There are 101 ways to make money in real estate…
One of them is “flipping a real estate contract”.
So, in this article, we’ll go into the finer details of:
- What flipping a contract means
- How to do it (step-by-step)
- Why/when to flip a contract
- How to find contracts to flip
- How to make money flipping contracts (and creative ways to do it)
What does “flipping a contract” mean?
Flipping a contract is a strategy in real estate that involves 3 parties, the original buyer (Party A), the seller of the real estate property (Party B), and an end-buyer (Party C — the one purchasing the contract). It first starts with 2 parties, a buyer (Part A) and a seller (Party B), who enter into a written agreement stating that Party A will purchase the property from Party B for a set amount. Then Party A sells the contract to Party C, who then has the interest, ability, and obligation to purchase the property from Party B.
Not always, but typically someone flipping a real estate contract is getting paid and has made “flipping contracts” into a business model.
Other terms related to flipping a real estate contract:
- Wholesaling — A real estate business strategy of finding discounted properties, going into a contract to buy, and then selling the contract for a markup.
- Option agreement — A different type of contract that some buyers use, where instead of a legally obligatory contract, it gives the real estate buyer an OPTION to buy rather than an obligation.
- Assigning a contract — the term used when you “flip a contract”. The legal phrase is usually “assigning the contract to someone else” rather than “selling the contract”.
- Assignment fee — When people make this into a business model, they typically charge a fee which they call an “assignment fee“. It’s just a “markup” from the original price.
- Double close — Another way for a seller to “flip the contract” and get paid; rather than an “assignment fee” they perform a double close while in escrow.
Disclaimer: before attempting any of these, makes sure you consult with a licensed real estate attorney for legal advice and proper contracts for your state — Some states have strict requirement on who can “wholesale” real estate, and how.
But first, let’s jump into the 5 steps to flipping a real estate contact:
5 steps to Flipping a real estate contract
1. Find a property (a good deal)
The first step to flipping a contract in real estate is finding a property to purchase. As a wholesaler (someone whose business model is to flip contracts for a fee), your goal is to find properties that are undervalued or distressed, and then negotiate a contract with the seller at a lower price than market value.
To successfully flip a contract, you need to understand the best ways to find these types of properties. One way is to look for distressed properties, such as those that have been on the market for a long time or are in foreclosure.
We won’t go into details about HOW to find these properties (you can read other articles of ours that talk about HOW to market to properties like this one on direct mail marketing. )
Typically you’re buying properties at a discount. Because then you have the potential to sell it quickly, and you can make a substantial profit by finding a buyer who is willing to take on the project. Another way to find real estate deals is to network with other investors and real estate agents, who often know of properties that are not yet on the market. This insider information can help you find properties quickly and build a successful flipping business.
2. Negotiate with the seller
The next is knowing how to COMP prices.
If you don’t know how to accurately price a property, no buyer will be purchasing (typically, the model for “flipping real estate contracts” ends with you assigning a contract to another INVESTOR. And these investors are looking for discounted properties; they’re flipping/rehabbing the house themselves.
So get good at comping houses (Comping = the art of estimating real estate prices)
And get good at estimating rehab prices.
Next is, you’ll have to come up with an offer price. You’ll most likely follow some “rules of thumb” or wholesaling formulas to come up with. The most common formula is the “75% rule”. This means that your MAX offer is 75% of the ARV (after repair value), minus the estimated repairs
Here’s an example:
After Repair value = $200,000
75% = $150,000
Repair estimation = $25,000
MAX OFFER = $125,000
Here’s a video explaining the concept, given by investor Ryan Dossey:
If you’re looking to flip a real estate contract to an end buyer, negotiating a good deal with the seller is essential.
Here are some tips to help you negotiate effectively:
- Do your research: Before making an offer, research the property and the local real estate market to determine the fair market value. This will give you a good starting point for negotiations.
- Make a strong initial offer: Start with a reasonable but low offer, which leaves room for negotiation. Make sure you explain why you’re offering that amount and highlight any potential repairs or upgrades needed.
- Build rapport with the seller: Establishing a good relationship with the seller can help you negotiate a better deal. Ask questions about their situation and be empathetic to their needs. Be respectful and patient throughout the process.
- Identify the seller’s priorities: Understanding the seller’s priorities will help you structure your offer to meet their needs. For example, if the seller needs to close quickly, you can offer a faster closing date in exchange for a lower price.
- Don’t be afraid to walk away: If negotiations reach a stalemate or the seller is unwilling to budge on their price, don’t be afraid to walk away. There are always other opportunities out there.
By following these tips, you can negotiate a good deal with the seller and increase your chances of successfully flipping the contract to an end buyer.
3. Enter closing
Once the seller agrees to the offer, you’ll need to enter closing.
The parties involved are:
- Escrow offer (or closing attorney depending on your state
- Title company
If you don’t have an escrow company in mind, then you’ll have to call some up asking if they do double closes OR if they can help assign a contract to a cash buyer (most will know what you mean).
Once you have an escrow company in mind, you’ll have to deliver the contract and instructions to the escrow office. They’ll get into contact with the seller for final signings
NOTE: it’s important to keep in contact with your seller after they sign. They still have to sigh the FINAL paperwork with escrow to make it final; in other words, the seller can STILL say no.
Keep in mind, that this process takes time because the title company is doing their due diligence to make sure the property is “saleable” by the selling party so they can insure the property.
While they’re doing this step (researching the title), this is a good place to FIND a cash buyer if you don’t have one already…
4. Find a buyer
This is where things can go sideways for wholesalers.
Because if you didn’t discount the property enough (either “mispriced” it, or underestimated the repairs), a cash buyer probably won’t look at it and you’re stuck in escrow with a property that isn’t a good deal.
So, the better you price a property, the easier it is to find a buyer.
One of the easiest ways to get started with finding a buyer is called “Reverse wholesaling“.
(we won’t get into the details of that, you can check out the article above ^ or you can view the video below:)
The important part to know is this:
Once you enter escrow, you should have a buyer in mind, or at least a plan for finding a buyer.
Places you can find a buyer:
- Facebook (lots of cash buyers are in local groups)
- You’re local REIA
- Other wholesalers (they might be happy to advertise your deal to their cash buyers list for a fee)
5. Close and get paid
Now the final part…
Once you have a cash buyer ready to take action and close on your contract… there are two ways to close a deal like this:
- Assignment
- Double close
Assignment
This is less complicated than a double close.
An assignment fee is a fee charged by real estate wholesalers for assigning their contractual rights to purchase a property to another buyer.
This fee is typically paid by the buyer who is purchasing the right to take over the contract.
To do this, the wholesaler must have a contract in place with the seller of the property that allows them to assign their rights to another buyer. It’s important for both the wholesaler and the buyer to understand the terms and conditions of the assignment agreement, including the assignment fee, before entering into the transaction.
Typically the fee shows up in the HUD statement that EVERYONE sees.
It’s easy to do, but if you need to conceal how much you make on an assignment for whatever reason, then you’ll have to do the next thing…
Double close
Double close is literally what the name implies. You close one transaction, then close the second.
A double close, also known as a simultaneous close or back-to-back close, is a type of real estate transaction where an investor purchases a property and then immediately resells it for a profit to another buyer. This is done by using two separate contracts – one to purchase the property and another to sell it. In order to successfully execute a double close, the investor needs to have access to enough funds to purchase the property and pay closing costs, as well as find a willing end buyer. It also requires working with a title company or real estate attorney who is experienced in handling double closings. Once all parties are in agreement, the investor completes the purchase and sale on the same day… then you get paid for the difference!
No one will see what you get paid — except for the closing attorneys or Escrow.
The downside is that it’s slightly more costly.
Avoid the risk of not finding a buyer
Lots of wholesalers who make flipping contracts a career/business fear the very potential reality that you might not find a buyer to sell the deal to.
So here are some ways to avoid that:
1. Be REALLY good at comping houses
The number one reason why people can’t find a buyer is that their price is too high, so no cash buyer will take it.
And the problem exists because they over-comped the property; locked in the contract for to high of a price. To avoid this, be a PRO at property analysis.
2. Get really good at estimating repairs
Another reason why wholesalers might find a cash buyer, is because they OVER estimated the repairs. This is VERY common with wholesalers. They might advertise a deal as. “only $20k COSMETIC repairs!”… when in reality , after the cash buyer looks at it, it’s more like a $5ok repair.
Understand hat construction costs are for houses. If you get this right, buyers will trust you more
3. Try Reverse Wholesaling
This is a strategy where BEFORE you give an offer to a seller, you take all the information you gather about the potential deal (pictures, notes, etc), and show a cash buyer who much they would pay for it.
You then calculate how much you want to get paid and create a MAX cash offer to present to your seller.
If they accept, you take that back to the cash buyer (and hopefully he keeps his word — and most will) and enter escrow for a double close with the cash buyer.
Here’s a video explaining it:
Summary
Flipping contracts can be done as a career/business strategy, or something you happen to do because you ended up not wanting to buy the property yourself.
You can do either an “assignment of contract” or a double close to “flip a contract”.
Wholesalers you make this into a strategy can get paid anywhere form $5k-$100k+ on one transaction — it just all depends on how good of a deal you make with the seller.
Typically your end buyer (the one buying the contract) will be a cash buyer (he might be another flipper or a buy-and-hold investor).
To make sure you find a buyer to flip the contract to…
You want to make sure
- It’s priced rigt
- It’s a good deal (good price, terms, location, etc)
And finally…
A quick way to avoid being stuck with a deal no one will buy is to consider Reverse Wholesaling first.