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.