Is this the future of flipping houses?

Question

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?

Marty Boardman · Answer

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 :)

Justin Fox · Answer

@Doug Poirier

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.

J Scott · Answer

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.

Scott E. · Answer

No time to watch the video. What is the strategy?

J Scott · Answer

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).

Brett Tvenge · Answer

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.

Doug Poirier · Answer

@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. · Answer

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

J Scott · Answer

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...

Greg H. · Answer

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

Is this the future of flipping houses?

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