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

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

Sharetha H.
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
Moderator
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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  • Sharetha H.
    OP
    Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
    10y
    Thank you J Scott . I will go that route.
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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    10y
    Originally posted by @Rich Hupper:

    @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.

    The mortgagee isn't on title -- they have a lien against the property.  There are plenty of situations where the list of people on title does not match the list of people on the mortgage.  For example, if one spouse qualifies for a loan, s/he may be the only name on the loan; but both spouses will often be on title.  In general, the mortgagee will want to ensure that anyone on the loan is on title, but not necessarily the other way around.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Sharetha H.  its as simple as doing a tenant in common transaction.. look that up

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  • Rich Hupper
    Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
    10y

    @j scott

    @J Scott

    Thanks J Scott, I keep getting confused because in massachusetts we have a mixture of a mortgage and deed of trust, which is called a mortgage deed. With the mortgage deed legal title is held by the bank and the party possessing the property has equitable title up until the loan debt is paid.

    I forget that a lot of people in this forum are from other parts of the country where the mortgage is an actual lien on the property where the owner has legal title.

    On a side note I am thinking about buying your book on flipping houses soon. Does your book cover topics such as: best entity to hold the property, proper insurance needed for the rehab, and drafting contracts to use with the contractors you hire?

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  • Sharetha H.
    OP
    Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
    10y
    Jay Hinrichs I will look into that--thanks!
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  • Sharetha H.
    OP
    Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
    10y
    I'm so glad I asked this question here before putting out $1 in this transaction. :) Hopefully if we are able to get added to the title, by the time we renovate and get it on the market, there won't be any issues with seasoning. J Scott Jay Hinrichs
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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    10y
    Originally posted by @Rich Hupper:

    Thanks J Scott, I keep getting confused because in massachusetts we have a mixture of a mortgage and deed of trust, which is called a mortgage deed. With the mortgage deed legal title is held by the bank and the party possessing the property has equitable title up until the loan debt is paid.

    I forget that a lot of people in this forum are from other parts of the country where the mortgage is an actual lien on the property where the owner has legal title.

    Hey Rich - That's interesting, and just another example of why talking to a good attorney is essential.  They definitely complicates matters, and depending on how the deed and mortgage are written will determine whether what I suggested is possible, and if not, what a better solution would be.  Law/customs are different all around the country, and this is a good reminder of why I (and everyone) needs to be careful about giving advice that may not be transferable among locations.

    The book stays away from giving anything that would even border on legal or tax advice, simply because every situation is different, and even two people who seemingly have similar situations might need vastly different legal, tax and insurance needs.

    If you purchase the books here on BiggerPockets, the package includes the contractor contracts that I use (written by my attorney in the state where I flip) -- it's a great starting point, but as pointed out above, getting it reviewed by a local attorney would probably be smart just to avoid any state-level differences in contract/real estate law.

    As for insurance, in general, you're going to want a builder's risk policy during the time of construction.  There are lots of nuances in builder's risk policies, so you'll want to read what's included/excluded and what additional riders you can get to cover you for stuff that you want covered.  There are some other threads about builder's risk insurance, I give my recommendation for company in those threads (NREI Insurance).

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  • Ron T.
    Investor · Sharon, SC · Member since 2014 · 77 posts · 40 votes
    10y

    You have several heavy weights in this thread giving much better advice than I could probably ever hope to.

    However I have a very simplistic mindset and sometimes look at things different and maybe my thoughts will strike a chord.

    - Always plan for the S*** Hits the fan scenario

    - What happens if the owner dies? If they are married and get divorced? What happens if you or your spouse die mid flip? What happens if the house burns down mid flip? 

    All of these things can and do happen everyday to someone somewhere. I am sure they are your bestest friends ever and the best human beings on earth. Doesn't matter what if something happens beyond their control?

    The only way I would do the deal with them maintaining ownership is I would secure a second lien position equal to the amount of your intended eventual profit before I spent a penny on the house. This protects you as well as reasonably possible. If it burns, you get insurance payout over and above 1st lien. If they try to shaft you, you get made whole whenever they sell, etc.

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  • Sharetha H.
    OP
    Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
    10y
    Ron T. Thanks so much! These are definitely valid points to consider! Thanks again.
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  • Lee Scarlett
    Jacksonville, FL · Member since 2015 · 280 posts · 53 votes
    10y

    @Sharetha H.

    How much time are you allocating to rehab and sell this house?

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  • Sharetha H.
    OP
    Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
    10y
    Lee Scarlett 120 days to rehab + sell it.
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  • Alicia Horton
    Blue Springs, MO · Member since 2015 · 45 posts · 15 votes
    10y

    Good info on this post!!! Great questions and responses. 

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  • Lee Scarlett
    Jacksonville, FL · Member since 2015 · 280 posts · 53 votes
    10y
    Originally posted by @Sharetha H.:

    Lee Scarlett 120 days to rehab + sell it.

     Okay, I was thinking that the idea of putting your name on the title is great advise.  Hopefully that works.  If for any reason that does not happen, PM me so I could could recommend someone that may be able to help.

    Wish you luck on it..!!

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  • Sharetha H.
    OP
    Real Estate Broker · Charlotte, NC · Member since 2012 · 44 posts · 10 votes
    10y
    I agree Alicia Horton . Thanks Lee Scarlett .
    1Reply
  • Account Closed
    Wholesaler · Mckinleyville, CA · Member since 2015 · 192 posts · 69 votes
    10y

    I don't know about North Carolina but Extended Double Closings are possible in CA, where you get Extended Transactional Funding and then hold onto the property for up to 30 days (depending) while the title insurance clears and you are able to sell to an End Buyer who has a conventional loan. The points you pay are steep but it is possible. FHA loans are another story with their Seasoning Requirements, so I would try to avoid those. Finding a lender to front you the money for 3-6 months is unlikely, but not impossible.

    I don't know all the requirements on the lending side of it, but I'm doing a deal like that right now. 

    @Sharetha H. Feel free to PM me if you have questions, i'll answer them to the best of my ability. 

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  • Duane Ortega
    Transactional Funder · Neptune, NJ · Member since 2011 · 187 posts · 86 votes
    10y

    @Sharetha H.

    If you are planning on rehabbing it, why not just go with a hard money loan vs. extended transactional funding?  From when I used to do extended transactional funding, I wouldn't allow any alterations to the property until AB and BC have closed.  It is just like a same-day but closing on the BC side is not on same day.  Also, depending on the lender, extended transactional funding may cost more.  Other cons for extended transactional funding is that (when I did it), if the C buyer falls through, I will proceed to foreclose on that property unless (and it's a big unless), there is another C buyer with a significant deposit down to replace the original C buyer immediately.

    With a hard money loan, you can buy it and rehab it for X months depending on the lender.  You may have multiple buyers fall through which doesn't matter to the hard money lender as long as you fulfill your contract with them.  The con is that you usually have to put down some of your own money.

    Good luck,

    Duane.

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  • Elizabeth Moore
    Real Estate Investor · Chapel Hill, NC · Member since 2015 · 78 posts · 10 votes
    10y

    You indicated that your friend has a loan on the property - do you know exactly what that payoff would be to the bank once it was sold?  Does she have equity in the property now and will there be enough equity after all payoffs and closing costs that will assure you get your money back for the rehab plus x amount of $'s that you settled on before hand in order for you and your partner to make a good profit on this deal? Before I did anything, I would have her contact her mortgage lender and have them fax or email her a payoff letter as of say April 15th.  This way, she can show you a ball park figure as to what the mortgage payoff would be before the renovation takes place.  I'm also assuming you have gotten comps on the area to make sure the property will be worth what all of you are hoping it will sell for after the improvements.

    If all of those things still look good and profitable, just have your lawyer draw up a Quit Claim Deed.  I don't believe it will affect the mortgage as long as she is still the Grantor of the property.  It will just show up on the chain of title when the lawyer for the new buyers run a search on the property.  Once you have a new contract, you, your partner, friend, etc.  will be shown as the Grantor on the new deed to the new buyers. Any liens will show up on the title search and will be taken care of by the new buyer's attorney at closing .  At the point where the settlement statement is drawn up, you and your friend can have monies divided in any percentage that you agreed on along with the monies owed to you for the renovation.  Attorney's do not care how you split your money as long as he has the money for payoffs, etc. so that his client gets a free and clear title.  If at closing you see that she is trying to screw you, you don't have to sign the deed and nothing moves forward until you both come to an agreement and it is shown on the closing statement that all parties sign.  Better have that all settled way ahead of time.  

    Talk to an attorney, have him draw up the deed and maybe some type of an agreement between the two of you that he can also record.  Do great rehabbing and get a great purchase price and all is well with the universe.  It doesn't have to be a big drawn out thing - should be quite easy!

    Good Luck and let us know how it all turns out!

    p.s.  I'm not an attorney so this is not legal advice  - I just have a lot of NC experience.

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  • Rich Hupper
    Broker / Investor · Tewksbury, MA · Member since 2008 · 1k+ posts · 351 votes
    10y

    @J Scott

    Thanks J scott

    0Reply
  • Michael Slockers
    Real Estate Entrepreneur · Owasso, OK · Member since 2015 · 220 posts · 154 votes
    9y

    I stumbled on this thread. How did this turn out @Sharetha H. ? 

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