Beginning real estate investors tend to have many of the same fears that I did when I first got started investing in real estate over 25 years ago. Here’s a few of them:
- Can I find a good deal?
- Can I buy it without using very much money?
- Will I make a profit… or… lose money.
One of the best ways to work through these fears while keeping the risks low is to “Flip a Contract.” The way that you do this is to get out there and make plenty of low, all cash, offers.
Don’t worry about the “all cash” part because if you do this right you won’t be closing on the property and buying it yourself. You’re goal is to get a great deal under contract and then “Flip” your contract to another investor in exchange for two to five thousand dollars or so.
There are three keys to making this work:
- Make sure your offer price is low enough
- Use a contract with a strong escape clause
- Begin building your buyers list (investors who’ll buy your contract) ahead of time.
Make sure your offer price is low enough
Your accepted, under contract, purchase price should be at the very most equal to 70 percent of the “After Repair Value” of the property LESS the cost of all the repairs that are needed to put it in ready to move in condition.
The biggest mistake many new investors make is to agree to pay too much or to underestimate the cost of repairs. The nice thing about using the “Flip a Contract” method is that if you make either of these mistakes then you won’t be able to find another investor who wants to buy your contract and your deal will fall apart .
This isn’t your goal of course, but it’s not a big deal as long as you make sure to:
Use a contract with a strong escape clause
The purchase contract that you use should absolutely have a strong escape clause in it. Get your attorney to look over any contracts you use before putting your real estate deals together. It’s very much worth it.
The typical escape clause gives you plenty of time to inspect the property and the financial details (including your repair estimates, etc.) so that you can get out of the deal if you can’t find another investor to flip your contract to.
As far as earnest money goes I don’t put any earnest money into a deal until I know for sure that the deal is a go. When you’re flipping your contract the way that you know you have a green light is when you’ve found the investor to flip to and they have given you the earnest money. That’s right, they give you earnest money to buy the flip which is what you use as your earnest money for your contract.
This takes us to:
Begin building your investor/buyers list ahead of time.
Call all the “I Buy Houses” signs, ads, and websites that you can find in your area. Create a list that includes the investor’s name, email address, phone number, and mailing address. Make a note of their preferences – what areas they will consider and what types of properties they are looking for.
Because you’ve built this list ahead of time when you get that hot little deal under contract you can let all of your investor/buyers know that 123 Main St. is available for X dollars. The price you give them is your purchase price PLUS the two to five thousand dollars that you are going to make by flipping your contract.
If none of them want your deal then you don’t really have a deal. You’ve agreed to pay too much or you’ve underestimated the cost of repairs. In deal making language, you didn’t leave any money on the table for the investor coming in after you.
If this happens, make sure to let the seller and or Realtor know as soon as possible that you are going to exercise your escape clause option. Obviously you’ll need to get your numbers dialed in sooner or later since no one’s going to want to deal with you if you fail to close on the deals that you sign up.
I hope that you’ve found this helpful.