Preselling a Flip

7 Replies

Hello everyone,

Although this is my first post, I've been a member for awhile and greatly benefited from all the information on BiggerPockets!  My partner and I have completed a number of different projects using various strategies (wholesaling, new construction, fix-and-flip, buy-rehab-rent-refi, etc). 

We now have a new project that seems to be somewhat unique as I couldn't find any previous discussions using the search function.  We have a property under contract and were planning on doing a typical fix-and-flip.  However, we are in discussions with a potential end-buyer who would be buying the property after completion.  Although I couldn't find anything by searching, I'm sure some of you guys have done a deal like this? I would be very interested in how you guys might have structured a deal like this.  Ideally, we would lock-in the sales price before actually closing on the property and get a contract in place for the end-sale.  The end-buyer could then pick out their finishes, colors, etc.  In order to minimize our risk of the buyer canceling the contract, I was think a decent down-payment and a detailed spec-sheet.

Thoughts?

Thanks,

Peter

There are a lot of other threads on this topic...

Generally speaking, the consensus is that you should get a very detailed scope of work for what the buyers want (and what you'll customize), collect a very large non-refundable deposit upfront to cover the cost of having to redo all their customizations should they back out (and also being compensated for the lost time), and then be prepared to have the buyer micro-manage you throughout the process and mess up your schedule with change-orders and last-minute issues.

Personally, I think that unless you have a lot of experience in this business, trying to customize a house for an end-buyer is going to pose more headaches, risks and wasted time than it's worth.  But, if you decide to move forward, make sure you're at least well-compensated for those headaches, risks and wasted time.

@Peter Christiansen

Preselling a house is great on one hand yet can be very daunting on the other hand, if you have never done it before.  Basically, you are now becoming the contractor to the buyers.  I would agree 100% with all of @J Scott's suggestions, especially the one about getting a large deposit.  I would not even say that it is a "suggestion" but a "necessity."  

Here is the type of wording we use in an addendum to our contracts if we presell a house:

In order to compensate the seller for the items and finishes that may need to change should the closing not occur because of any contingency in the contract, the parties agree that there shall be a separate deposit of $20,000.00 which shall be non-refundable to the purchasers should the transaction not close.These funds are not earnest money that is in any way refundable to the purchaser should the contract fail to close.

This means if we give them allowances to pick out lighting, tile, etc. and they pick out items we would never have picked and the house doesn't close -- for ANY REASON (loan doesn't go through, appraisal too low, they simply change their minds, etc.), we get the $20,000 so that we can then do the house as we see fit.

There are many other pitfalls you must pay attention to when selling early, but none as important as this one.  Not having this type of addendum in your sales contract could be deadly.  

Good luck!

Julia Blythe

    @J Scott and @Julia Blythe thanks for your replies.  The potential end-buyer fell through, so we'll be completing this project as a regular flip now and listing it when it's done.  Based on you guys' experience and advice, it seems like that's a better way to go anyway.

    Julia, thanks for the addendum...should we presell a flip in the future, we'll definitely add that to our contract.

    Peter

    Originally posted by @Peter Christiansen :

    @J Scott and @Julia Blythe thanks for your replies.  The potential end-buyer fell through, so we'll be completing this project as a regular flip now and listing it when it's done.  Based on you guys' experience and advice, it seems like that's a better way to go anyway.

    Julia, thanks for the addendum...should we presell a flip in the future, we'll definitely add that to our contract.

    Peter

    Interesting how these special request just seem to fall apart.  Most of my 600+ closing I have been invalved in were in the new home sales industry throughout Southern California.   

    These home were for the most part highly upgraded custom spec track homes.  It was fairly common place for buyers to add upwards of $75,000 to $125,000 in options. The builder had cut off dates that were strictly followed with 25% penalty if you went over and all options required a 50% nonrefundable deposit.  This weeded out all the dreamers, just like it simularly has done for you.  Good work protecting your investment.  Now find your real buyer and close the escrow, and find another.

    Jim

    @Nathan Paisley , thank you - will do!  I checked out your website, do you ever get deals in Camden or Burlington County?

    @jim 

    @Jim Keller , that seems like a good way to structure deals with upgrades for new construction.  I agree that money usually weeds out the dreamers!  Better to weed them out as early as possible!!

    @Peter Christiansen absolutely we do. It's just at the moment the ones we have are in Ocean County and Atlantic County. Thanks for checking out the site!

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