Are you interested in investing in real estate but don’t know where to start?
Well, perhaps you’ll start here: flipping real estate contracts.
It just might be the avenue that will allow you to jump into REI. Flipping contracts in real estate is often known as contract assignment or wholesaling, so if you’ve seen those other terms, it means the same thing.
Lots to cover, so let’s get to it…
What Is Flipping Contracts in Real Estate?
First, we’re gonna quickly break down the basics involved in flipping real estate contracts…
An individual or an entity (like an LLC) enters into a contractual agreement to purchase a property with the intention of transferring, or flipping, that contract to another buyer before the property’s actually purchased.
This is super important because as the investor, you’re advertising and flipping the contract NOT the property. (Doing the latter would be brokering without a license and that’s illegal.)
There are usually 3 key parties involved in flipping real estate contracts:
- property seller
- Investor
- end-buyer
Now, let’s get into the weed and talk about how to flip real estate contracts…
How to Flip Real Estate Contracts: 5 Steps
As an investor, you would find a potential real estate investment by looking for undervalued or distressed properties, most often from motivated sellers.
You’d negotiate and secure a contract with that property owner at an agreed-upon price. But, instead of going forward with the purchase, you would pass on the contract to a third-party buyer, who is looking to acquire the property for a profit — possibly a rehab or even a buy & hold.
As the investor, you earn a profit by assigning the contract to your end-buyer at a higher price than the purchase price of your original agreement with the motivated seller.
Let’s say your agreement with the seller is for $200k. You then assign that agreement to your end-buyer for $215k, which means you pocket a cool $15k. Sweet.
And! This allows you to earn a profit from the transaction without investing on the ownership side.
Now let’s move on to the meat… the “how” in more detail. Follow these 5 steps to flip real estate contracts:
- Research the Market & Identify Your Property
One major personality trait that you should have when considering a venture in flipping real estate contracts is an ability to do research. You will need to know how to look for distressed properties, foreclosures, or homes in need of renovation.
And to do all that, you’ll need to gain a thorough understanding of the location, neighborhood trends, property values, estimated repair costs and ARV (after repair value), and comps.
- Create Your Buyers Network
The “flip” part of flipping real estate contracts is the part that will make you a profit, so you have to find people to whom you can flip!
Create a strong network of real estate investors and buyers who are looking to purchase contracts or perhaps partner with you on deals. Attend local events and meetup groups, find groups on social media, or speak with friends and family to assess who you already know.
Many investors ask their buyers list the type of properties they want to invest in, or the area, and then go out and “shop” for those properties. Instead of shooting fish in a barrel, bringing every deal to every end-buyer, you’ve got specifics to help narrow your search.
- Check Out the Property
“Due diligence” is one of the most important parts of your venture to flip real estate contracts.
It involves inspecting the property, assessing the repairs and any renovation costs (a contractor can help with this), and verifying the property’s legal status. Evaluate thoroughly so that you don’t run into hidden issues that might ruin your deal.
- Negotiate the Contract
So, you’ve found a property that seems promising — great! Now it’s time to negotiate the purchase contract with the property seller.
Aim to secure the property at a price that allows you to make a reasonable profit margin when you assign it to your end-buyer. Your contract should include clear terms and conditions and should outline your right to assign it. (And ALWAYS have a qualified attorney review your contracts and agreements.)
- Assign the Contract
Now that you’ve gotten a contract with the seller, it’s time to assign the contract. That means assigning contractual rights to purchase the property to another investor/end-buyer.
Make sure you have a written agreement with the end-buyer that outlines the terms of the assignment, including fees and any other details.
Again, If you need help drafting this type of agreement, this is where your network can help you. Make sure to include lawyers on your targeted list of contacts, so you’re protected when you flip the real estate contract.
Benefits & Disadvantages of Flipping Contracts in Real Estate
Flipping real estate contracts can provide several benefits to your investment portfolio and financial well-being, but that doesn’t mean that it’s not without its disadvantages. It’s important to go into the venture with your eyes wide open and understand both.
Benefits of flipping real estate contracts include:
- No ownership: You never take ownership of the property.
- Low risk: When you flip real estate contracts, you aren’t susceptible to market fluctuations and the costs associated with home ownership such as property maintenance, insurance, and taxes.
- No property management: Since you’re not renting out a home you own, you completely avoid responsibilities such as tenant issues, maintenance and repairs, which can take up a lot of your time and be stressful.
- Quick turnaround: Flipping real estate contracts can provide you with a fast profit since you turn the contract over to another investor quickly. It can be as quick as a matter of weeks!
Some disadvantages to keep in mind when flipping real estate contracts:
- Competition: Flipping real estate contracts has grown in popularity, so finding good deals may become more challenging as more investors enter the field.
- Fluctuating profits: Investors who regularly flip real estate contracts don’t make a guaranteed amount of money and the timing fluctuates, because each deal is different. That means there is no guarantee for steady income.
- Legalities: Legal complexities of flipping real estate can be complex and can vary depending on where you are. You need to know how to understand the regulations you’re up against and how to protect yourself from legal battles. (Hello, attorney again!)
Does an Investor Need a Real Estate License to Flip Contracts or Is it Illegal?
We’ll be clear: flipping/wholesaling it NOT illegal — when done correctly.
To flip real estate, you don’t need a real estate license, as long as you market the contract NOT the house.
Now, rules and regulations vary from state to state and even from county to county, and it’s still important to understand real estate laws that might affect you.
BTW: Personally, we say go ahead and get your real estate license. All it takes is some time, a little studying, and a course fee. We think it’s worth it.
What’s the Potential Profit of Flipping Contracts in Real Estate?
Just like any investment opportunity, the potential profit when flipping real estate contracts isn’t exact, and it doesn’t come without risks. Profit can vary widely depending on several factors, including your local real estate market, the deal you secure, your ability to negotiate, and the end-buyer.
Some investors can make several thousand dollars per contract, while others have the ability to make more. Typical would be $10k per deal, but it could certainly be more.
One way to ensure you have a higher likelihood of making a high profit is to work on your deal pipeline consistently. That ensures that you are never waiting for the next deal.
Final Thoughts: Should You Flip Real Estate Contracts?
Flipping real estate investment contracts can be an accessible entry point to real estate. Hooray!
But! It’s critical to have an understanding of the investment, strong negotiation skills, and a dedication to keeping up with the market.
Do your research and speak with experts about the risks.
Who knows, you might become an expert in how to flip real estate contracts before you know it!
Happy deal hunting!
