Is this the future of flipping houses?
Member since 2022 · 8 posts · 2 votes
Hey all, wanted to share with you my house flipping strategy. I'm confident that this strategy is the future of flipping real estate. Buying houses to flip is costly and time consuming. Why buy when you can flip without owning the property?
No Justin, I do not believe this is the future of house flipping.
I was approached a few years ago by an investment group in Phoenix looking to implement this strategy (JV agreement). They wanted me to provide the design concepts/SOW/budget for the properties and utilize my rehab team. They would lend the homeowner the funds for the rehab and compensate me for my time. It didn't work out because there were way too many people involved in the decision-making. The owners were especially difficult to work with. Basically everyone watches HGTV and so everyone thinks they're an expert with design. And since it's still their house they want the final say. Never a good idea to "partner" with someone you don't know.
Also, HUGE risk putting up the rehab funds without owning the property. If the owner files bankruptcy, goes into foreclosure or dies you'll have a difficult time getting your money back.
I agree with @Justin Fox - it's best to have full control over the outcome of the deal. Even with the proper expectations set people are people. Buyers are liars, sellers are worse :)
Nice effort but I prefer to not put any $$ into a property unless it's owned solely by me. I also wouldn't want a seller having any say whatsoever about fixtures, finishes or negotiating the sale because they now have a stake in profitability.
Would you have paid 75,000.00 in interest and other soft costs even if you had just used 10 -12% money with no up front origination fees? Or in your case, cheaper conventional money?
If the seller wants more profits then they should have spent the time and money to keep it current, instead of deferring maintenance.
I understand where you're coming from, the approach isn't for everyone. This strategy works well when the proper expectations and boundaries are set with the home owner. It is supposed to be entirely hands off for the seller so the contractor handles all decisions about the flip. In some cases a house might even be vacant and that would be a perfect time to perform the renos.
This is a strategy for flippers who want to get into deals with less of their own capital and accelerate their business and access untapped properties. You'd be surprised how many people sell as is because many do not have the money to renovate before they sell. This system works great to help distressed sellers and is a win for everyone involved.
No Justin, I do not believe this is the future of house flipping.
I was approached a few years ago by an investment group in Phoenix looking to implement this strategy (JV agreement). They wanted me to provide the design concepts/SOW/budget for the properties and utilize my rehab team. They would lend the homeowner the funds for the rehab and compensate me for my time. It didn't work out because there were way too many people involved in the decision-making. The owners were especially difficult to work with. Basically everyone watches HGTV and so everyone thinks they're an expert with design. And since it's still their house they want the final say. Never a good idea to "partner" with someone you don't know.
Also, HUGE risk putting up the rehab funds without owning the property. If the owner files bankruptcy, goes into foreclosure or dies you'll have a difficult time getting your money back.
I agree with @Justin Fox - it's best to have full control over the outcome of the deal. Even with the proper expectations set people are people. Buyers are liars, sellers are worse :)
Hey all, wanted to share with you my house flipping strategy. I'm confident that this strategy is the future of flipping real estate. Buying houses to flip is costly and time consuming. Why buy when you can flip without owning the property?
I couldn't disagree more... first off a 300k house, I'm coming out of pocket 10%, no fee's no points.. Not 75k.. second off I'm not investing any money into a house that I'm not in ownership of.. You'd need to redraft title work, form LLC with random seller... And what's your exit strategy if it doesn't sell with this route? Seems like a good pitch for a contractor to pitch but not for a flipper to pitch a motivated seller.. leaving alot of money on the table.
So, the seller has an equity stake in the deal but absolutely no control?
You might want to consult a good SEC attorney before moving forward on this strategy. Sounds to me like you may have just created a security, and I'm guessing you're not doing this compliantly.
I don't recommend anyone pursue this route without good legal advice, include from someone well versed in securities law.
Thank you for the input gentlemen, I appreciate the feedback. The concept has potential and could use some refining.
@Marty Boardman this contract structure is way different than involving multiple entities. It's strictly between a flipper (contractor) who has the capital and abilities to do the work and the homeowner. The home owner isn't a partner, they're a customer who agrees to hire a contractor. The homeowner benefits greatly since they have a professional contractor who will renovate their home without it costing them a dime. Essentially the future buyer pays for all the work and materials of the flip.
@Brett Tvenge I am in Ontario Canada, we need 20% down for a secondary dwelling. I agree there is always a risk you do all this work and it doesn't sell, just like any flip. At that point I'd make a cash offer to the seller for the return that I guaranteed.
The way the contract is structured the contractor is being hired by the seller to perform the work.
@J Scott the contract has been vetted and it is fully legal. The seller and contractor both have a mutual interest to sell the house for the most possible while doing the work within a few months and spending on renos wisely. The owner has a say, but ideally they will trust the contractor with decisions. I hear ya it could turn sideways if you have a difficult home owner. Relationship and trust building is key for this strategy.
Ideally properties that have clear title are the safest route to avoid any issues.
Who decides what renovations to do? Who decides what to list the property for? Who decides whether to accept an offer? I assume you aren't allowing the homeowner to have equal say as you, right? Even though they have equal equity ownership?
This has nothing to do with the contract. The way you are structuring this deal, you are likely creating a security, which means that the transaction is now regulated by the SEC and their rules. The contract can be perfectly legal, and you can still be running afoul of SEC rules (one has nothing to do with the other).
Is the person who created the contract a securities attorney? If not, I would recommend you consult with one.Several points but no this is not the future of home flipping:
-With your presentation, you pointed out all of the costs of selling with the conventional way of flipping but omitted them with your method. Those costs still exist
- Your scenario was a 250k property that with light reno which became a 100k reno was worth 500k. Not a realistic model but I will take all the 250k properties that are worth 500k
-Now to the legal part. How is one to protect themselves when a seller changes their mind after the reno? Your "building relationships" answer does not work when things go south. I flip primarily in Texas where a seller/owner has strong homestead protections. Unless one goes the lien route, it would be very difficult and costly to recoup your costs if the seller refuses to sell. Just add you to the title? Other issues arise there such a holding times with certain types of financing as title has changed hands(FHA Anti-flip rule comes to mind). Go the lien route, one would have to foreclose which fortunately is not difficult in Texas but may take a year or so in other judicial states. What if the owner declares bankruptcy?
The bottom line is not taking title and having full control is loaded with pitfalls. I would be surprised if any experienced flipper would go this route and no inexperienced flipper should even consider it
@jscott thank you for this. I will consult with my lawyer to see if it's all kosher given what you've brought to light.
The homeowner definitely has equal say. The renovations are agreed upon by both the owner (seller) and the contractor. The list price of the property is determined by a professional appraiser who appraises the house before the renovations begin (to provide an accurate as-is price) and also conducts a full appraisal once the renovations are completed to have an accurate market value price. The homeowner and realtor can agree on that list price or can modify it as they see fit. The realtor is provided the contract and works with the seller once renovations are completed.
I agree, just like any legal contract, one must be very careful with getting into the deal. This is solely my opionion and not legal advice.
@Greg H.thank you for this.
Yes there are definitely still costs in this model, it takes money to make money!
The figures in the example are strictly to explain the strategy, please don't put too much weight on it.
There is a cancellation clause in the contract that protects the home owner and contractor. If the seller backs out the contractor is entitled to an hourly rate for the work performed and must be reimbursed for all expenses that were incurred plus mark up. Just like doing business with anyone there is always a risk. However you as the contractor decides who you do business with and vice versa. If the business model is approached with helping others in mind, and if the owner sees the value of the service brought by the contractor, things should go fine.
Yes there is a registered mortgage completed before renos before by the contractor to protect them. Essentially all bases are covered to protect the owner and contractor within the contract.
I appreciate the scrutiny gentlemen. It's definitely a unique strategy for unique situations.
The homeowner definitely has equal say.
In that case, I would have a lot of very different concerns about this arrangement. You're now giving someone who isn't a professional investor and who presumably doesn't understand this business the ability to have equal say in the business plan. And assuming they have equal say, that means that they have input into whether the business plan changes, they have input on whether to list for more, list for less, when to list, etc. And if you want to change the business plan based on changing economic conditions or new information that comes in during the project, they then have equal say about changing up the strategy.
I've made the mistake of letting buyers do things as simple as change colors or materials, and in more cases than not, it was a complete headache (or worse). I couldn't even imagine giving someone else who knows nothing about this business 50/50 control over the project.
Sounds like a recipe for disaster...
@jscott you raise good points. I would take the consultative selling approach to with a potential home owner so in my situation they'd want me to just handle it all...but I see what you mean legally there's no way to have completely control once the contract is signed - it's 50/50. Depending on what type of home owner it is, i think it's still possible for it to work.
it's been a fun chat fellas. I'll drop my hopes of it being the next big thing haha. There are a too many implications with this idea.
@Greg H.thank you for this.
Yes there are definitely still costs in this model, it takes money to make money!
The figures in the example are strictly to explain the strategy, please don't put too much weight on it.
There is a cancellation clause in the contract that protects the home owner and contractor. If the seller backs out the contractor is entitled to an hourly rate for the work performed and must be reimbursed for all expenses that were incurred plus mark up. Just like doing business with anyone there is always a risk. However you as the contractor decides who you do business with and vice versa. If the business model is approached with helping others in mind, and if the owner sees the value of the service brought by the contractor, things should go fine.
Yes there is a registered mortgage completed before renos before by the contractor to protect them. Essentially all bases are covered to protect the owner and contractor within the contract.
I appreciate the scrutiny gentlemen. It's definitely a unique strategy for unique situations.
So I only go with what I know and I fully acknowledge the laws are different in different states and in Canada. So with the hourly rate scenario, if they don't pay you would seek a judgement. However judgement do not attach to one's homestead in Texas. I can own a million dollar home with many judgement and decide to sell and the judgments will not be collected. So as you can now see this is a no go in my world
@Greg H.thank you for this.
Yes there are definitely still costs in this model, it takes money to make money!
The figures in the example are strictly to explain the strategy, please don't put too much weight on it.
There is a cancellation clause in the contract that protects the home owner and contractor. If the seller backs out the contractor is entitled to an hourly rate for the work performed and must be reimbursed for all expenses that were incurred plus mark up. Just like doing business with anyone there is always a risk. However you as the contractor decides who you do business with and vice versa. If the business model is approached with helping others in mind, and if the owner sees the value of the service brought by the contractor, things should go fine.
Yes there is a registered mortgage completed before renos before by the contractor to protect them. Essentially all bases are covered to protect the owner and contractor within the contract.
I appreciate the scrutiny gentlemen. It's definitely a unique strategy for unique situations.
So I only go with what I know and I fully acknowledge the laws are different in different states and in Canada. So with the hourly rate scenario, if they don't pay you would seek a judgement. However judgement do not attach to one's homestead in Texas. I can own a million dollar home with many judgement and decide to sell and the judgments will not be collected. So as you can now see this is a no go in my world
Thank you for the input gentlemen, I appreciate the feedback. The concept has potential and could use some refining.
@Marty Boardman this contract structure is way different than involving multiple entities. It's strictly between a flipper (contractor) who has the capital and abilities to do the work and the homeowner. The home owner isn't a partner, they're a customer who agrees to hire a contractor. The homeowner benefits greatly since they have a professional contractor who will renovate their home without it costing them a dime. Essentially the future buyer pays for all the work and materials of the flip.
@Brett Tvenge I am in Ontario Canada, we need 20% down for a secondary dwelling. I agree there is always a risk you do all this work and it doesn't sell, just like any flip. At that point I'd make a cash offer to the seller for the return that I guaranteed.
The way the contract is structured the contractor is being hired by the seller to perform the work.
@J Scott the contract has been vetted and it is fully legal. The seller and contractor both have a mutual interest to sell the house for the most possible while doing the work within a few months and spending on renos wisely. The owner has a say, but ideally they will trust the contractor with decisions. I hear ya it could turn sideways if you have a difficult home owner. Relationship and trust building is key for this strategy.
Ideally properties that have clear title are the safest route to avoid any issues.
It's important to be aware of all the potential legal issues that could arise from a strategy like this. Without understanding the full extent of what you are doing, it can be easy to inadvertently cross some lines and find yourself in hot water with securities law. Make sure you have a thorough understanding of what is involved before proceeding!
Hey all, wanted to share with you my house flipping strategy. I'm confident that this strategy is the future of flipping real estate. Buying houses to flip is costly and time consuming. Why buy when you can flip without owning the property
*************************************************************
This is not really new. I believe there were, and maybe still are, companies and even Brokerages that had this as one of their business models. It's also similar to an Equity Share (ES) arrangement, where the Investor would control the property and pay the expenses (typically through leasing it out), and then take part in some equity sharing arrangement when the house sold, at some point in the future. But, that strategy was usually best for those homes in good condition, where the Sellers had a difficult time selling. But, the Investors didn't need to invest a lot of upfront rehab money. This situation was usually better in a property and market, with good appreciation potential.
What you are proposing, is more of an immediate "forced equity" situation, where the investor does the rehab, hoping to benefit from an immediate increase in appreciation/equity, as a result of the rehab. In that case, the investor would risk their money, time, experience, etc, with limited control and limited or no ownership benefits. So, if the market changed, or some unexpected rehab issues or costs came up, etc, they would not be free to decide what is best for that deal. Like, if they couldn't sell, they couldn't unilaterally decide to rent it out for a few years and sell in the future. So, basically, they would be risking a lot for a limited return.
And let's look at the #'s:
1) Your way
Investor invests $100k, profits $75k
Return = 75%
2) Typical Deal
Investor invests
$50,000 (20% down pmt)
$5,000 (2% closing cost)
$12,344 (6 mths holding costs incl- mtg @7%, utilities at $250/mth, taxes @ 1.2% annually of purchase price, insurance @ $720/yr)
$100,000 (rehab costs)
So, total monies invested = $167k (rounded)
Profit = $500k (SP) - $200k (loan balance) - $117k (rehab + holding costs) = 132k (rounded)
Return = 79%
So, if I did my #'s correct and didn't miss anything, the returns are actually not much different, but the risk profile is. Your way, you invest quite a bit of money in something you don't fully own or control and in the other way, you invest more money, but have more options, should things go south, and have the potential to make significantly more nominal amount money, without having to split it.