The allure of quick profits and the opportunity to get started in the industry with minimal barriers and costs have made flipping real estate contracts a popular venture for many investors in 2023. This business model, often involving assigning contracts, presents a relatively low-risk way to generate a lucrative income, especially in situations where fast turnover is crucial.
However, while it's highly rewarding, this real estate strategy is not without its potential pitfalls. Jumping into contract flipping without the necessary knowledge and skills could set you on a path toward business failure. It's imperative to arm yourself with the right tools and understanding to ensure your venture's success in this dynamic and challenging field.
Therefore, it is high time you armed yourself with the right arsenals and educate yourself on how to flip real estate contracts for higher levels of success:
To put it simply, flipping real estate contracts is assigning contracts for a fee. This is when you find a great investment opportunity (for instance, a single-family house), get the property under contract, and then "sell" the rights under the purchase contract for an assignment fee.
Flipping contracts is the most common exit strategy when you are wholesaling real estate. It's so common that the terms are often used interchangeably.
When you choose to flip real estate contracts, you simply become the bridge that links sellers and end buyers. Nonetheless, it varies from fixing and "flipping" real estate because you don't actually purchase the subject property.
Rather, you enter into an agreement with the property owner, which gives you the right to purchase the property for a specific price at a later date.
Instead of closing on the property, you simply assign the rights to purchase the property to an investor (also known as a cash buyer) who will pay a higher price than what you have contracted to buy it for.
The end buyer in this situation is typically an investor who wants to rehab and sell the property for a desirable return on their investment. You're essentially rewarded for securing good deals and finding cash buyers who close on those deals.
Still confused? Let’s put this in simple terms…
When you put a property under contract, the seller has agreed to sell you their property for a specific price and terms. Instead of closing on the property yourself, you assign (a.k.a. transfer) the rights to buy that property to another buyer. Any markup in the price you negotiate with your buyer is your "wholesale fee."
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Venturing into real estate contract flipping can feel overwhelming if you're unsure where to start. But, like any business venture, understanding the steps involved is key to successful execution. We break down how to flip real estate contracts into six straightforward steps.
By following this roadmap, you'll equip yourself with a solid foundation to jumpstart your real estate endeavors, increase your likelihood of success, and navigate the complexities of this lucrative niche with confidence. Here are the essential steps to get you started flipping and selling real estate contracts:
Whenever you want to flip real estate contracts, the first thing you need to do is to identify a great opportunity.
As a rule of thumb, always look for motivated sellers who need to sell, other than those who want to sell. For instance, look for sellers who have to move quickly or are facing foreclosure, since they will increase your chances of getting a deal closed.
Additionally, look for properties that are physically distressed. This means there are issues with the property's functionality, and appearance, or that it is simply outdated for its time. Often, cannot qualify for conventional financing, so they must be sold for cash to an investor.
As long as you practice due diligence and stay consistent in your search, you will undoubtedly find ideal properties owned by motivated sellers or that are in physical distress.
After you have identified the right property, negotiate the contract terms with the property owner. Note that there is no universal agreement that works for all negotiations. Always have a candid discussion with the homeowner or listing agent, and develop a contract that will create a win-win situation for both sides of the deal.
Contrary to popular belief, money is not always the primary motivation for sellers. Be flexible with your terms to accommodate the seller's situation. Terms such as flexible closing timelines, taking over a property with tenants in place, purchasing a property in "as-is" condition, and paying cash, may be more important to the seller than getting the highest price.
Instead of making guesses and creating a contract, hire an attorney or work with a mentor who is knowledgeable about real estate transactions to make sure you have a solid contract.
That being said, let the experts at Real Estate Skills do some heavy lifting for you! Download our free real estate contract templates below to help you get started!
Now that the contract has been drafted, it is time to obtain signatures from both parties. As long as the contract is appealing to the seller, there is no reason why he/she shouldn't sign it and move toward closing.
Once the contract has been signed by the parties involved, it becomes effective according to the doctrine of equitable conversion. The seller retains the legal title of the property while the buyer acquires an equitable interest and gains control of the said property.
Once you have approval and signatures by all parties, you have what's called an executed contract. From here, it's simply a matter of both sides fulfilling the obligations spelled out in the contractual agreement. Remember that contracts are legally binding, so pay close attention to what is included in the fine print.
To ensure success when attempting to flip real estate contracts, have several reliable buyers lined up before signing a contract with the seller. Develop a buyers list, and understand what they are looking in a deal. With your executed contract in hand, you then identify one who is interested in the type of property you have. As you gain experience, assigning contracts can take as little as a few hours, and you'll be collecting assignment fees before you know it!
Here’s where you complete the required contract assignment paperwork to properly flip the contract to your buyer. The buyer has agreed to purchase the property at your marked-up price and has committed to move forward. Assigning or flipping the contract to the buyer transfers your right and obligations to close on the property to your investor buyer, who will fund and take title to the property.
After you find a buyer, assign the deal, and the transaction closes, you'll earn what is referred to as assignment fees. This is the difference between the amount stated in your initial contract and the final sale price that your buyer pays for the deal. Depending on your relationship with your cash buyers, you can structure the deal to get paid inside or outside of escrow.
As an aspiring real estate investor, you've probably asked yourself this question: “Do I need a license to flip real estate contracts?”
The short answer is: No, you do not need a license to flip contracts. What you do need is the proper education and training on how to flip real estate contracts. In understanding how to wholesale real estate step-by-step, we know that it generally doesn't require a real estate license to complete a contract assignment.
That said, there are numerous advantages to becoming a real estate agent and having your license when assigning contracts, including:
The question of whether or not one should get a license to flip contracts has generated a heated debate on online and offline platforms among real estate investors and brokers.
The legality of flipping contracts has become a hot topic among newbies and expert real estate investors alike.
Some claim that it is legal since wholesaling is not brokering, but rather signing a contract and assigning it to another party. In short, contract flippers are not selling property, but rather selling the ownership of the real estate contract. On the flip side, those who find it illegal claim that wholesalers act as brokers since they are advertising and "selling" properties; thus, the law must apply in this situation.
To add salt to injury, wholesalers typically market property that they don’t own. In most states, the act of “marketing property” is in its own brokering, which is deemed illegal without a license.
If you get 20 lawyers to explain to you the legality of flipping real estate contracts, you will undoubtedly get 20 different answers. To ensure that you flip real estate contracts without getting on the wrong side of the law, consider getting your real estate license since no one will accuse you of 'brokering' without a license.
Alternatively, you can double close on the property. Work with local title companies to set up a simultaneous closing (or back-to-back closing) and resell it immediately.
There's generally nothing illegal about buying a property and then selling it shortly thereafter.
Yes, it is possible to flip real estate contracts without money. In fact, it is not as difficult as you might think.
For this reason, wholesaling and flipping contracts has grown in popularity among all levels of investors - from experienced investors to those just starting a real estate business.
If you're tight on capital - perhaps from having too many projects going on or having too much capital tied up in other deals - wholesaling is a fantastic way to monetize your deal flow while achieving conservative returns. That said, without a doubt, real estate investing is easier to do with some capital than without.
Before we dive into the details of each option you can choose, we invite you to view our video on How To Get Into Real Estate With No Money! This comprehensive guide, with host Alex Martinez, will help you better understand how you can begin investing today without any out-of-pocket cash!
Essentially, the steps involved in flipping real estate contacts without money are similar to those outlined earlier in this post. However, the main obstacle to overcome is the placement of an earnest money deposit after your contract is accepted. As you develop relationships with your investor buyers, you can simply ask them to fund the earnest money deposit when they have committed to the deal. This allows you to flip real estate contracts without investing a dime in the deal.
The amount of earnest money deposit is typically anywhere between 1 and 3% of the purchase price, depending on the competitiveness of your local market. If the buyer doesn't agree to fund the earnest money deposit, other sources can help you to flip real estate contracts without investing a dime. Here are 3 ways to flip real estate contracts with no money:
This is, without a doubt, one of the easiest ways to fund real estate contract flipping deals without money. Find a partner who has the money to invest. This could be a friend, a family member, a close business associate, or another real estate professional.
Ask the partner to finance the earnest money deposits for your wholesale ventures. There are numerous ways to create a true win-win for you and your partner. You'll be doing all the work to make the deal happen, and they'll fund the capital required as needed to push the deal forward. At the end of the day, you can offer to split the profits 50-50 or even pay a flat fee.
Private money lenders are individuals with disposable money to invest, who are more interested in playing a "passive" role in the transaction. Often, these are wealthy, relationship-based lenders who understand the real estate business and believe that you're capable of providing a solid return on their investment.
You can get pretty creative with how you structure the loan from a private money source. You're more likely to negotiate a reasonable interest rate compared with other sources of capital. A great question to ask these individuals is, "What type of return are you currently getting on your money?"
Many individuals with capital are merely receiving a 1-3% interest rate in savings accounts and bonds. So, offer them a more attractive rate to entice them to become a capital source for your real estate deals.
Getting a hard money loan is another reliable source of funding. Hard money lenders are people and professional companies who are willing to lend money on real estate transactions at high-interest rates around 9-14%. Some even charge points on top of the interest. Ideally, find a hard money lender who can fund 100% of the deal.
In some instances when flipping contracts, you may need to actually close on the property. There are specific hard money lenders who offer transactional funding, which is a short-term loan designed for back-to-back closings.
*Pro Tip: Only choose this source of funds for properties that you are planning to double close.
How much money you can earn flipping real estate contracts is dependent on several factors, including:
Therefore, there is no universal amount of money that you can make by flipping real estate contracts. However, experienced contract flippers who turn over dozens of properties annually can easily hit six and seven figures in income per year!
When you choose to flip real estate contracts, keep in mind that it might take as much as 180 days to flip a single house, which means that your end buyers can be tied for up to 6 months. That's why it's important to have an extensive list of cash buyers or work only with sophisticated, high-volume fix and flippers.
As a matter of fact, only 11% of house flippers flip more than ten properties a year.
Also, keep in mind that the amount of money you will make from flipping real estate contracts will depend on the market you are selling your flips. This is because some markets are more profitable than others. For example, in some cities such as Pittsburgh and Pennsylvania, flippers saw returns of up to 131% in 2019, while those in McAllen-Edinburg, TX had an average profit of $8,750.
While flipping contracts can work in any market, it's important to understand your local arena and know what types of properties investors are looking to flip. Therefore, ensure flipping is popular among investors in the location that you choose.
There is no doubt that you want to use real estate wholesaling as a gateway to real investment.
You have watched fix-and-flip shows and have read all the popular books. When you compare flipping contracts to other strategies, you are confident that wholesaling is the real deal. You chose to go for it. But it is taking you a great deal of time. Several weeks have passed and you still haven't made money from your first flip!
This bears the overarching question, "Can you make $5,000 to $15,000 per month flipping real estate contracts?"
The truth is, you can make as much money as you desire by flipping real estate contracts. As long as you follow a proven process, sharpen your skills, and stay consistent, it is certainly possible. Let's break it down.
Wholesale fees vary greatly but typically average around $5,000 to $10,000 per deal. Let's say you find three good deals every month. If you clear a $5,000 fee per transaction, that is a whopping $15,000! Remember, this is earned without the hassle and risk inherent in buying and renovating property to hold or resell.
The secret of making $5,000 to $15,000 a month flipping real estate contracts is analyzing every deal before making offers. This way, you can determine the profit margin for your end buyer while factoring in your desired assignment fee.
It's a matter of increasing your deal volume or making larger assignment fees on each transaction. It's essential to have a consistent deal flow and a full pipeline of leads. This is achieved by consistent marketing and having systems in place to process those leads.
Of course, not everyone will flip real estate contracts and make a good living out of it. It takes many offers submitted before getting one under contract. Furthermore, it may take getting several properties under contract to close a deal and get paid. Nonetheless, if you're willing to put in the required effort and see it as a lucrative venture in the long term, then your monthly income will sooner or later be unmatched.
A prudent real estate contract comes with a number of contingencies. These are conditions that must be met for a buyer to move forward with fulfilling the agreement. Contingencies imply an understanding with the seller that certain tasks will be completed within a certain time. If these conditions are not met, then you can use these contingencies to get out of a contract.
Let's say you have found an ideal property that you put under contract, but a home inspection report details some pricey issues such as a damaged foundation that needs repair.
As long as there is an inspection contingency in place, you can back out of the contract. If the seller is not willing to offer credit to offset the repair costs or doesn't want to fix the problem at all, you have the right to walk away without any repercussions.
Watch my short explanation of why including an inspection contingency is arguably the most important thing as a real estate investor:
A financing contingency is another essential safeguard that can help you as a flipper to get out of an accepted offer contract. This happens if a lender or capital source fails to give you approval within the agreed timeframe.
Nonetheless, before you use contingencies to opt out of an accepted offer, pay close attention to contingency deadlines. For instance, a financing contingency is typically met within 30 days to get final loan approval, while an inspection contingency is typically removed within 7-14 days after the agreement is signed. In case you need more time to finish a contingency task, you must request a contract extension that must be approved by the seller in writing to become effective.
When designing a real estate contract, ensure that it contains an escape clause. This is basically a clause or term and condition that will allow you to avoid performing the contract without being liable for breach of contract whenever the need arises.
For example, if an inspection reveals that there are irregularities or defects in a property, you can use this clause to opt out of an accepted offer.
This clause takes many forms, such as a 'subject to 30-day due diligence' clause, which allows the buyer a 30-day buffer period to inspect a property before accepting to purchase it. Another one is the 72-hour clause, which is prevalent in many real estate contracts.
Well, before we answer this question, you need to know that there is a difference between flipping houses and flipping real estate contracts.
When it comes to flipping property, it means that you have to buy the house, fix it up, and then flip it to a buyer. If you are a fan of HGTV house flipping shows, you can attest to the fact that there is a lot that goes into flipping houses.
You need capital to buy the house and even more to fix it up. You have to manage contractors vendors, and understand the sales process. Additionally, you have to wait for weeks or even months before the property can be listed and sold. Time is money, as you'll be paying holding costs for every day you own the property, as well.
When flipping real estate contracts, you will be in and out of the deal before ever owning the property. Since you're simply participating in the acquisition, you're simply assigning the contract to someone who takes on all the risk and hassle of fixing and flipping the house.
Unlike flipping houses, you don't need to take any risks or invest any money. This flipping real estate contract is an ideal option to choose, especially if you are a new real estate investor.
There are a wide array of things that can help you achieve this as a real estate investor, but flipping real estate contracts is one of the surefire ways to earn money quickly.
However, what may hinder you from achieving your goals is the preconceived notion that you need to have a lot of capital and a desirable credit score. Nonetheless, you can pull this off even if you have a zero balance in your bank account and the poorest credit score in the neighborhood.
While flipping real estate contracts is a fairly straightforward concept, there are many small details that make it more complex than what it looks like on the surface. If it was plain and simple, everyone would be doing it!
You need to learn how to flip real estate contracts the right way so that you can easily break into the industry. To do this, it's important to invest in your education and gain mentorship from successful investors in the industry. Consider learning from others and taking a course that will give you all the insights, tips, suggestions, and strategies that will set you ahead of the competition.
Luckily, our real estate experts have developed a comprehensive flipping real estate course that will sharpen your skills and help you achieve your wholesaling ambitions in no time!
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