preselling a flip?

Question

this is a new one for me, and wanted to see if anyone else has experienced this, or at least has some ideas...  had a flip  go on the market, and right away we got a few offers.  we're under contract currently, but the backup offer, found out i'm about to start another one just 2 blocks down the road, and have expressed interest at purchasing for the same price before i have even started.  i'm not quite sure how to structure this.  i don't want them to see the current condition of the home, as i'm not sure if they'll be able to vision the final product, so i haven't given them the exact address yet-just the street.  also, it's a little different than new construction, in that not everything will be replaced and brand new.  i really don't like the idea of the buyer micro managing the jobsite, and saying he doesnt like this piece of siding or old trim (it's a historic area and i try to maintain the charm by keeping the siding and trim if possible, etc.)   any ideas on how to accomplish this?

Account Closed · Answer

I wouldn't do it.  It doesn't sound like the kind of house that you know for sure what all your costs are going to be.  Unless you are really experienced with all kinds of variables, I wouldn't lock yourself in on this one.  I don't know about your market, but where I am prices are going up and buyer's don't have that much too choose from for a straight sale (non reo, non short sale).  I wouldn't lock myself into today's price, even if it's a 60 day rehab.

Unless your market is flooded with houses with many DOMs I would pass on signing up the sale now.

James Vermillion · Answer

Bryan,

We were asked to do something similar on our last flip, but we decided not to because we saw too many ways the whole thing could work out poorly for both parties...but guess what, these same buyers ended up purchasing the property after the renovations were completed.  This saved us from having to work for per-determined buyers and everyone from possible contractual issues.

Also, while having the buyers on the hook is a very good thing, it sounds like you will not have trouble selling this property either way.  I would try to keep them interested (have your cake and eat it too) and see what happens.

Brian Burke · Answer

If you got multiple offers on the first one, that is a signal that the market for that type of home in that area is very active.

If it we're me, I'd tell the backup buyer's agent that you will notify them the day before the house is listed to give them a head start.  That's all I'd do.

This approach forces them to put their best foot forward because they will be competing with other buyers, and maybe you'll get multiple offers again (and higher than theirs or stronger buyers).

It also prevents you from becoming their personal home designer/contractor.  This business is tough enough without injecting buyers into the rehab decisions.

Ann Contorno · Answer

Interesting problem to have Bryan!  You are right in that most people lack vision, which is why we do what we do and not everyone else can.  Do you have any similar properties that you've done that you have pictures or video of that you can show them?  I would definitely not let them in while the place is wrecked.  You never know which way that will go.

Relative to micromanaging the job the way to stop that or at least insure that you will not experience any issues financially if you allow their input is to take a NON REFUNDABLE earnest money deposit from them if they want to come in and start making pics.  And I don't mean just changing out a piece of trim or some siding - I'm referencing if they want custom paint colors or a say on the countertops, etc.  Make sure that it's enough to cover the changes and enough to put them back to neutral colors/choices should you have to market the property anyway if they fall through as a buyer.

I would structure the contract that you keep this non refundable earnest money whether or not the deal closes.  2 out of 10 mortgage applications get approved these days (something like that) and I would not get stuck holding the bag on any customizations.  I would also talk to their lender personally before entering into any contracts with them and find out how their credit scores are, if they have reserves, etc.

Good luck Bryan!  Hope all goes well!
Ann

Account Closed · Answer

I've done it, Bird in the hand is always a good thing if the numbers are clear to begin with.   I'm all about risk management though, it isn't so much about getting every possible dollar.    I didn't let them see it though till demo was completed.     I also didn't let the wife see it till it was mostly back together.   Made the husband describe it to her.    It was basically a carbon copy of what we had done a few streets over.

The buyer ended up putting in some custom upgrades that i wasn't fond of.   I made them pay a non-refundable deposit for any upgrades they wanted with the full knowledge for any reason, including financing this deal falls apart, i'm keeping that deposit.   I only made them give a deposit for things i didn't plan on.   Like they wanted marble instead of Granite.    I made them give a deposit fro the price difference on what I was going to do and the color they picked for marble.    Same rule would of applied if the colors were out of the norm for paint/tile etc.    Purple walls?   Sure, 1500 non-refundable deposit please.   They didn't change much compared to my plan, a slightly different shade of tan for the walls I didn't make them put more down for.    Lots of small choices i let them do since I didn't care either way.     They i think saved me time with a lot of the little stuff.  I embrace free labor.

It worked out in the end.   If it would of not closed with them, i was happy with how the flip came out assuming I could offset the extra improvements I didn't think made financial sense.    I'm sure though things would of worked out better for me if they had no closed.   Extra appeal to the next buyer.   They had maybe 3000 in extra deposits?

Ran into very few of these types of situations...

J Scott · Answer

My general response is, "Don't do it..."  It's just too risky in terms of the buyer not "getting it," wanting to be involved in decisions, impacting the renovation and then walking away, etc.

That said, I'll make exceptions under the following circumstances:

1.  The buyer has seen another property that I've done that is comparable;

2.  The buyer's agent is on-board;

3.  The buyer doesn't get a say in any decisions, though I'll often give them a few neutral paint colors to choose from, etc;

4.  The buyer is only allowed to visit the property with his agent and with an appointment prior to rehab being completed;

5.  The buyer performs his inspections and finishes due diligence within a 7 days of the rehab being completed.

This way, with the possible exception of some extra paperwork and potentially losing up to 7 days after the rehab, there is absolutely no risk to me (and the upside is not having to stage or market).

Of course, the other risk here is that the market heats up during the rehab and you've now locked in a price lower than what you can resell for, so keep that in mind as well.  This actually happened on the last house I sold -- we got it under contract when it was torn down to the studs, in the 60 days between contract and sale, another house in the neighborhood sold that increased the comp value of mine, and I likely could have gotten a few thousand more for mine had I held out.

But, I was happy to get the quick sale and not have to stage or market.

Account Closed · Answer

thanks for all the replies and ideas.  yall have given me a lot to think about...i'm meeting with my listing agent tmrw so he can explain to me exactly as he was told..then we can go from there...again, i apprecaite the input, and it gives me some great ideas to discuss with him tmrw :)

JOE SNEAD · Answer

I think having a buyer on the hook is a good thing.  A non refundable deposit with a contract that you will complete the rehab giving them certain selections only.  Can you give your buyer options.  say pick one of three paint color schemes for the interior,  pick a kitchen scheme what color cabinets and counter tops.

I think you can present the buyers with choices which will give them the feel they are getting a custom home and what they want. While all along you still have control of everything thats going into the project.

The other option is to increase your price point to make it worth the extra time and questions they are going to have.  See  if they jump on it.

Tracey Williams · Answer

Bryan, 
Great situation to be in ! ! !
I think even if you don't get this buyer, you'll still be able to sell the house quickly. 
Good luck.
Tracey

preselling a flip?

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