To Flip Or Not To Flip? Advice Needed And Appreciated
Ok so heres the deal. I tried to break into REI about 5 or 6 months ago with my granparents as private backers. I was going to buy fixer-uppers, etc. Well, I had a house and when my grandparents went to get pre-qualified, they refied instead. Well that put me and my partner off the game for a while. Now we are ready to attack again, with a slightly differant approach. Here is a hypothetical situation. Please tell me if you see any flaws in my plan:
Motivated seller has a house he must get rid of.
Comps at: 150,000
Has 1st mrtg at 75,000 no 2nd
Wants 15,000 of his equity for moving, etc.
My plan of action: Put the house under contract to buy in X amount of days. Use standard contract except for 2 extra clauses. 1. Contract is void if I can not find a buyer for the home or assign the contract and 2. he can keep his house on the market until I either assign the contract or buy the home. I then call up an investor and tell him that I have a house that is comping at 150,000 that I will sell it to him for 20K down and 90K financed. On paper, I get 5k when he puts the money down and another 15k when we close and he finances the property. This makes sense in my head and I am unaware of any problems so far, but tell me if you see anything that might be wrong with it. The reason I want to do it this way to get started is that I am 17 and still in High School but my partner is 18 and able to sign where I tell him to. He doesn't have credit yet and I don't have large caches of cash. I know that I wont find a ton of these deals out there, but I believe there is more than enough distress property in my area to make this work. Tell me if I am wrong.
The REI man "Mike"
P.S. If you could point me in the right direction as far as a how-to on assigning contracts, I would be grateful.
What you have said does make sense. It looks to me that you will find a property, get it under contract, and look to assign it. In your situation you will make an instant $5k and then finance the 15k as a second mortgage. The property will be taken subjecct to an exisitng first mortgage.
A couple of thoughts:
1. You have the trust with the seller. You can likely convince him to sell the home sub2 the mortgage but I think it will be much harder when you tell him that some investor guy you find will take responsibility for homeowner's loan.
2. What you are making is being disclosed to the party you are assigning to. You can accomplish this privacy for a few extra dollars by double closing. Basically instead of assigning the contract you get another purchase agreement. You give them all to the attorney or closing company and you get a check for the difference. The deed goes into your name but then right back out.
GOOD LUCK
PS I am 19
First of all myfrogger, its great to hear that other young people are in on this. I appreciate the double closing idea. I hadnt thought of that. I am actually a telemarketer right now and have a knack for convincing people to do stuff they dont want to. I have no morals qualms about doing it as long as everyone wins. I think what I will do is just have the investor get his own financing instead of assuming the loan. The last thing I want is an angry seller calling about a loan that is in his name on a house he doesnt own anymore. Thanks again.
The REI man "Mike"
[ Edited by Zach on Date 04/12/2004 ]
I do see a couple of problems with this structure. 1) the contract that allows them to sell the building to someone else up until the time you close is a problem. The short version of my problem here goes like this, you spend 45 days lining up your investor, are all ready to close and somebody else offers $10 more than you did, who do you think is going to end up with the house? A big part of the point of getting the thing under contract is so that you are not in a bidding war.
2) Its going to be very difficult to find a seller willing to sign with you if you admit upfront that you think they are undervalued and are just looking to flip. You may be very good at "convincing people to do what they don't want to do" but this is a really hard sell.
You mention that you are going to assign the contract in one paragraph then talk about selling it to an investor in another. These are two different things. If you are going to assign the deal, the new buyer gets the original deal you got. You just get an assignment fee. If you are going to resell it on different terms or price, they you need to do the double close.
And having a clause like "I want out if I don't get another buyer" does not sound too promissiong to the seller. In essence, allowing him to keep the property on the market means you go nothing (you don't have the property tied up). I would suggest a clause like "pending a suitable inspection report" or a suitable appraisal, or subject to partner's approval, etc...
Thanks for all the replies. Any additional comments are more then welcome. I appreciate people pointing out the holes before I fall into them.
The REI man
Hi thereiman & myfrogger,
I commend you both for stepping into the REI arena at such a young age.
My first interest in RE actually began when I was fifteen...Unfortunately, I did not begin to persue my dreams until now...25yrs later!!!...Better late than never.
In my case, I became busy raising kids going to school and really getting off track w/what it was I really wanted to do in life.
It just feels my heart when young folks like yourself are focused...Stay focused!!!
80% of the wealthiest people got their $$$ from REI...The sky is limit in this field.
When I was going to University of Houston, I was majoring in Business Computer Info. and minored in RE...I had seen an informercial on "No money down"...the next day, I asked my RE instructor was this true and how is this possible...The reply I got was "NO".
So, at the time, in my mind I figured the teacher Knew what he was talking about...Well some years later, I find out differently...That scenario has taught me to never accept NO unless I''ve tried every options where I cannot turn it into a YES.
Peace & Blessings
Good fortunes in REI
JB