Selling a Flip Before Completion

8 Replies

We have been working on a high end flip -- at least it is considered high for our market. The approximately ARV is around $500k. We have intentionally allowed realtors who show up at the house to look at it but have not allowed them to bring clients until we are closer to completion. Two days ago, a couple showed up and said that their realtor had mentioned the house to them. (NOTE: Their realtor is not one that has shown up at the house nor one we have ever talked with previously). Long story short, the people are very interested in purchasing it and according to them, "price is not an issue". They said they were very impressed with the quality of the work we had done and the loved the finishes and styles we had chosen. (Funny since our contractor thinks we are crazy with some of our design choices. Love the validation from even a prospective buyer that they like it).

My question is, what are the pitfalls or things to watch out for when negotiating and dealing with a house that still needs to be completed?  Basically, everything is done except for refinishing the hardwood floors, installing light fixtures, bathroom accessories (mirrors, towel bars, etc) and we are still waiting on the quartz counter tops for the kitchens and bathrooms to be delivered.  

The only changes the folks may request (and say they are willing to pay extra for) are:

1) Changing the back porch to a screened porch.  Should be fairly easy as it already has a roof and 2 sides

2) Having hardwoods in the 3 upstairs bedrooms instead of carpet.  There is old pine in there now but we would have to interweave additional pine in a couple of the rooms, as we added approximately 1,000 sf to the back of the house.  (We were originally going to do carpet in only the upstairs bedrooms and have almost 100 yr oak wood floors downstairs, including the master downstairs.)

I have purchased light fixtures for about half of the house (3,000 sf), but have yet to purchase the other light fixtures and bathroom vanity mirrors.  We have 3 other houses waiting in the wings to get started, so I would just as soon keep my lighting to use at one of the other houses and give the buyers an allowance so that I don't have to spend my time looking for the "right" lighting that they may or may not like.  Right line of thinking or not??

We have never been under contract on a house that is not yet completed -- and let me make myself clear, this is not a sure thing.  I don't count my chickens before they hatch but want to get my eggs in a row.  (I guess I really do sound like I am from Tennessee!)  Any advice would be greatly appreciated.

Eggs will break , even in a row .  nothing wrong with getting it under contract , now with the "extras" they want done , make them pay for them up front let them know if they dont settle , there is no refund . This is what they do in my area on new homes when people want over and above 

Conventional, FHA, cash buyer? If financed, appraiser items may come up. Reasonably mitigate health and safety risks (maybe an escrow hold back for loan contingency repairs). Permit/CO? As is contract, no warranties, full disclosure/acknowledged/signed re unfinished items, etc.

You treat it like a builder selling new construction.  They have a limited time frame to remove financing contingencies.  You treat any requested changes like a "change order" and they pay for the changes up front.  You make them pay for their upgrades as part of their initial deposit and you itemize them as part of their contract price.  Personally, I would also make them deposit the cost of potentially having to redo any changes you would not have personally made in case they don't close.  If they do close, it's all credited to their price.  

Make sure you aren't dealing with a nut job.  If you sense that they are, make them wait.  Keep them off your construction site as much as possible.  Custom building and renovations are two different creatures entirely when it comes to managing personalities in a transaction.  

I'm assuming the property is in Midtown which is really hot so I would make them pay dearly.  

The most significant change as I see it is that you will be changing the dynamic from one in which you are doing a project that is totally under your control, to one in which you are acting under the direction of a client with all of the potential requirements of satisfying them. What if for instance, they aren't satisfied with a floor finish or other detail? Are your other projects negatively impacted if the completion schedule is extended on this one.

Just think of it in terms of being a GC. 

Just be careful as they can seem all great at beginning and once under contract start making all kinds of extra demands that they think should be included. Definitely make them pay for any sort of extras. And I would ask for a higher price ( maybe towards the top of the ARV, and assuming it can still appraise for that) the market is heating up and while it is nice to have a bird in the hand, you never know what you might have got if went to market, especially since there is a lot of interest. Food got thought.

@Jimmy Watson experienced this on his last flip and may have some inputs. 

On my first flip, I actually had the original seller want to see what I had done to his house and potentially make an offer. I refused because we were very early on in the rehab, and I didn't want to give up control of the rehab and work as someone else's contractor on my first flip. My realtor did promise him that he could see the house when it is completed, before it is listed. (We're still working on that house.)

I like the idea of requiring payment up front with no refund if they don't close. That's a lot of protection. If you do go down this path, what kind of mark up will you charge the buyer for the upgrades they request?

Would love to see pics of this house, especially the "crazy" design choices :).

First I would want to know if they planned to buy the house all cash from you and if so I would demand proof of funds, a contract and non refundable earnest money. Next on any changes they are ordering I would demand cash payment up front and make that non-refundable as well. If they intend to finance the deal I would ask for a loan pre-approval letter from a lender. Have the extras performed by a licensed contractor so it his guarantee, insurance and license on the line and not have it become your liability. Learn to value and price your time on top of that what will this potentially cost you personally and add that cost in there somewhere. Have them pay that up front as well. 

Ask yourself if the house would be just as marketable to the general buying public in case for some reason they failed to close. 

Another option is to sell the house to them as is, where is. If they intend to finance the house chances are a regular mortgage company will not qualify the house but let them work out how they will finance the house themselves. 

You can also decide to avoid any complications at this point, finish the house as you have planned and then give them right of first refusal. Once they own the house they can have whatever work they want done to their specifications using whatever means available to them such as using contractors. As it is I see you potentially placing yourself in the position of being their contractor. Ultimately as the seller you may be making yourself liable for quality issues and have to come back to fix things the new owners will have issue with. 

I would avoid this situation of selling the house prematurely and have them pay you an earnest deposit to have the right of first refusal (non-refundable). Finish the house and let them deal with having the changes made to the house as the new owners. If they do not want to buy the house in its finished state then you simply market the house as originally planned and you will be free to move on with your business of attending to your other properties. If then they do not buy the house you keep the earnest money deposit as they would have refused or failed to buy it. 

@Julia Blythe It is very challenging to say the least, especially on a rehab of an older home.  The 2 pre sold properties I completed this past year have ended up costing me money either out of pocket for a loss or out of projected profit.  I haven't achieved my projected return on any of the pre-sold properties we have completed.  An example is when you tell the clients that you are leaving existing drywall and painting over, but they expect a "smooth" finish, you either bite the bullet or argue over it.  I found that charging more on the final sales price or upgrades leads to more issues on expectations. Hint: You never win!  I am working on creating a checklist of items for the next time I pre-sell a property.  This list will detail the scope of work planned, and what will remain.  The buyers will initial each line item.  The line item will also detail who is responsible for the decision making.  Example:  Lighting to be selected per buyer, or tile to be selected/designed per builder.  You can never be too detailed.  It is great for everyone to be on the same page when it comes to expectations.

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