Most people understand the concept of flipping houses. But you may be surprised to learn that you can also flip real estate contracts and make money without ever actually purchasing a property or doing any repairs. Also known as real estate wholesaling – this strategy is a great way for inexperienced real estate investors to get started because it doesn’t require good credit or upfront capital. In this post, we explore how real estate investors can learn to flip real estate contracts.
What Does it Mean to Flip Real Estate Contracts?
Flipping a real estate contract entails locating a property that is being offered at a discounted price, getting it under contract, and then selling that contract to a buyer at a higher price. Although it takes careful planning and working knowledge of your local real estate market, you can earn a decent profit flipping contracts without ever purchasing the property. Therefore, you do not need good credit or money saved for a down payment when wholesaling real estate – all you have to do is identify a suitable property and find a willing buyer.
The end buyer will most likely be another real estate investor that knows how to flip houses, and will put the work into rehabbing it, then selling it at full market value. So, in essence, you are getting paid a finder’s fee for locating an investment property and convincing the current owner to sell. There is no ceiling to how much you can make flipping real estate contracts. But in order to make a profit, you have to find a property that is being offered at a rock-bottom price, so both you and the buyer can make a profit on the deal. This typically means that the home is either distressed or the buyer is motivated to sell because of a major life event or financial problem.
How to Flip Real Estate Contracts
Flipping real estate contracts doesn’t require cash investment or good credit, but it does require hard work and patience. Here are the basic steps you must go through to successfully flip a real estate contract.
Step 1 - Identify a Property
The first step when flipping contracts is to find an investment property that is being offered by a motivated seller. Motivated sellers are homeowners who are looking to sell quickly because of a major life event such as a divorce or a death in the family, or financial difficulties, such as a foreclosure. The property may also be in disrepair and the owner does not have the time or the funds available to fix it.
To find motivated sellers, you can drive around your neighborhood and look for distressed buildings, visit the local courthouse or look online on sites like Craigslist or HomesByOwner. How you locate properties is how you will earn your money as a real estate wholesaler, so you should develop a strategy that works for you.
Step 2 - Contact the Owner
Once you’ve located a potential investment property, it’s time to contact the owner. You can usually find their information through county court records or any listings online. It’s important to be upfront with the owner about your intentions. Don’t try to disguise yourself as an average homeowner, because it will only backfire when you try to get them to sign an assignment contract.
Some sellers may not be interested in working with wholesalers or investors and it’s better to establish that from the beginning than waste your time if they back out of a wholesale deal at the last minute.
Step 3 - Estimate the Property Value and ARV
Before you sign any flipping contracts, it’s important to crunch the numbers and make sure it’s a profitable deal. In order to do so, you’ll have to estimate the market value of the property and the after-repair value (ARV). Investors will pay somewhere around 65% – 70% of the ARV for an investment property. This means you will need to locate a property being sold for even less than that to make a profit.
Say a home is worth $400,000 in good condition. An investor would likely pay somewhere between $250,000 to $280,00, depending on the condition and how much work needs to be done. If you can get a buyer to agree to sell a property to you for less than that, you can pocket the difference.
Step 4 - Get the Property Under Contract
Once you’ve landed on a number that makes sense and gotten the buyer to agree to sell, it’s time to get the property under contract, also called an assignment agreement. Keep in mind that you will not be purchasing the property- you will have the property owner sign an assignment agreement, which gives you – the wholesaler – the right to sell the contract to an end buyer. Once you are assigned that right, you will sign a separate purchase agreement with the buyer.
Your reward is the assignment fee that is built into the real estate contract.
Step 5 - Find a Buyer
Once the property is under contract, it’s time to find a buyer if you haven’t already. To make things easy, you may want to start building a potential buyer’s list before scouting for properties. That way you have options when it comes time to sell and you may be able to get a better deal.
Most assignment contracts contain a clause that allows the wholesaler to back out of the sale if they experience difficulty finding potential buyers. So it’s important to have a lawyer review any contracts beforehand. Once you’ve found a buyer who is willing to offer a price that makes sense for your deal, all you have to do is close on the sale and walk away with your profits.
How Much Money Can You Make Flipping Real Estate Contracts?
It all depends on your goals and work ethic. Some wholesalers make over 6 figures, working less than 40 hours per week, while others struggle to close a single deal. The better the discount you can secure on a property, the more money you’ll be able to pocket.
Experienced wholesalers can make between $5,000 to $10,000 per deal. If you find a diamond in the rough, you can potentially make more. But it takes patience and dedication to wait for a big wholesale deal. The more you understand the market you’re working in and the larger your network of investors and property owners becomes, the more money you will eventually earn.
Flipping Real Estate Contracts vs Flipping Houses vs Micro Flipping
The difference between flipping a contract and a house flip is that you’re not actually purchasing the property and you’re not doing any of the renovations yourself. There is less risk involved in real estate wholesaling, but the profit margins are also lower as well. Flipping a home requires good credit or a cash investment because you are actually purchasing a property for a period of time, whereas a wholesaler is just securing the right to sell to someone who is willing to do the heavy lifting.
There is also another type of wholesaling called micro-flipping that is becoming popular. Micro flipping involves using technology to identify undervalued properties and then flipping the contracts digitally. The difference between regular wholesaling and micro flipping is that you’re utilizing datasets and other digital tools to locate properties that aren’t necessarily distressed, they’re simply undervalued. This involves even less risk than traditional wholesaling and transactions typically happen much more quickly. But, micro-flippers typically only make a few thousand dollars per deal and have to compete with large companies like Zillow and Redfin who are effectively doing the same thing.
Flipping real estate contracts is a good way to learn the basics of real estate investing and the real estate industry, while pocketing some extra cash in the process. It’s a relatively low risk real estate investing strategy. But you have to do your due diligence and build a solid network – otherwise, you could end up wasting your time.