Flipping
How to close on a flipped property
By
Sep 19, 2005, 10:11

There are several ways to close on a property that’s been flipped, and four of them are described here: collapsed closing, one closing, assigning the contract, and putting the property under option.

Here’s how a collapsed closing works. You’re buying a property for $200,000 and the lawyer deeds the property from the seller to you. At the same moment, there is a deed and closing statement from you to the end buyer. The buyer comes in at 3:00 P.M. with mortgage money of $250,000. The funds are wired in or the buyer has a cashier’s check and gives it to the attorney. The attorney takes the money and finishes the paperwork, then goes to the next room at 3:30 P.M. and gives the seller $200,000, pays off the liens, does the closing. A deed passes from the seller to you and from you to the buyer. The seller doesn’t care what the deed says. He or she is interested in getting his $200,000. And you get $50,000 for being in the middle.

Wait a minute. We’ve got a problem. The seller paid all the closing costs of $2,000 for one transaction, and the buyer paid all the closing costs of $2,000 for the other transaction. Any excess closing funds should to you, but you left out a statement to ensure that in your contract. So the closing attorney has to follow contract law, stating there are two deeds and only one title insurance and there is double money here – another $2,000. What do you tell the lawyer to do with it? Read the contract. You just made $2,000.

The other standard way is called one closing. There is one deed from the original seller to the end buyer; you are not in the deed. (That’s preferable because mortgage companies don’t endorse a property going from one person to another person in a day or a week.) the deed goes from the seller for $200,000 to the buyer for $250,000, and you get the difference. There is one closing statement, and you get a finder’s fee.

Some mortgage companies don’t like a middle person; they want the property to go from one person to the other without a flip fee. The process can be subject to fraud. Instead of getting a flip fee, call it a finder’s fee, consulting fee, marketing fee, or some other fee that comes off the back of the closing statement similar to liens, taxes, attorney’s fees, title fees, and survey fees listed in the closing statement. Now it says that a $50,000 fee, to you or your company name, is for finding the deal.

If that doesn’t work, you can get the original seller to sign a debt and put a lien on the property for $50,000. the lien has to be paid off in order to pass title to the end buyer, so your finder’s fee becomes a lien and comes off the back of the closing statement. Banks and mortgage companies generally don’t care what comes off the back. But they don’t want to see you buy a property for $150,000, which then goes to me for $200,000, and finally to a third party for $250,000, all within a short period of time. Instead, do a collapsed closing and take it as a fee or a lien off the back of the closing statement. Let your attorney help you out with that; that is how you get paid.

A better way to flip properties is to assign your contract. You have a contract to buy it from the seller for $200,000, and the buyer is willing to pay you $250,000, so have the buyer purchase your contract and you get $50,000. The wording says, “I assign this contract, the right to buy the house for $200,000, to you.” Have you ever heard of the option market in stocks? There isn’t any liability involved; the buyer simply bought your contract, just as people buy and sell the right to buy and sell the stocks. About a billion of them go around a day. You can do it with real estate.

One of my students never signs a contract to buy property; he thinks it’s risky. He does between a half million and $1 million a year flipping properties by working the courthouse angle: He finds all the estate sale, probates, and foreclosures and puts them under contract and flips them. He has never owned a property, never hired a contractor, never borrowed any money. He’s been doing this for six years. He simply flips, flips, flips.

His preference is to put the properties under option. The contract states, “I’ll give you $10 for the right to buy the house for $200,000; I option it.” That means he sells the option to the end buyer and lets the title company close it. If he doesn’t end up buying that property, all he loses is $10.

You could make a fortune just doing options. For example, you option to buy a hotel for $10 million and then find someone who will pay $11 million and buy your option. You step out of it at the closing gong.

The good news about wholesaling is that it’s fun; if you do it right, you really have little risk and you don’t need any capital. You may need a little earnest money every now and then, but you don’t really need serious money to start. Also, it’s profitable.

Now here’s the bad news. When you flip something, you make a nice profit, then you’ve got to flip something else; you’ve got to keep doing it, like sales. If you don’t sell something next week, you don’t get paid (unless you have set up some source of residual income).

Another disadvantage about wholesaling properties is taxes. If you buy and sell chairs and make a profit, you have to pay your normal income tax rate on whatever you make after all the expenses, plus you have to pay a self-employment tax, which is about 14 to 16 percent of what you make. When you work for a company, the company takes half of the taxes out of your paycheck and you pay the other half. So the government is going to get its 14 or 16 percent whether you work for somebody else or whether you work for yourself.

If you buy property (or anything else) with the intention of selling it for a profit, you’re self-employed and charged a self-employment tax above and beyond your income tax. The way to reduce some of that is to write off everything you legally and ethically can so that on paper you can show less income and thus are taxed on less. If you decide to form a corporation that flips properties, then you can let the corporation writes off things like business-related meals, travel, equipment, and driving expenses. Instead of paying out salaries, your corporation may pay out dividends, since dividends generally are taxed at a lower rate than salaries. Talk to your accountant. You could have lot of money.

Don’t forget to get a good accountant who understands real estate.