Getting creative with a potential off market flip

[Louise McEwen]

Hi Everyone,

I am looking to purchase a single family, in Chandler, AZ, and have been out bid a couple of times already. The MLS drops a new address and it's under contract within 24 hours. So I am trying to be creative to avoid over paying for a property. My plan is own for 1-2 years and rent out and buy again. Full disclosure this idea was sparked from reading forums here and Bigger Pocket podcasts. I am a newbie, so may be missing important pieces. Open honest feedback and reality checks are welcome!

Here's the proposal- I have a friend/acquaintance who flips homes. I'm thinking of pitching him a guaranteed buyer (me) and a profit for him. I believe these numbers are close. (again I am open for...that's illegal, can't do that, or dang go get it, girl)

Possible (Hypothetical) Option

$300,000 ARV

Purchase price of home $160,000

Reno/Repairs                    50,000

Single Agent Fees              9,000

Carry Costs                       2,000

Total Investment (Friend) $221,000

I buy for $300,000  his profit 26% return $79,000

We write a contract up that states the agreed upon purchase price and timeline and friend sells it to me off market.

No bidding wars, no GC headaches, turnkey home for me

No unexpected carry costs, marketing, a single agent only fees for friend

I did read that friend can't sell it to me for less than 25% market value which leaves me a potential immediate equity but could be discouraging for him since he could potentially make more from this project. I appreciate you reading my proposal and looking forward to your feedback!

[Greg Scott]

The concept is fine.  You could do this.  Whether you would want to would depend on the return you think you can get from renting.  

I'm not sure where you got the idea that your friend could not sell at a discount.  As a flipper, there is value to your friend to have secured an end-buyer without the time to market / close that he would otherwise have. He could discount it if he wanted to, but he may not want to if the market is hot.    On the other hand, I'm not sure why you have any agent fees in there.  If you have a person-to-person transaction, you really don't have to have an agent.  As a newbie, I understand why you might want to, but that is optional.  I'd still get the house inspected.

If you have this personal relationship with the flipper there should not be a reason you capture some equity at closing, even if it is nominal.  If you paid $291K with no agent, your friend is no worse off.  If you start the purchase process early, you could shave off weeks of holding costs which also have value to your flipper friend.