How to Flip Contracts in Real Estate: The Insider’s Guide

Flipping contracts in real estate, also known as wholesaling, involves securing a property under contract and then assigning that contract to another buyer for a fee, effectively profiting from the spread without ever actually owning the property. The key is identifying undervalued properties, negotiating favorable contract terms, and finding a ready, willing, and able buyer to take your place, all within a tight timeframe.

Understanding the Contract Flip

At its core, flipping contracts is about controlling a property, not owning it. You’re essentially acting as a middleman, finding deals and connecting them with investors. This strategy allows you to generate income from real estate without the significant capital outlay typically associated with buying and holding properties.

The Process Step-by-Step

1. Find a Deal: This is paramount. Look for distressed properties, houses in need of repair, or situations where sellers are highly motivated. Think pre-foreclosures, tax delinquencies, or probate sales.
2. Analyze the Property: Thoroughly assess the property’s potential value after repairs (ARV – After Repair Value). Compare it to similar properties in the area (comps) to estimate renovation costs and determine the potential profit margin. Use tools like Zillow, Redfin, and the MLS if you have access.
3. Negotiate the Contract: Offer a price below market value that accounts for the property’s condition and your desired assignment fee. Include an assignment clause in the contract, which explicitly allows you to transfer your rights and obligations to another party. Without this, you can’t flip the contract.
4. Secure Funding (Optional): While you don’t need financing to buy the property yourself, you should understand your end buyer’s funding capabilities. It’s also wise to get earnest money from the final buyer when assigning the contract, to ensure they will fulfill the deal.
5. Find a Buyer: Network with other investors, real estate agents, and cash buyers. Build a buyer’s list of individuals or companies actively seeking investment opportunities. Social media, online forums, and local real estate investor associations are great resources.
6. Assign the Contract: Once you have a buyer, execute an assignment agreement. This document transfers all your rights and obligations under the original purchase agreement to the new buyer.
7. Collect Your Fee: The assignment fee is the difference between the price you negotiated with the seller and the price the new buyer is willing to pay. This is your profit.
8. Close the Deal: Ensure the new buyer closes on the property according to the terms of the original contract.

Essential Contract Clauses

• Assignment Clause: As mentioned earlier, this is non-negotiable. The contract must clearly state that you have the right to assign the contract to another party.
• Inspection Clause: Allows you to conduct thorough inspections of the property before closing. This protects you and your potential buyers from unforeseen issues.
• Contingency Clauses: Consider including clauses that protect you, such as a financing contingency or a contingency based on the buyer you assign the contract to.
• Clear Closing Date: Set a realistic closing date that allows ample time for inspections, title work, and assignment.

Building Your Buyer’s List

A strong buyer’s list is your most valuable asset. Here’s how to cultivate one:

• Network, Network, Network: Attend local real estate investor meetings, connect with agents specializing in investment properties, and engage in online real estate communities.
• Targeted Marketing: Reach out to potential buyers through email marketing, direct mail, or social media. Highlight the types of properties you typically deal with.
• Relationship Building: Foster genuine relationships with your buyers. Understand their investment criteria and provide them with valuable deals that meet their needs.

Ethical Considerations

Transparency is crucial. Always disclose that you are a wholesaler and that you intend to assign the contract. Failure to do so can lead to legal and ethical issues. Also, never falsely represent a property’s condition or value.

Frequently Asked Questions (FAQs)

1. What skills are needed to successfully flip contracts?

Negotiation skills are paramount, along with marketing skills to find buyers and analytical skills to evaluate properties. Understanding real estate contracts and market trends is also crucial. You also need persistence and strong communication skills to deal with sellers, buyers, and other professionals.

2. How much capital do I need to start flipping contracts?

One of the major advantages is that you need minimal capital to start. Unlike traditional flipping, you’re not buying the property. You might need funds for marketing or earnest money deposits (though some wholesalers negotiate zero-down contracts). The amount can range from a few hundred to a few thousand dollars.

3. What are the legal considerations when assigning a contract?

Ensure the contract contains an assignment clause, and that you fully disclose your intention to assign to the seller. It’s wise to consult with a real estate attorney to ensure compliance with local laws and regulations. Properly drafted assignment agreements are also essential.

4. How do I determine a fair assignment fee?

The assignment fee is influenced by several factors, including the discounted price you negotiated, the property’s potential profit margin, and the buyer’s willingness to pay. Research comparable properties and understand market demand to arrive at a fair price that benefits both you and the buyer.

5. What if I can’t find a buyer before the closing date?

This is a common risk. Options include negotiating an extension with the seller, finding a partner to help secure funding, or, as a last resort, backing out of the deal (potentially forfeiting your earnest money deposit, depending on your contract). Thorough due diligence and a strong buyer’s list mitigate this risk.

6. What are the tax implications of flipping contracts?

Assignment fees are generally considered ordinary income and are subject to federal and state income taxes. Consult with a tax professional to understand your specific tax obligations and potential deductions.

7. Can I flip contracts on any type of property?

While most common with single-family homes, you can flip contracts on various property types, including multi-family buildings, land, and commercial properties. The principles remain the same: find a deal, secure the contract, and assign it for a fee. However, larger properties typically require more sophisticated buyers.

8. How do I find motivated sellers?

Driving for dollars (looking for distressed properties), targeting pre-foreclosure lists, marketing to probate attorneys, and utilizing online resources can all lead to motivated sellers. The key is to identify situations where sellers are facing challenges and need to sell quickly.

9. What is “double closing” and how does it differ from contract assignment?

Double closing involves two separate transactions. You buy the property from the seller and then immediately resell it to the end buyer. While it requires more capital and involves higher closing costs, it keeps your profit margin confidential. In contract assignment, only one closing happens as you are assigning your interest in the purchase and sale agreement.

10. Can I flip contracts if I have bad credit?

Yes, because you are not obtaining financing to buy the property. Your credit score is not a primary factor. The ability to find deals and connect them with buyers is what matters most.

11. How do I build credibility as a new wholesaler?

Transparency, honesty, and consistent communication are crucial. Provide accurate information about the properties you’re offering, honor your commitments, and build relationships with both sellers and buyers. Consider partnering with experienced wholesalers to gain mentorship and credibility.

12. What are the common mistakes to avoid when flipping contracts?

Underestimating repair costs, overpaying for properties, failing to secure an assignment clause, neglecting due diligence, and not having a strong buyer’s list are common pitfalls. Thorough research, careful negotiation, and a solid understanding of the process are essential to success.

Contract flipping can be a lucrative entry point into real estate investing. However, it requires dedication, perseverance, and a commitment to ethical practices. By understanding the process, building a strong network, and continually honing your skills, you can achieve success in this dynamic and rewarding field.