Strategy: Conditional 25% holdback to seller until I resell?

4 Replies

Do you think this type of approach would work, and is it currently being used in some form? Would there be anything illegal or ethical with it?

I'd like to hear if people think the following is a viable strategy for quick buying and reselling residential properties. I would locate interested sellers who have >40% equity in their SFH and do not have a contract with a RE professional to sell their house. I would accept to purchase their house immediately for a 5% discount below what they think the market value is (I could show them comps), as well as discounting the standard 6% RE sales commission. For example, if the expected market value is $200,000 I would sign a contract to purchase their house for $178,000 (11% reduction from $200,000). They would receive 75% of this money at closing, but the other 25% would either be held in escrow, or owner financed (not sure which would work better) until I resell the house. However, a condition would be that if $200,000 is not the true market value and I cannot resell it for this, the difference in my resale price will be discounted from the money they receive from escrow (or discounted from the seller financed note payoff).

The benefit to the seller is that they would immediately have their house under contract/sold (to me) and would receive 75% of their money quickly. The downside to the seller is the 5% discount they are giving me. Also, the house may not sell for what they had hoped. My profit would be the 5% discount they give me, plus another 3% commission when I resell (I am getting my RE license). In the above example, this would come to $16,000. This isn’t a huge profit, but would be $10,000 more than a standard sales commission. My cash on cash return (20% down if financing the purchase) would be around 25%. I could give the sellers another option of simply listing the property with me for sale, but in that case they would have to wait until the sale to receive their money. 

What do you think?

Originally posted by @Wayne Brooks :

I can’t see sellers going for this. Also, You’ll have closing costs on the purchase and on your sale.....doesn’t seem to make sense.

Yes, the example 5% I gave might not be enough to make it worthwhile.  I agree that a lot of sellers probably wouldn't be interested.  At the same time, there is a whole marketing approach that looks for people who will sell for 65% of market value.  I would think there would be a lot more people open to the above strategy than selling for 65%.

Another concern would be what are you doing if it sells over 200,000? If you are keeping it I think an argument could be made for a NET listing, which could get you in trouble.

Just throwing out thoughts.

Good point. To use this type of contract it would be good to get legal counsel on whether it could be considered a de facto net listing. While net listings can be legal in TX, they are unusual circumstances.

Other options would be that the seller receives the difference  in sales price (eg the amount over $200k) when I resell, or some type of split of the difference.