Flipping With Assignment Will Not Work

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Assigning a Contract to a new buyer is the easiest way to make a quick profit on a house that you can get below value. But.... the only problem is that everyone can see your profit at the closing table. Many sellers have backed out at closing once they see the money they could have made on their own. Never mind all of your hard work and diligence finding the property, finding the buyer, and negotiating the paper work!



One alternative that MAY work is to flip the property. The problem normally that comes to mind with this strategy is two fold: 1) You have to take title to the property (even if only for a second) so there are double transfer taxes to pay...., and 2) the new buyer may have trouble getting a loan because now you have a title seasoning problem.



IF and only IF you have enough profit to cover the spread, you can offer owner financing to your new buyer and then sell that seller financed mortgage at closing for the cash you need to 1) pay off your original buyer, and 2) to put a profit in your pocket. Remember all seller financed notes are purchased at a discount.... so there must be enough profit to cover the spread.



Basically, it works like this. These numbers are used for example purposes only. Let's say you put the property under Contract with the original seller for $80k. Now you put the property under Contract to sell it to the new buyer for $100k, assuming it really will appraise for this (very important). Now you have $20k as your spread.



Suppose your new buyer can put down $10,000 in cash at closing and has "okay" credit of 600ish. We structure the deal so that you "the seller" carry back at $85,000 first lien and a $5,000 second lien. Let's say we purchase the first lien from you at closing for $77,000.



Now you have the $77,000 from us, the $10,000 from the down payment, for a total cash amount of $87,000 PLUS you have a $5,000 2nd lien to keep as an investment. The title company will take the $80k to close the transaction with your original seller. He will receive that amount, less any underlying payoffs and title fees.



You receive the difference: $7,000 in cash and a $5,000 2nd lien as an investment. The title company will take out the transfer taxes (usually 1-2%) depending upon what is stipulated in your respective Contracts. If you state the seller is to pay all of it on the first contract, and the new buyer is to pay all of it on the second contract, you can save yourself that fee. Be careful.



This is just one way to save a deal where an assignment might not work.



Hope this gets the creative juices flowing!



Warmly,



Michele Robbins, CPA

Comments(7)

  • Lufos13th October, 2003

    Dear Friends,



    In view of Hud's recent messages to the profession, we have responded by going back in time to a prior method which seems to work and of course denys the various parties to the escrow seeing the true path

    of title.



    I buy a property from Mr. Jimmy Doe, I take it to escrow and set the escrow. Describe the sales price say, $100,000. work out the costs.



    I then sell the property for $130,000. My Buyer is prequalified and I move him into escrow no 2. He is buying from me or my title holder. He closes and from that closing the prior escrow is funded and closes. I get the $30,000. The Title Company, opened a Preliminary Title Report for the first Escrow and issues Title Policy at Sale to the second escrow. I and the Escrow Officer liasion with the Title Company and all is cool. I pay a little extra for the adjustments in title occuring during transfer from Seller to ultimate Buyer.



    This holds down the exotic paper work. Sometimes (2) I have had to write an explanation for the Arb Officer or Senior Title Officer.



    I try to stay away from Hud although I am one of their Brokers, I see little value in their recent listings, most of which are to high in price and not reflective of the True Value of the properties. I can buy in the slummy areas in which reside most of their properties for about 50 to 65% of their prices. I am sure as the offers do not meet their listed prices they will be coming down. Some of the larger offenders of the add on add on sale to sale are no longer doing this.They are a little nervous and do not wish to find themselves back on the border or whatever. Interesting times, I got my wish.



    Cheers Lucius

  • SolutionsKid9th October, 2003

    Great post cparobbins, this topic really is something that people should learn because it shows the other side of "flipping". Hope everyone reads this one.


  • JohnMerchant9th October, 2003

    Michelle



    I'm not sure I'm clear on exactly what you mean, when you say the transaction is basically totally visible to all parties.



    I've done many multi-party deals, where A sells to B, who sells to C, etc....and NOBODY but B (me, if I'm flipping) and escrow knows how much A's getting, or C's getting...all each party sees is his own deal.



    A competent escrow officer knows very well that it is her/his job to keep all transactions separate and "partititoned" from the others, and if they don't, it could cause all kinds of problems.



    But what puzzles me is I know from reading other posts of yours that you are experienced and probably know as much about escrow as I do, and & I'm sure you do your deals the same way.



    So why is A learning what you're doing with C?



    Second area of puzzlement: When you say you've lost deals where A got incensed when he learned of profit you're getting on your sale to C...surely you're certainly getting an iron-clad P&S Agreement signed by A, that he can't legally walk from...aren't you?



    He can't just walk away from signed written agreement, unless you're just letting him.



    Youve got rights too, and you could certainly force his completing the sale to you as per his agreement.

  • JeffreyAdam15th February, 2004

    I strongly disagree. Your wholesale buyers should not care if you payed one dollar for the property as long as there is room in it for them. If you brought me a deal for $60k worth $100k and you bought it for $10k I would not have a problem with it because there was still money in it for me.

    • WheelerDealer16th February, 2004 Reply

      "Should not" and "do not" are different topics all together.



      Im with you. However, people are funny they think they should have gotten a "better" deal.

      • JeffreyAdam22nd February, 2004 Reply

        It cracks me up when attorney and CPA's try

        to give advice on things they have never personally done!



        First of all, when you flip a property and assign a contract, the purchase price remains the same. The seller does not

        see the profit you made! It works like this,

        you tie up a property, open up escrow as

        an assignment, find a new buyer who pays

        you the difference between what you are purchasing the property for and what you are selling the property. After you receive your fee, you then assign! Done deal!! The seller never sees the profit you make because the

        sales price remains the same. The only thing he sees is a new buyer who you can say is your partner. "Mrs. Crabtree, you will have your check this Friday, by the way, I am closing escrow in my partners name for tax reasons."



        Best Riches,

        Jeff Adam

    • Lufos22nd February, 2004 Reply

      Jeff noh Adam,



      Has of course spelled it out. We here in California utilizing an escrow (stake holder) have an edge. There is really no reason to expose an ultimate profit. The main thing is to have acceptable documentation that the title company will accept.



      Among the garbage paper I usualy have included a Grant Deed and a Statement of Identity for the Title Company.



      Cheers Lucius

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