Flipping - Assignment vs. Taking Title
Assigning a Contract to a new buyer can be one of the easiest ways to make a quick profit on a house that you can get below value and flip to an end buyer. But.... the biggest problem with this is that everyone could end up seeing your profit at the closing table. The assignment ‘fee’ may be shown on the HUD1 (where both buyer and seller sign). Also, the end buyer has the right to see the contract that you have ‘assigned’ to him thereby seeing the price you are paying the seller. Many sellers have backed out at closing (legally bound or not) once they see the money they could have made on their own. End buyers have also walked away once they have seen the lower price that the seller is willing to sell for. Never mind all of your hard work and diligence finding the property, finding the buyer, and negotiating the paper work!
One alternative that MAY work is to flip the property –i.e., taking title. The problem normally that comes to mind with this strategy is two fold: 1) You have to take title to the property (even if only for a second) so there are double transfer taxes, double closing costs, etc., to pay...., and 2) the new buyer may have trouble getting a loan because now you have a title seasoning problem (most banks only wish to give loans secured by properties that have been held by the seller for 12 months or longer).
IF you have enough profit in your deal, you can offer owner financing to your new end buyer and then sell that seller financed mortgage at closing for the cash you need to 1) pay off your original buyer, and 2) to put a profit in your pocket. Remember all seller financed notes are purchased at a discount (depending upon the terms, buyer’s credit, etc.) .... so there must be enough profit to cover the spread. It will not work for every deal of course, but it is certainly a great tool to know about. It has saved me personally many, many deals that would have otherwise been lost.
Basically, it works like this. These numbers are used for example purposes only. Let's say you put the property under Contract with the original seller for $70k. Now you put the property under Contract to sell it to the new buyer for $100k, assuming it really will appraise for this (very important). Now you have $30k as your ‘spread’.
Suppose your new buyer can put down $5,000 in cash at closing and has "okay" credit of 600ish (stated income would be fine, of course). The deal can be structured so that you "the seller" carry back a $90,000 first lien, usually with an 8% interest rate (which you will sell to a note buyer at closing) and a $5,000 second lien, which you will keep and receive monthly payments for. Let's say the buyer purchases the first lien of $90k from you at closing for $78,000.
Now you have the $78,000 from the note buyer, the $5,000 from the down payment, for a total cash amount of $83,000 PLUS you have a $5,000 2nd lien to keep as an investment. The title company will take the $70k to close the transaction with your original seller and he will receive that amount, less any underlying payoffs and title fees.
You receive the difference: $13,000 in cash and a $5,000 2nd lien as an investment. Not bad for a deal that you didn’t spend any money on! The title company will take out the transfer taxes depending upon what is stipulated in your respective Contracts. If you state the seller is to pay all of it on the first contract, and the new buyer is to pay all of it on the second contract, you can save yourself that fee (and any other split costs). Be careful to account for this.
Rehabbed properties (with proof of repairs) and regular properties without title seasoning problems can also be set up this way – with much better scenarios than the ‘flipping' example above. Currently these properties can be set up at 95%LTV (Loan to Value) – EVEN INVESTMENT RESIDENTIAL PROPERIES! The discount on the note is usually about $6,000 -$7,000 if set up properly from the beginning. If the seller is willing, this is an awesome deal for the Buyer. It is a wonderful opportunity to purchase investment properties (1-4 units) for only 5% cash down!
This is just one way to save a deal where an assignment might not work. My husband and I have been buying houses via assignments, subject2, L/O etc., (mdhousebuyer.com) as well as investing in notes (notefunding.com) for years. We love using both businesses to be creative and get deals done that would have otherwise never closed.
Hope this gets the creative juices flowing!
Warmly,
Michele Robbins, CPA
Note Funding Resources, LLC