Real estate flipping: lucrative and legal

By
Real Estate Agent with Century 21 Western Realty

"Flipping can be a very lucrative pursuit. We are not talking about flapjacks here, but real estate," says Judon Fambrough, attorney with the Real Estate Center at Texas A&M University.

Flipping refers to the practice of finding a property that is for sale - usually priced below-market - and then selling it soon after it is bought for a quick profit.

The most cost-effective way to flip property does not involve closing and taking possession of the property. Those who use flipping as a way to make money often assign or sell their sales contract to another party for cash or trade. An assignment is a transfer or grant of all the seller's rights, title and interest in property or in a contract.

Fambrough provided this illustration: Jones is well-paid executive who owns a second home on a lake. But when the firm she works for merges with another, she is suddenly without a job. Jones decides the smart thing to do is to sell her lakefront home and use the money to live on while she searches for another job. She prices the property at $200,000, which is less than market value, for a quick sale.

Brown learns that she is selling and makes an offer. He signs a sales contract agreeing to purchase the property at $200,000. Actually, Brown has no intention of fishing, boating or even living on the property. He hopes that Smith, an investor who specializes in recreational properties, will take the property off his hands.

Sure enough, Smith is very interested in the property. In exchange for assigning the sales contract to him, Smith gives Brown $20,000. Smith, not Brown, purchases the lakefront property.

"This type of flipping is smart," says Fambrough, "because the person who sells the contract pays no closing costs."

As a general rule, Texas views all contracts as assignable, just as all property is transferable. But there are a few limitations. Here are some points to be aware of.

  • Contracts providing extension of credit, such as owner-financed transactions, cannot be assigned because the seller is depending on a particular buyer's creditworthiness. Likewise, contracts that depend on character, skill and confidence cannot be assigned.
  • Any contract may be made assignable by its terms. An owner-financed sales contract, which is otherwise nonassignable, can be assigned if the language in the agreement so states.
  • Contracts can be made nonassignable by their terms too. Language in a contract that forbids assignments is strictly enforced. An attempt to assign the contract renders the assignment void, the underlying contract terminates and the person attempting the assignment forfeits all rights in the contract.
  • Financing options may be limited. The Department of Housing and Urban Development issued a ruling limiting, to some degree, the financing of flipped property. If the seller of a single-family residence purchased the house within the past 90 days, the buyer is usually ineligible for Federal Housing Administration (FHA) financing.

 

 

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Rainer
155,621
R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham
Bank of England (NMLS#418481) - Raleigh, NC
Bob Mitchell (NMLS#1046286)

Good post!  I like the fact that you are counteracting a lot of posts that paint "flipping" in a negative light.  While you have to be careful and it's not for everyone, it can serve a very useful purpose and should not be viewed in a negative connotation.

 

R.B. "Bob" Mitchell

ValueList Real Estate Services, Inc. 

Mar 29, 2007 05:45 AM #1
Rainer
10,390
Darcy Rockwell
eMortgage LLC - Latham, NY
Mortgage Consultant
I found this to be a great article.  Not only from a business stand point but also on a personal basis.  My husband is very interested in "flipping" . 
Mar 29, 2007 05:50 AM #2
Rainer
19,360
Michael Krotchie
Tierra Antigua Realty, LLC - Tucson, AZ
Tucson Realtor, 520.261.MIKE
Brandon, do you know if only some states allow assignable contracts? Good article btw.
Apr 04, 2007 03:00 AM #3
Rainer
17,603
Wendy Burns
Keller Williams Realty - Cary - Apex, NC

Brandon,

I was contacted by an out of State investor who wants me to find investor properties.  That's not at all unusual here, as we currently have on of the strongest markets.  The investor plans to submit several offers (on MLS listed properties), wants assignable contracts, and is just going to see what sticks.  My question is, if a contract gets assigned to a third party prior to closing (just one closing not a double), is the seller still obligated to pay the listing agent and buyer agent commissions? It seems to me that an agent could easily put a lot of energy into this and get left out in the end.  What do you think.

 

Apr 16, 2008 08:48 AM #4
Rainmaker
254,432
Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management
Whatever works!  Thanks for your perspective.
Apr 16, 2008 05:22 PM #5
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Rainer
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Brandon Robichaux

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