Flipping a house that we don't own...how would this work?

Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes

Hi Everyone... Working with a partner on our first flip. We don't own the house (a friend does), but we are putting all the money into the renovation (the friend is carrying the mortgage on the property). My partner and I have come to an agreement with the friend on a purchase price (that they would receive when the renovated house is sold), and we will have an agreement drawn up by an attorney outlining the terms. When it comes time to close on the flip sale, how would we show the net profit coming to us on the closing statement? Has anyone ever done a transaction like this?

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J ScottPro Member

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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

10y

Is your end-buyer going to be getting a loan? If so, who will they be buying the property from? You or your friend? They can't buy it from you, as you don't own it (and if they're getting a government-backed loan, I can promise that the underwriter won't be happy dealing with a marked-up purchase option on your side). So, they'd have to be buying it from your friend. Assuming they're buying it from your friend, a purchase option would prohibit your friend from selling it to them, which would defeat the purpose.

Why not just buy it outright from your friend now. If you don't have the cash, then agree to deferred payment or owner-carry. Or, if the current owner has a loan on the property, then perhaps add yourself to title so that you have a legal interest in the property at resale.

Regardless, I can think of many ways a deal like this can go wrong. Talk to a good attorney and accountant, and have them draw up the appropriate documents with all contingencies covered.

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Derek Carroll
Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
10y
Sharetha H. I wouldn't do it that way, I would figure out a way to take ownership...however to answer your question if you absolutely have to do it as asked then I would do a purchase option contract with your friend. This way the price paid to them is set and this person absolutely can't back out or renegotiate later on. Not sure what language you'd use to handle the right to work on it and the right to market it. You'd want an attorney involved for sure.
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Hugh Ayles
Cedar Park, TX · Member since 2015 · 377 posts · 200 votes
10y
In the world of contracting, you would have a joint venture agreement. The JV agreement outlines the percentage stake of each partner. That percentage reflects your profit portion.
As with any accounting advice, confirm this with your CPA.
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Sharetha H.
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Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
10y
Derek Carroll Thanks. Now that you said that, I'm thinking if we did a purchase option contract, we could do a double closing once we get a buyer for the renovated house--the first closing between us and our friend, and the second closing between us and the new buyer. That make sense to you? And yeah...we'd still need to figure out the document/language to allow us to be able to work on the house.
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Derek Carroll
Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes
10y
exactly
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Sharetha H.
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Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
10y
Hugh Ayles Thanks. That makes sense, but what about on the actual closing statement? What would the hypothetical line item be (for example: payment to our LLC)?
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Sharetha H.
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Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
10y
Derek Carroll Thanks!
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Hugh Ayles
Cedar Park, TX · Member since 2015 · 377 posts · 200 votes
10y
Originally posted by @Sharetha H.:

Hugh Ayles Thanks. That makes sense, but what about on the actual closing statement? What would the hypothetical line item be (for example: payment to our LLC)?
I would think you would list each partner and next to them list the distribution amount.
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Sharetha H.
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Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
10y
Hugh Ayles Thanks!
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
Sharetha H. So I'm missing something I think. What keeps the owner of the property from telling you to go fly a kite after you put a bunch of money and labor into his house? RR
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Sharetha H.
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Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
10y
Ralph R. Because we're friends and they just wouldn't do that to us... :) Just kidding. We are going to have an agreement in writing. Upon Derek Carroll's suggestion, we're going to do a purchase option contract and if we do that, the homeowner won't be able to sell the house to anyone else during the time of our option. The contract will also indicate that they *have* to sell it as well.
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
@Sharetha H. so I guess I'm still not clear. Purchase option= he has to sell to you and your partner only and you have the OPTION to resell to another party. Right? What happens if the Market value is at or below the cost of the house plus rehab cost? Do you split the loss? Do you still have to buy the house and take all the loss? If you rent the house as some people mite do how does that work?? I'm not a flipper so I'm curious. RR
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Sharetha H.
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Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
10y
Ralph R. With the option, my friend would HAVE to sell it to me, but we don't HAVE to buy it (but we would because we're putting the money into the rehab). If the market value is lower after we rehab it, then my partner and I would take the loss (but still buy the house from my friend). Of course I am not anticipating a loss in the transaction, though.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Is your end-buyer going to be getting a loan? If so, who will they be buying the property from? You or your friend? They can't buy it from you, as you don't own it (and if they're getting a government-backed loan, I can promise that the underwriter won't be happy dealing with a marked-up purchase option on your side). So, they'd have to be buying it from your friend. Assuming they're buying it from your friend, a purchase option would prohibit your friend from selling it to them, which would defeat the purpose.
Why not just buy it outright from your friend now. If you don't have the cash, then agree to deferred payment or owner-carry. Or, if the current owner has a loan on the property, then perhaps add yourself to title so that you have a legal interest in the property at resale.
Regardless, I can think of many ways a deal like this can go wrong. Talk to a good attorney and accountant, and have them draw up the appropriate documents with all contingencies covered.

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Maricela Chavez
Real Estate Agent · Tucker, GA · Member since 2016 · 90 posts · 144 votes
10y
Why the double closing? I don't understand this. I bought a house cash and flipped it. It's being sold to new owner on April 12. When the attorney contacted me for pay off, there was a line asking if I had any other payoffs to anyone, or if I owned the house outright. I'm almost positive that you can put this on the settlement statement. For example, 40k going to so and so. I used a Home Depot project loan card for a portion of my rehab. If I want to pay this out of my proceeds. I can. All I have to do is give them the payoff info. Address etc. I would be more concerned with either getting added to the deed prior to spending any cash. Even you had an attorney draft up an agreement. It's still a civil case of things go south. I'm not questioning the friendship. But better safe than sorry. I have found that when it comes to money, the friendships/ family ties go down the drain if anything were to come up. If you are on the deed, they can't sell without you and vice versa. If I were you I would call an attorney that specializes in real estate closings and ask if these proceeds can come out of closing to a third party vendor/individual. If you both are on the deed then the proceeds come to both names.
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
10y
@Sharetha H. gottcha. It's like a First right of refusal with a locked in purchase price, and he HAS to sell the property. Pretty original. The part that scares me is if the rehab numbers are off you gotta put even more money into the project to take a loss. Putting good money after bad. I gotta agree with @Derek Carroll I wouldn't do it that way if I could avoid it. RR
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Maricela Chavez:

Why the double closing? I don't understand this. I bought a house cash and flipped it. It's being sold to new owner on April 12. When the attorney contacted me for pay off, there was a line asking if I had any other payoffs to anyone, or if I owned the house outright. I'm almost positive that you can put this on the settlement statement. For example, 40k going to so and so.
The problem is that she doesn't own the property, so she wouldn't be the one selling it (you can't sell what you don't own). Her friend owns the property and would legally have to be the one who markets it and sell it. If they're going to use a real estate agent, the friend would have to sign the listing agreement, etc.
What happens if the friend gets annoyed for some reason and refuses to sign the listing agreement or sign the closing papers? Sure, you can sue, but you're not going to be able to market/sell the house until a judge rules, which could take months (or more).
Without being on title, I don't see a low-risk or easy path here...
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Maricela Chavez
Real Estate Agent · Tucker, GA · Member since 2016 · 90 posts · 144 votes
10y
Ah ok I see. It sounds like too many variables. 😬
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Sharetha H. these types of deals end up with broken hearts and hurt feelings @J Scott has very valid points.
If I was putting the cash into the deal I would want to be on title so I have the right to sell and pay off the lien holders..
of course this can go fine and cumbya and all but it can also lead to a disaster and broken friend ships.
the seasoning and flipping rules that J Scott mentions are one of your major stumbles to whoever advised you on at the double close scenario un less the property is sold for cash.
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Wesley Garris
Investor · Atlanta, GA · Member since 2014 · 20 posts · 0 votes
10y
@Jay Hinrichs good points. Would love to connect with you, have a few questions of my own!
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Sharetha H.
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Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
10y
Thanks for all the advice J Scott Maricela Chavez . Definitely some details we need to work out. The end buyer would likely be getting a loan. I presumed that they'd be able to buy it from me if I do the double closing (meaning I would technically own it the same day I sold it to the end buyer). I'm familiar with seasoning requirements on government-backed loans, but not for conventional loans. Also, my partner and I are not able to purchase the property outright from my friend at all. My friend already owns the property and has a loan and just has agreed to sell it to us at a specified price.
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Sharetha H.
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Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
10y
Forgot to tag you in my response above Jay Hinrichs .
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Sharetha H.:

Thanks for all the advice J Scott Maricela Chavez . Definitely some details we need to work out. The end buyer would likely be getting a loan. I presumed that they'd be able to buy it from me if I do the double closing (meaning I would technically own it the same day I sold it to the end buyer). I'm familiar with seasoning requirements on government-backed loans, but not for conventional loans.
Also, my partner and I are not able to purchase the property outright from my friend at all. My friend already owns the property and has a loan and just has agreed to sell it to us at a specified price.
A few things:
- If you can't buy the property today, how are you going to be able to buy it on the day you plan to resell it? Are you expecting that you'll be able to use the buyer's funds to close your purchase? Most title companies don't allow that these days, so you'll probably still have to come up with the cash for the purchase.
- Conventional loans *are* government-backed loans.
- Seasoning requirements and chain of title issues will probably not allow you to do a double-close if the buyer is getting a conventional, FHA or VA loan.
Again, it sounds like you're setting yourself up for issues, and you may not even realize there are issues until you get to the closing table and find out that you can't close. Either hire a really good real estate attorney to help figure out the details (and have an accountant and underwriter verify everything as well) or figure out a different plan.
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Sharetha H.
OP
Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
10y
J Scott Thanks! Yeah...I didn't realize that conventional loans were govt-backed. And yes, I was planning to use the end buyer's funds to close. Phooey. Do you have any ideas on how I could possibly make this work? With no money (only enough for the rehab portion) and no credit...lol.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Sharetha H.:

J Scott Thanks! Yeah...I didn't realize that conventional loans were govt-backed. And yes, I was planning to use the end buyer's funds to close. Phooey.
Do you have any ideas on how I could possibly make this work? With no money (only enough for the rehab portion) and no credit...lol.
Partner with the owner of the property, get your name put on the title, and then when you go to sell, sell it jointly and split the profits. If you go that route, definitely speak with an attorney about writing up the agreement, so that if/when issues arise, you have clear mediation procedures in place.
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Rich Hupper
Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
10y
@Jscott
Can you explain the mechanics where one adds themselves to the title of a property where the property is currently mortgaged . The current owner has equitable title and the lender has legal title or is this incorrect thinking? I feel like the mortgagee would have issue with this.
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