How Real Estate Investors Flip Houses For Cash

Published: 07th May 2010
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Most people refer to buying and selling houses as flipping houses. Flipping houses really means wholesaling houses, though most people think it refers to buying, fixing and selling houses. Wholesaling houses involves buying at a low price fixing them up then selling them at a premium for profit.

We will consider this meaning of flipping houses for our purposes.

Wholesaling houses is the quickest business model to generate profits in real estate investing. It also needs the least amount of cash invested in the deal. Occasionally you can wholesale houses without using your own cash.

So how do you flip houses?

1) Identify below market value houses

Motivated sellers form the best source of houses below market value. People with legal problems form the best source of cheap houses. These are people with legal issues such as liens on their properties, divorcing, have inherited property, bad tenants, and so on.

You target them by sending them letters or post cards. In my business, I send them 2 mail pieces a month apart. Each mail piece prominently sends them to my website URL as the main call to action. My phone number is less prominent. This way, they visit my real estate investing website instead of call me so my website pre-sells for me.

Chances are the houses I get are fully pre-screened and pre-negotiated so I need just a few minutes to tell whether it is a deal or not - then make an offer or move on.

Some people wholesale properties that have been foreclosed, but this is not the subject of this article.

2) Sign a contract to buy

Once you have identified a good deal whose figures look appealing, you must put it into contract. In each state, there are contracts regularly used by real estate agents, or you can get contracts that can be used all over the country. I prefer to use contracts mandated by our state real estate commission because they are more popular and most people, including title companies and sellers are more comfortable with them.

3) Begin title work.

The first thing I do is fax my contracts to my title company to begin title work. Title work identifies all liens on the house so they are cleared when you buy or sell. This is the work of the title company. As an investor, you do not need to get too concerned about the technicalities involved. I prefer to let professionals do their work.

4) Identify buyer with money

I prefer buyers with real cash in the bank. Cash transactions have few limitations and are more preferable. Most real estate investors buying houses have cash from a previous sale or line of credit.

Alternatively most have private money lenders or get cash from hard money lenders.

Avoid buyers looking for traditional loans. Most loan companies will not lend on houses that need rehab and you could have seasoning issues, meaning you must hold the property for 6 months to 1 year before you can sell it.

5) Sign a contract to sell

The amount of money in the deal determines the type of contract you sign. Make sure to leave enough cash in the deal for your real estate investor buyer. After all they have to do most of the work.

If my potential profit is less than $10,000, I prefer to do a contract assignment.

In contract assignment, you simply assign your contract to your real estate investor buyer. In this case you are assigning the contract, not assigning or selling the house. This is perfectly legal countrywide and you do not need a license for it. This contract is usually as little as 2 to 3 paragraphs.

In this case, the real estate investor buyer you wholesale the deal to closes the transaction, not you. You collect an assignment fee once the deal is closed.

If I am making more than $10,00 or my profits are near or the same as the real estate investor I sell to, then I prefer to do a simultaneous closing, also called double closing. This involves buying the house from my motivated seller, then selling it to my real estate investor buyer.

In a simultaneous closing, you buy and sell on the same table, therefore you do 2 transactions. In this case you own it when you buy, then sell it a few minutes later. Of course, you have to incur closing costs that you do not incur in contract assignment.

The contract for simultaneous closing is just like the one for buying, but with higher price and better terms for you.

In either case, ensure you collect an earnest money check before signing the contract. Always make sure they lose their earnest money if they do not buy the house. Make sure the contract expires before your contract to buy and the property reverts back to you.

6) Collect your profits

You must make ensure follow the transaction process until the deal is closed. You collect your check from the title company when the transaction is completed. It is therefore in your best interest to make sure you close any loose ends and make sure the deal does not fall between your fingers.

How must money do you need to flip houses?

When you sign your contract with the buyer, you may have to put up earnest money, usually between $100 to $500. There is no contract without earnest money. When I sign the contract to sell, I collect an earnest money check which is deposited with the title company.

In double closing, the first transaction can be closed with money from your investor buyer so you use none of your own money. If your buyer source of funds does not allow you to use his money to close the first transaction, then you might need to get transactional funding to a few points to close the first transaction before you can sell.

The checks you collect from wholesaling houses will ultimately be easy and fast. You can close a few such transactions a month.

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