let me set the record straight.
#1- A "Wholesale" deal is where you
purchase a property under 70% of
market value. Typically wholesalers
will buy a property for 60-65% of
market value and re-sell it to their
wholesale buyers for 67-69%
of market value. If you are going
to be a successful "wholesaler"
you have to leave room in the
"wholesale buyer."
#2- A wholesaler can collect their fee
at closing if they want to and get
paid thru the Hud-1, however
from experience, this causes too
many problems with the seller and
the listing agent. The seller gets
upset when they see you have sold
the property to someone else. The
listing agent also gets upset and it
ruins your credibility and the listing
agent quickly spreads the word that
you are a "Wholesaler" and other
agents will not want to work with you.
Again this is speaking from exper-
ience of doing over 100 wholesale
the past 5 years.
3#. For all you new investors out there
who want to start "Wholesaling" and
build a credible relationship with
your "Wholesale Buyers" I will give
you some million dollar advice.
Get your purchase contract signed
and go and open up escrow as an
"Assignment." Then present the
deal to your "Wholesale Buyers."
If they want to purchase the property
from you, keep it simple. Have them
pay you your "Wholesale" fee, and
then "assign" your escrow to them.
The escrow company will draw up
an amendment that you and the
seller signs. You tell the seller that
you are closing in your partners
name. Theoretically you are closing
in your partners name as you are
getting paid on the front end of the
deal. By doing your "wholesale"
deals this way, you are not upsetting
the seller for re-selling the property
nor the listing agent. You will also
find the listing agent will contact you
directly on future deals. If for some
reason the seller refuses to let you
close in your "Wholesale Buyers"
name which is rare. You go to
Plan B- you close it in your name
and then Grant Deed the property
to your new "Wholesale Buyer",
collect your fee, either have them
arrange their new financing or
assume the existing financing
that you have in place. I have all
my "Wholesale Buyers" approved
with my private lender and hard
money lender so that when I
"wholesale" them a property
they can assume the financing.
Where else can you purchase
a property under 70% of market
value with financing in place?
Usually with 100% financing in
place because of the relationship
I have built with my lenders, they
will lend up to 70% LTV. Because
of this, I have other investors
calling me on a daily basis for
"Wholesale" deals.
Again, this is speaking stricly from where
the "Rubber Meets The Road" not from
some book I read!
Best Riches,
Jeffrey Adam
_________________
"The only place success comes before work
is in the dictionary."
[ Edited by JeffreyAdam on Date 04/13/2004 ][ Edited by JeffreyAdam on Date 04/13/2004 ]
Hi
I'm beginning to notice an interesting trend here at TCI. I think that a lot of us do not know how to respectfully disagree with someone without personal attacks. I know everyone has a need to be the smartest person on the block but being rude to prove your knowledge is counterproductive. Nancy has good points--if you disagree it's your right--but let's try to keep it professional.
If the shoe fits wear it.
BTW: I know from this post that I can prepare myself for a host of rude remarks about me and my experience--but I'm a big girl-----I can take it. But I will always speak my mind-----------respectfully of course.
Results
Ms. Results One:
The title of this forum is "The Creative Investor." This is suppose to be a learning environment for everyone. If you are a land expert, then post your information and advice so we can all benefit. If you are in the loan business, then maybe you could keep us all informed of new information or loans that could benefit all of us.
The problem that has been occurring as of lately is that people who do not know what they are talking about are giving advice here when they have no practical
experience, which steers the new investors in the wrong direction. There are people on this board who post on every topic as if they are a "Guru" of
some sort or they are trying to come out
in the top rankings for the month in the
number of post.
I think if we all just get back to basics and give information out that is 100%
accurate and not misleading we could
all benefit. It is very discouraging for
someone like myself who takes time out
of my busy workday to come to this board
and see someone repeatedly giving advice that has no warrant or does not make any sense.
Best Riches,
Jeffrey Adam
[addsig]
Thanks you for bring that up Jeff, Some of us newbies need all the help we can get and misinforamtion is our worst enemy.
Thanks alot,
James
John and Jeff-
I must agree with Results_one. I have posted in other areas on the "rudeness" and "attacking" nature that some people display on this site. Nancy was upfront about her experience and was trying to share the possible simularities between land contracting and wholesaling. She never claimed she had first hand experience in wholesaling.
To Jimbezy-
I agree, misinformation can be harmful. However it is NEVER wise to just "take" someone's word, even if they are experienced. You have to find out for YOUR self. This may include getting advice from many "pros" on a matter. It's like religion...if you just take someone's word (or their belief) and never find out the truth for yourself, you'll never know why you "believe" what you do. You must find out why things work the way the do and come to an understanding with that knowledge. Take the advice of everyone with a grain of salt. Even mine!
Best wishes,
Jonna
Yes I try to take in everyones info with a grain of salt. But some investors paint a harsh, some times discouraging picture. But thats just part of the game I guess, if I am going to win at it then Im gonna have to see through the BS.
Thanks a lot,
James
I am closing this post out. If you won't say it to somebodys face, don't say it on this board.