Flipping real estate contracts is a great way for beginner real estate investors to get started in real estate. Here are some of the benefits:
- No cash investment or credit information is required
- Learning how to wholesale real estate is not difficult
- It has a low level of risk
- Investors can make money quickly which they can put towards buying investment properties
So, What Does Flipping Real Estate Contracts Involve?
Also known as wholesaling real estate, flipping real estate contracts involves finding a property for sale, signing a real estate assignment contract with the seller and then flipping the contract to another buyer for a profit. This means that the real estate wholesaler is acting as a middleman between the seller and the end buyer.
Though the process of flipping contracts is not complex, it requires a lot of hard work in order to succeed. Here is how to flip real estate contracts:
1. Find an investment property to put under contract
Real estate wholesaling begins with finding motivated sellers. These are people that need to sell property quickly due to divorce, job transfers or to avoid foreclosure. You can find such investment properties on sites such as HomesByOwner, FSBO, Craigslist, or the Mashvisor Property Marketplace. Another option is to drive around neighborhoods where you would want to wholesale real estate. Look out for FSBO signs on yards, as well as indicators of distressed homes. Other ways of finding wholesale deals include:
- Visiting the local courthouse
- Attending real estate networking events
- Using ‘bandit signs’ to get the attention of motivated sellers
- Working with a local real estate agent
2. Get in touch with the property owner
Once you find a suitable income property, the next step is to contact the owner. When it comes to presenting yourself, there are two options:
- You could be honest with the seller that you are a wholesaler. This means informing them about your intentions of real estate contract assignment. Keep in mind that some property owners might be resistant to the idea since they have never heard of it.
- You could sign a contract with the seller without talking about wholesaling. If you already have an end buyer, you could tell the property owner that the buyer is a partner. Though this is not illegal, it is very ambiguous. Be sure to get familiar with wholesaling laws to avoid violations.
Your goal at this stage should be to convince the owner to sell the home at a low price. Hire an attorney that is familiar with such real estate transactions to guide you on how to put a house under contract.
3. Establish the property value
The only way to make a profit on wholesale properties is to put them under contract for below market value. To buy a home below market value, make sure you know what the market value is first. If you ask the owner the lowest price they would accept and they quote a number that is $20,000 or more below market value, then it shows they are really motivated. The best way to determine market value is to find out what similar properties nearby have been sold for in the past six months or less. You can get this information from a local real estate agent with experience buying or selling property in the neighborhood or by using Mashvisor.
Related: What Are the Main Property Valuation Methods?
4. Estimate repairs
When determining how much to offer on a house, you will need to factor in the cost of repairs. When you visit the home, it would be advisable to bring along a contractor. As you walk around the property, look out for things like appliances, counters, cabinets, carpets, paint or anything else that might need to be replaced or redone. Don’t forget major things such as the roof, basement, plumbing, heating system, and electrical wiring. Once you have a rough estimate of the repair expenses, you can use these figures to justify your offer to the seller.
5. Negotiate the price
When getting into the negotiation, keep in mind the repair costs and what the property could sell for afterward. Here is a formula to consider:
- Compute 75% of the property’s after-repair value
- Deduct the repair cost
- Deduct your fee
- The remaining amount should be your offer
Example: If the property is worth $200,000 after repairs, lower the figure to 75% ($150,000) and deduct the repair cost of $30,000 and your profit of $10,000, making the total $110,000.
Once you have negotiated and agreed on a price, sign a contract to purchase and give yourself 30 days to close the real estate deal.
6. Find a buyer
Since the contract with the owner is expiring within 30 days, you will need to move very fast to find a cash buyer. Here are some strategies for finding cash buyers:
- Attend local real estate events to network with potential buyers
- Print flyers or posters with the property details and distribute them
- List the wholesale property on sites such as Mashvisor or Craigslist
- If you already have a potential buyers list, call or email them and ask if they are interested
While our guide includes finding a buyer as step #6, you may also find more success if you try to find buyers earlier on. Network and build a buyers list of real estate investors who are looking for deals. This way, when you find the right investment property, you will know who to call right away.
7. Close on the investment property
Look for a title company that understands wholesaling to handle the closing. Within a few days, the company will do a title search to find out if the property has any encumbrances or liens. The title company will also take charge of coordinating the sale, getting payment from your buyer and drafting the final settlement. After the buyer and seller have signed the wholesale real estate contract, the deed will be recorded and you will get paid via wire transfer or check.
Related: Learn How to Do a Title Search in 5 Steps
You can also watch our video to learn more about flipping houses step by step as a beginner investor:
Conclusion
Though it is an effective strategy for making money in real estate, flipping real estate contracts is not for everyone. Before deciding to flip real estate contracts, ask yourself the following questions:
- Do you have a knack for locating distressed rental properties?
- Do you have strong research skills?
- Do you have great negotiation skills?
- Do you have enough cash to invest in marketing?
For anyone willing to put in the work, flipping real estate contracts can be a great real estate investment strategy especially for beginner investors. You can use the cash you make through wholesaling to buy an investment property and build your own real estate portfolio. Start a 7-day free trial of Mashvisor to search for the top investment properties in the US.
Related: 8 Real Estate Investment Strategies for Beginners
To find out how Mashvisor can help you find profitable real estate investment opportunities across the US market, sign up for a demo with our team.
