How can I Flip a Property Without Owning It?

Question

Hello, I need help figuring out how to do this the best way without title, legal, or financial trouble.

We've negotiated a deal with a seller (who we know) that we'll buy his house for $345k in 3-6 months after we're done with renovations so that we can sell it and take the profit. It's like a mix of fix and flip and wholesaling. I know it's pretty dangerous to put money into a house that you don't own even if we know the person and we have a sales contract on it (which we don't have yet). But I'm wondering if there's a better way to do this or an addendum we could add to the contract to hold him liable for any expenses incurred in the event that he defaults on the sale.

I thought I could do seller financing but it's not free and clear and he still has a mortgage which I think would trigger a due on sale clause, right?

Would a promissory note be good in this situation? If so, how would you use it?

Joe Splitrock · Answer

@Danielle Becker I would not perform rehab on a property if you don't have title. Since you don't own the property, the rehab costs are not a business expense. That means more taxes on sale, not to mention the risk of him owning the rehabbed property.

Most people in your situation buy the property subject to existing financing. Just search out the term "subject to" and you will find tons of discussions in the forums about it. You will buy the house and take title. You will give him money at closing and make his monthly payment for 3-6 months. At the end of rehab, you sell the property and pay off the loan. Then on your taxes, you can claim the rehab expenses against the proceeds of the sale.

The loan stays in the sellers name. Technically it could trigger due on sale clause, but assuming you are paying the monthly mortgage bill, they have no reason to foreclose. Just the process of foreclosing takes months to initiate and there is no point if they are getting paid.

Usually the seller is paid lump sum at closing that is the difference between the amount owed and selling price. If that is burdensome financially, you could pay part at closing (like $1000) and have him hold additional seller financing. You are making two payments in that case, one on his original mortgage and the other to him on the difference. You can write the loan as 30 year amortization with 1 year balloon. Say the difference is $40,000 at 30 year amortization, that is $190 per month. You pay that until you sell it and then lump sum the outstanding balance. At closing, your business gets a check, the sellers mortgage company gets a pay off check and the seller gets their pay off.

People do this strategy all the time and there is very little risk.

Michael Gessner · Answer

@Danielle Becker basicly do seller financing, have a closing where the deed is recorded in your name and he as lein holder. Offer him and intrest rate which is payable upon the sale of the property. Or you can open an llc both of which are managing partners and do the same as above seller financing with intrest. If you do the llc route deed would be recorded in the llc name

Mason Hickman · Answer

@Danielle Becker

Ok, the plan I would use is to write a sales contract to close with a long timeline (so you have time for your flip) and build into the contract that you can extend X times up to Y months without penalty or charge and it is agreed to up front from the seller. Included in the contract, put assignment language that you are allowed to assign the contract to a third party at your sole discretion. At the same time (or as part of the agreement), I would write up a memorandum of understanding with the consent to do construction on the property and to take possession of the property now. Then, after you do the work, you can assign the contract to 3rd party buyer (or do double close if you prefer). This shouldn't trigger the due on sale clause that an option would because ownership hasn't transferred, yet. The option contract should be recorded with the registry of deeds.

Of course, I would get your attorney's thoughts and buy-in.

Drew Sygit · Answer

@Danielle Becker you could also have the owner sign a second mortgage with you for the construction costs plus your anticipated profit.

Challenge is of they change their mind you would have to foreclose to force them to perform.

Mason Hickman · Answer

@Danielle Becker

At least here in MA, if the buyer has a valid contract to purchase and hits all the dates/requirements within the contract, they can force the Seller to go through with the transaction, even if the Seller tries to change their mind. Check with your attorney. Obviously the risk here is that you do all the work and then the Sellers try to renege on the deal.

Danielle Becker · Answer

Ok cool thank you! You definitely added some helpful tips like the extension of the contract without penalty and the memorandum which I've never used before as a Realtor. I'll have to ask my attorney how a memorandum works and how I can effectively "take possession." What power does that have? We are going to have the seller sign a notice of commencement since he will still hold title during renovation but basically gives us permission to pull permits on his behalf. My biggest concern is making sure the contract is binding and that we will be able to execute as planned after the project is completed and he can't default on the contract and decide to not sell. I will need the contract to say that if in the event of default, the seller is responsible for paying back all of the expenses incurred for the renovation. That's our biggest fear.

Darius Ogloza · Answer

@Danielle Becker Several reasons:

First, under an executed sales agreement the risk of loss passes to you - you become responsible for insuring the property, paying taxes, etc.  Getting insurance naming the correct mortgagee could pose issues for you.

Second, under a sales agreement, you trigger local tenancy laws with your seller living on the property.  Your seller becomes your tenant after x number of days.  This could pose serious issues in case the seller chooses not to move.

Third, it appeared to me from your OP that you also had concerns about violating the due on sale clause on the existing mortgage.  Of course, the language of the mortgagee's clause controls and may reach options, but I would personally be more comfortable with a recorded option than with a  recorded sales contract from that perspective as well.

You should absolutely go over all of this with a local lawyer!!!

Danielle Becker · Answer

Yes. My investor partners and I are trying to figure out how to flip the house without buying it first to avoid mortgage costs and other costs up front.

Danielle Becker · Answer

Hey Darius, thank you so much for your help! What would be the value of an option contract over a normal sales contract? If I did a simultaneous closing like as if I was wholesaling then I would say I was paying cash and have the title company split the difference. Is the option contract safer for me somehow?

Danielle Becker · Answer

Hey thanks so much for your help. The point of seller financing would be to put the home in my name before starting work right? Wouldn't that trigger their current mortgage company a "due on sale" clause to take effect?

How can I Flip a Property Without Owning It?

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