Flipping houses is the creative investing technique of choice for many beginners. For those brand new to the business, it appears to be the best place to get started because it may require little or no money and appears to contain very little risk.
However, all that glitters is not gold. There’s a dirty little secret most beginners are unaware of when it comes to flipping real estate. (And by flipping houses, I’m referring to getting a property under contract, then flipping it to another buyer).
Here is what they don’t tell you about flipping houses…
Good Flipping Deals Come From Motivated Sellers
Of the millions of homeowners out there, a small portion of them want to sell their homes. Then, of these sellers, a very select few of them actually want to sell their property so badly that they’re willing to give it away for a very cheap price (or very favorable terms).
Most good flipping deals come from “motivated” sellers. A motivated seller is in a bind and has very few options left to sell their property. When a person is backed into a corner, they can become emotional and sometimes irrational.
So the emotions and irrationality of these people becomes a positive and a negative for the creative investor. On one hand, circumstances have created a dire situation. That provides house flippers with the opportunity to get a good deal. On the other hand, those emotions and irrationality create a volatility that, in some cases, is like gun powder – one spark can set the seller off.
What They Don’t Tell You About Flipping Houses
Here’s where things can go terribly wrong that is rarely mentioned or talked about.
If the motivated seller, who is usually in a financial collapse, sees that you’re about to make $5,000 or $10,000, they may get very upset. Why? Put yourself in their sellers shoes for a moment.
Maybe they’ve owned the home for 10 years. In that time, they may have replaced the roof, the A/C, some appliances, have done tons of handyman fix up jobs, paid for the property taxes, the insurance, and on and on. To the homeowner, they have been paying their dues on that house, spending a small fortune to keep the house in good working order. Now here you come along, with no skin in the game, and you’re going to make thousands of dollars on their house without, in their minds, doing anything.
Do you see the rub, here?
The Most Valuable Skill in Real Estate
This point of view that these house flippers aren’t doing anything, yet profiting from the seller’s plight is not based on the facts of the real estate business, but it’s sometimes the reality of what’s going through the seller’s mind.
Brokering a deal is an extremely valuable skill. It’s more valuable than the work of fixing up the house, originating the loan, or closing the transaction. Putting a buyer and a seller together in a real estate transaction is the most lucrative part of the deal.
If you don’t believe me, just look at any closing statement and see whose getting the biggest check. Motivated sellers rarely understand this fact. What they see is some person having them sign a contract and then a few weeks later, collecting thousands of dollars without lifting a finger. They don’t realize that finding a buyer willing to pay more for the property than what it is under contract for is an extremely valuable real estate skill.
When Things Fall Apart
So rather than be happy with what they’re getting, motivated sellers often become enraged when they see the profit a flipper is making on the deal. And this is when things fall apart. Boy, do I have some stories!
On a deal I was doing years ago, a day before closing, the seller saw the final HUD statement h’d be signing, he saw I was earning $7,000 on a house he was selling to me for $21,000. He left a voice mail on my phone that said, “You son-of-a-$%^#&. You’re making $7,000 and you haven’t done a damn thing! This deal is off. I don’t care what our contract says. I want out, and if you don’t cancel this agreement, if I find out where you live, I will blow your head off with my shotgun.”
So how do you avoid this from happening to you?
How to Avoid a Flipping Disaster
Avoid a “house flipping” disaster.
1. Lay the Foundation
You have to lay the foundation with the seller that you intend to make a profit. Make it very clear to the motivated seller by asking:
“Sir, are you okay with me making a profit from this deal? Are you sure you’re okay? So if you find out I am making a profit, you’re not going to go crazy on me, right?”
That type of conversation lays the foundation. Psychologists tell us that people are more likely to stick to the commitments they’ve made verbally out of their own mouths than ones you try to impose on them.
2. Plan Your Closing
Even if you’ve laid a great foundation, you have to be aware that people don’t always follow through with their verbal or written commitments.
If the deal is nearing closing and your gut tells you that the seller may flip-out if they find out you are making a profit, you may have to do two closings.
- Two Closings Approach: The first closing would be you buying the property from the seller and the second closing would be you selling the property to the new buyer. Both closings could be scheduled for the same day, in succession, but it will double your closing costs and in most cases, you’ll need transactional funding, which would further cut into your net profits. In some cases, two closings could remove all the flipping profits.
- Rolling the Dice: Although doing two closings is the safest route to keeping your profit amount private, it may not be practical due to the extra costs. You may have to roll the dice and brace yourself for the whole thing to fall apart. (I recommend prayer in such cases.)
- The Cool Seller: If the seller is cool and you think they won’t care about your profit amount, just have your profit on the closing statement and hopefully the deal will close like a hot knife through butter.
- The All-Cash Buyer: If the new buyer is paying all cash, sometimes you can convince him to pay you an assignment fee just before the closing – off the closing statement. This is the ideal way to get paid when flipping. But most all-cash buyers won’t pay you until closing actually occurs.
- The Loan Buyer: If the new buyer is getting a loan, this creates all kinds of problems for a flipper. The two closing approach is very difficult unless the buyer is working with a mortgage broker schooled in the art of originating no-title-seasoning-requirement loans. Plus, many loan underwriters will reject a flipper’s assignment fee on the closing statement because they may dispute the validity of it. That’s why most flippers sell their deals to all-cash investors. There are some other ways to handle flipping to a loan buyer and actually getting paid, but they can be quite complicated and are best handled on a deal-by-deal basis by a qualified professional.
Flipping Houses Can Be Complicated
As you can see, flipping houses can be more complicated than it seems. Although many beginners feel that it’s the best place to get started in creative real estate, it can be a tough way to break into investing without the help of a mentor or coach. And although it may not require much money to complete the transaction, flipping houses successfully involves considerable knowledge. And if you aren’t careful, you could create quite a sticky situation with an angry seller.
That’s what they don’t tell you about flipping houses.
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