Residential Backflipping

[Russell Strom]

Hi everyone,

I listened to a webinar the other day that had an interesting idea. They called it residential backflipping. I'll try to lay out the basics from that webinar here (this is what Peter Conti and Jerry Norton were saying):

Characteristics of house/loan that are good candidates for a back flip:
-It must be a high end home with a loan of $417,000 or greater (these jumbo loans are less likely to have been packaged and sold in a security, which makes them much easier to deal with and profits are larger).
-Owners must owe more than the house is worth.
-Owners want to keep the property.
-Owners don't want to hurt their credit (short sale, foreclosure, etc. are other options for them but will destroy their credit).
-Owners must be current on the loan's payments.

4 Steps to completing a back flip:
1. Establish the current value of the house-make sure loan is greater than value.
2. Determine the Price to Buy the Note- Take 80% of the current value of the home (the owners will be able to refinance at 80% LTV to pay you off once you buy the note). Subtract the amount of your profit (10-15% of the current value). This will give you the highest price at which you can buy the note.
3. Exit Plan, Owner Approved-Get the owner pre-approved for the refi at 80% LTV.
4. Buy note, close on refi-They said you could do this in 7 to 10 days, but i'm not sure why you couldn't set up a simultaneous closing.

Here is an example they gave (they said it was from a real deal):
$1.2 million loan
Value of $1.05 million
$800k refinance amount
$700k Note buy price
$100k profit

I am interested in doing deals like this because their are a lot of high end homes that are underwater in my area (San Diego). Here are my questions:
Has anyone ever done anything like this?
Are simultaneous closings on this type of deal possible? This would limit your risk of the buyer walking after you have bought the note. Are there other ways you can think of to limit this risk?
I think the best way to find owners that are underwater is advertising (craigslist, bandit signs, etc.), does anyone have other ideas?
Can anyone recommend any hard money lenders or transactional funding lenders that might be willing to do this type of deal?

I do not want to pay for the program ($1000), I really want to learn how to do this on my own, so I really appreciate any help or advice anyone can give. The program will give you access to lenders and tell you how to do it all, but they will only give you $10k per deal out of the profits, so I'd rather get the whole profit. Thanks for your help and ideas!

[Jon Holdman]

Normally I'd object if a thread went off topic, but since its your thread, here goes.

There are quite a few threads on how people got started. Needless to say, people got started in lots of ways. I got started with a (bad) investment in a mini-storage. Did some money lending, bought a couple of rentals.

Sounds like you're coming to the realization that the promises of easy riches are false. Let me assure you - they are false. All too many of those promises are being made to people like you ("we both lost our jobs so we don't have much to work with") by people who's goal is to separate you from that tiny bit of cash you still have left.

Wholesaling, in particular because it seems like it requires very little to get started and can easily produce a big paycheck. Wholesaling is not real estate investing. Its a real estate job. It is effectively the same job as a real estate agent. Its dressed up with assignments and double closes to avoid the licensing requirements of being an agent. Like being an agent, if you're successful and do a lot of deals, you can make a lot of money. But its commissioned sales. You only make money when you can do deals. And doing deals is hard. You're right, banks won't accept assignments on either short sales or REOs. You have to do a double close (probably with transactional funding) or buy in an LLC and sell the LLC. Plus the deals are readily available on the MLS which means any active investor has already seen them. And every other wholesaler can see them. What you need to be doing is some form of marketing to try to find deals that aren't on the MLS. Like real estate agents do to try to get their listings.

If you need cash coming in soon the answer is simple - find a job. These gurus selling these courses denigrate a job, calling it "trading hours for dollars" or a J.O.B. (just over broke). Then they turn right around and try to sell you a job like wholesaling or this "residential backflipping". Those are jobs just like flipping burgers. They're, in some ways, worse than flipping burgers. Unless you're the burger shack owner, you get a paycheck regardless of how many burgers you flip. With all the "real estate investing" jobs (wholesaling, fix and flipping, agent, developer, property manager) you only get paid if you do actually flip the burger.

Plus, its a new job that you don't fully understand and don't know how to do. So, like most new jobs, there's a learning curve. And, like any job where you're trying to build up a business from scratch, there's a delay. Every sales job has the concept of a "funnel". There's the wide end where you're trying to get people outside the funnel (who don't even know you exist) into the wide end (where they're at least aware of your existence.) Then you have to move them down the funnel by repeated contacts. A series of letters, phone calls, knocking on their door, getting them to look at your web site, having a conversation over the kitchen table, etc. Only a tiny percentage of the leads that enter the wide end of that funnel come out of the tip and actually generate any dollars. But to get that one deal out of the tip, you have to have the entire funnel filled up. When you start, your funnel is empty. You have to do marketing and hunt for deals to get it full. That takes time and money.

It would be a very unusual hard money lender who would lend for a note. Transactional funding is for a day when you have the buyer lined up. I do not believe for a minute the home owner in this situation will be able to get a refinance line up because you want to be the lender yet you don't even own the note. You can't provide payoff information, you're not in any system the new lender can verify. To make this work, you're going to have to actually buy the note and hold it for long enough for the homeowner to negotiate the refi.