A great way for new investors to get started in the industry is by learning how to flip real estate contracts. With a relatively low level of risk, the barrier to entry, and cost, flipping real estate contracts awards new investors with the path of least resistance. Nonetheless, despite the relative ease of execution associated with contract assignment, there is still an evident margin of error one must consider before one can partake in the strategy themselves. Therefore, it’s important for investors who want to flip contracts to educate themselves on the subject matter; only then will they realize success on a higher level.
What Does Flipping Real Estate Contracts Mean?
Flipping real estate contracts is just another way of assigning contracts—or wholesaling real estate using the assignment contract—the two are entirely interchangeable.
As a wholesale strategy, real estate contract flipping serves as a way for investors to act as intermediaries between sellers and end buyers. However, instead of acquiring the subject property, the investor flipping the contract (the wholesaler) will enter into an agreement with the original owner, giving them the right to buy the property later.
That’s an important distinction to make: the original owner isn’t selling the home but rather awarding the investor the rights to buy the home. Today’s wholesalers sign a contract that says they have the right to purchase the property in return for what is typically referred to as “equitable interest” in the home.
Next, I’ll discuss the 7 steps to flipping a real estate contract.
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How To Flip Real Estate Contracts In 7 Steps
Flipping real estate contracts has become synonymous with perhaps the simplest investment strategy in the entire housing industry: wholesaling. However, make no mistake about it: the “simple” moniker is applied loosely. Not unlike every form of real estate investing, even simple real estate contracts come with an inherent degree of risk. Therefore, to increase your odds of realizing success, one must exercise due diligence and follow the steps outlined below:
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Find A Property
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Contact The Owner
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Determine The Property Value
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Write Up The Contract
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Get It Approved
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Find An End Buyer
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Close On The Property
Step 1: Find A Property
Flipping real estate contracts starts with finding the right property. Not only will investors need to find a desirable home, but they will also need to work with those willing to go through the assignment contract process, specifically, motivated sellers. At the very least, motivated sellers are just that: motivated. Whether they face foreclosure or need to move for work, people who are motivated to sell represent a great opportunity. Investors should prioritize homes owned by those who need to sell—not those who want to sell. Doing so will increase the likelihood of a deal being brought to the closing table or (in this case) entering into an agreement on a basic real estate contract.
In searching for a viable candidate, there are several strategies for investors to consider. Investors should look in two places if they want to find distressed homeowners: their local courthouse and list providers.
Take a trip to the local courthouse and browse recent lis pendens or notice of default filings. As it turns out, delinquent mortgages are public knowledge and can be viewed by anyone who knows how to find them. With a little due diligence and patience, investors may be able to compile a list of nearby homes whose owners are motivated to sell for one reason or another.
Investors who would rather pay for someone else to do the legwork can purchase a list of delinquent homeowners. These lists (which can be bought online) are often created using the same documents at the courthouse.
Step 2: Contact The Owner
During your property search, you will hopefully come into contact with information on the owner. Typically, court records, property deeds or titles, and tax records will be public information. These documents can lead you to the person’s name. From there, you can either attempt to search for their phone number or you can come up with a plan to knock on the door during the day.
When you get in touch with the property, be polite and introduce yourself and your real estate business. Inquire about the property and whether they are interested in selling the home at this time. It is not uncommon for property owners to be hesitant or nervous to speak about selling the property, just think about how you would react in their position. Attempt to find common ground and leave them with your contact information to reach back out with additional questions or when they are ready to move forward.
Step 3: Determine Property Value
The key to flipping real estate contracts is securing homes under market value. After all, the sale price is what will make the property most attractive to the end buyer. Determine the market value of the home before securing the property by analyzing comparable homes in the area. Review properties with a similar square footage, number of bedrooms and bathrooms, and with similar amenities. Get an idea for the average selling price and time on market.
Each of these characteristics will help you determine the viability of the property as an investment. When you are trying to assign the final contract to house flippers, these details are especially critical. Without the right sale price you, and your end buyer, will not be able to maximize your profits from the deal. Utilize online research, local real estate agents, and more as you determine the property value of your potential investment.
Step 4: Write Up The Contract
Once investors find a home that exhibits all of a good wholesale deal’s characteristics, the next step is to negotiate contract terms with the homeowner. Provided they are ready and willing to sell; the idea is to negotiate an assignment of contract. That said, there’s no universal contract that will work for every negotiation. Instead, investors will need to tailor the impending contract to meet both the homeowner’s intentions and their own.
The verbiage of the contract between each party is of critical importance. There should be no room for interpretation or ambiguity. The act of assigning a contract needs to be purposeful and deliberate. All purchase and sale agreements, by default, can be sold to another party unless specifically stated otherwise. It is essential to make sure the contract states the investor’s exact intentions. Hire an attorney versed in these types of real estate transactions to ensure ensuing discussions go smoothly.
Step 5: Get It Approved
Once drafted, the contract must receive approval from both parties. After all, even the most basic real estate contracts represent an agreement on behalf of each individual. Of course, that means investors will need to draft a contract that appeases sellers—that’s where the motivation comes into play. If an investor can identify the seller’s motivation, they may be able to write a contract that is simultaneously attractive to the seller and beneficial for the impending wholesale deal.
Provided each person involved in the deal agrees to the terms, it’s time to sign the contract. According to the doctrine of equitable conversion, once a real estate purchase agreement is signed by all parties and becomes effective, the buyer becomes the equitable owner, and the seller retains bare legal title to the property under the previously agreed-upon terms.
Step 6: Find A Buyer
Today’s best contract flipping investors begin with the end in mind. More specifically, they’ll have a buyer lined up before they even sign a contract with a seller. That way, they’ll already know how the deal is expected to unfold. Most wholesalers, for that matter, compile what’s known in the industry as a buyers list. As its name suggests, a buyers list is a list of potential buyers. Wholesalers may consult such a list to identify anyone interested in buying a home and assign them the contract from the impending deal. A properly curated buyers list could facilitate an assignment of contact in as little as a few hours.
Step 7: Close On The Property
Once you have identified an end buyer, it’s time to close the deal officially. Connect the buyer with a title company experienced in wholesale deals, and wait for the title search to be completed. The title search with pull information on any potential ownership disputes or tax liens. Within a week, you should know whether the final sale can go through. The title company will then draft the final contract with the buyer and official seller, marking the end of your role as a wholesaler in the transaction. At that point, you can accept payment for your work via wire transfer or check.
Pros & Cons Of Real Estate Contract Flipping
Before you decide to get started in real estate contract flipping, you should take time to weigh the pros and cons to figure out if this investment strategy is right for you and your goals.
Benefits Of Real Estate Contract Flipping
Real estate contract flipping presents many attractive investing benefits. One real estate contract flipping benefit is that it does not require much money to get started. That means that there is little risk associated with this opportunity as well. Flipping contracts is a great way to get money in your pocket fast.
Disadvantages Of Real Estate Contract Flipping
Although there is a potential to make money flipping real estate contracts, there are also some drawbacks. One drawback is that creating a large amount of income from flipping real estate contracts will require many deals. This will require investors to spend more time and effort evaluating potential deals. Investors will also be required to spend a significant amount of time compiling their wholesalers list for each deal to be matched with a buyer who is ready to assign the contract. Developing an efficient system for doing so will not happen overnight. Many investors find a drawback in the amount of time it may take to find success with this investing strategy.
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How Much Can You Make From Flipping Real Estate Contracts
There is no limit to the amount of money you can make from flipping real estate contracts. However, your income will depend on the amount of work and effort you put into the practice. Wholesaling requires you to sift through numerous deals to find the right contracts to represent — this can take up a significant amount of time, especially while you hone in on your search criteria.
The exact amount of money you make will depend on how well you negotiate contracts with your end buyer. Wholesaler fees are generally the difference between how much the contract costs to buy and how much you can sell it for in the end. This difference can vary from deal to deal. Generally speaking, you can expect each real estate contract sale to generate a few thousand dollars in profit.
Over time, you may succeed in building relationships with other real estate investors in your market. Wholesalers are often invaluable for investors who flip houses, as they don’t always have the time to search for deals. If you play your cards right, you could negotiate minimum fees or per-deal agreements with these investors. This could create a more predictable flow of income, as long as you can find new deals consistently.
Summary
If you are interested in an entry-level investing strategy, learning how to flip real estate contracts might be for you. The barrier to entry, in particular, is relatively low. Additionally, assigning a contract is viewed as a relatively risk-averse real estate investment strategy. That said, investors can’t underestimate the process. While easier to grasp than rehabbing, wholesaling must be approached with cautious optimism. Do not let its simplicity get the best of you. Instead, learn how to flip real estate contracts with a proven system. Understanding the contract assignment process is the best way to mitigate risk and realize success.
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