Pitfalls? Avoiding Transfer Tax -Flipping WITH the original owner

[Natalie Schanne]

What are the pitfalls to having a contract with an owner to "flip" his property while he still owns it 100%? Does anyone do this successfully to pocket more money and/or utilize owner "private financing"?

For example: You get a call off your Cash For Houses postcard. Instead of him selling his un-updated house for $100k cash in a "We Buy Ugly Homes"-type deal, you sign a contract to fix up his home for the profits over/above that amount. Then you put in 20-30k over 30-60 days and sell it on MLS for $200k within 90-120 days of contract.

Pros: 1. You avoid paying the transfer tax twice (in Philadelphia it's 4% usually split 50/50, in other parts of PA and NJ it's 2% usually split 50/50), saving 2-6% of the gross price.

2. You avoid title insurance and settlement costs twice. (Say $1500/deal)

3. Seller MAY be able to get some/all the extra money "capital gains" free due to the 2 year residence IRS rule and maybe can pass it through to you at some advantage (somehow?).

4. You avoid a public record showing what you bought it for. As a RE agent, I tell retail buyers when public records show me a flipper bought the house 60 days ago for $100k and it's now listed for $250k.

5. If the owner holds the property during this flip period for free, you save your private / hard money 10% APR on the purchase price (which could be worth another 3-6% of the gross).

Cons: 1. Most Cash For Houses sellers are looking for simple, fast, easy, guaranteed $$ with no additional thoughts or hassles. They're willing to accept a 20-40% discount off MLS list prices for the convenience.

2. If something happens with the house owner such as a contract disagreement and they don't sign necessary documents and/or sell the property as scheduled, you can't get your $$ investment out quickly without costly or lengthy foreclosure and/or lawsuits. (What's a way around this to force their signatures?)

Thanks for any and all ideas. In my market, the flip margins are really getting squeezed by contractors bidding and low-balling their internal labor expenses. An extra $5-10k profit in a deal from reducing transaction fees would really help.

[Chris K.]

@Natalie Schanne

I have to think about this more. But if you plan to do this in PA, you'll need to take various steps to safeguard your interests. I agree with @Steve Vaughan that using options are probably the best method. But there are many other factors to consider as well. For example, you have to think about privity of contract issues when it comes to dealing with the contractors. 

The signed deed option does nothing when it comes to transfer taxes in PA. You can either be a lawful citizen and pay it twice or risk committing tax fraud.  

In short, I don't think it's impossible. But you have to do a lot of due diligence. And you have to stay on your toes so that the homeowner cannot try to weasel their way out of the option. In terms of lawsuits, you'll likely need to bring an action for specific performance. I suppose it could be less costly than a foreclosure action, but it's still costly. 

@Mark Redmann --- I'm confused about your objection to Natalie looking up the initial sale price. If Natalie is representing the buyer, why shouldn't she try to find all the information available so that the buyer can get the property for the lowest price? That is exactly what a buyer's realtor should do. In fact, I would be concerned if she didn't do this. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it as legal advice. Always consult with your attorney before you rely on the above information.