Quit claiming to flip

14 Replies

Hi everyone! I'm looking to get started investing and I have some cash to do it. I'm interested in a home I found through an agent at a Meetup and I think it has some potential. I'm still running through the numbers but I think it's going to be a narrow window for profitability. It needs carpet and a few patches in drywall. nothing too major other than the driveway and front porch have settled a little so I may need to do some concrete work. other than that pretty much three to four months job I think. The property is listed at $365,000. based off comps from two different agents the arv would be about $410,000. I'm thinking about $35,000 or so for repairs. I may be able to get into the place cheaper if the seller quit claims the deed to me. He owes $330,000 on the home and needs $26,000 to become current. Then I would be making his $2000/m mortgage while doing the repairs. The home also has an $11,000 lien against it but the agent is supposed to talk to them about a settlement. Obviously the cost of the home is the same either way but I wouldn't have to put down the 20% down payment to purchase the property. I could do everything with the cash I have now, I think. I don't know much about the quit claim deed process or how this can get me into trouble. I this process common? Any Horror/ success stories to a similar situation? Thanks, Gabriel
Originally posted by @Gabriel Smith :
Hi everyone!

I'm looking to get started investing and I have some cash to do it. I'm interested in a home I found through an agent at a Meetup and I think it has some potential.

I'm still running through the numbers but I think it's going to be a narrow window for profitability. It needs carpet and a few patches in drywall. nothing too major other than the driveway and front porch have settled a little so I may need to do some concrete work. other than that pretty much three to four months job I think.

The property is listed at $365,000. based off comps from two different agents the arv would be about $410,000. I'm thinking about $35,000 or so for repairs.

I may be able to get into the place cheaper if the seller quit claims the deed to me.

He owes $330,000 on the home and needs $26,000 to become current. Then I would be making his $2000/m mortgage while doing the repairs.

The home also has an $11,000 lien against it but the agent is supposed to talk to them about a settlement.

Obviously the cost of the home is the same either way but I wouldn't have to put down the 20% down payment to purchase the property. I could do everything with the cash I have now, I think.

I don't know much about the quit claim deed process or how this can get me into trouble. I this process common? Any Horror/ success stories to a similar situation?

Thanks, Gabriel

So all that and the ARV is $410,000? Figure 6 months carrying costs, 6% Real Estate Agent fees to sell ($25,000), closing costs and short term capital gains (if you are fortunate enough to more than break even on this one).

Nah, wouldn't touch it. Use your money to buy an ice cream truck. Sell ice cream. It''s summer. have some fun. This one wouldn't be fun if everything went right and they never go right.

Instead look "off market" like this one: There is real money to be made for sure, but you've got to do it the right way. . .

https://www.biggerpockets.com/forums/600/topics/584916-average-cash-flow-per-door-in-phoenix-metro-area

Hi Gabriel,

Unfortunately, I’m with everyone else on this one. The fixed costs alone wouldn’t make it worth it. Way to much risk for such a small reward. I would keep looking. Better to have no deal than a bad deal.

Thank you for all the honest feedback! The only way to make it work is to get it for less than $325,000. It's in pre-forclosure so I don't think it will happen. 

I was really hoping to here someone who has used a quit claim to get a deal though... Is this uncommon? What added expenses will there be?

@Gabriel Smith $330k + 6% commission + $26k + $11k = full market value before you even do the repairs. FMV is a range, not a specific dollar amount. In this case if the realtors are right about their estimate, the FMV range is $390-$430k. As an investor you can't be all-in for more than $390k on this one otherwise you're paying OVER market value.

The only way I would consider doing this one is if the seller can negotiate to have their arrears added to the end of the mortgage, that $11k lien wiped clean, and buy sub2 for $330k. Then get a contractor tenant/buyer who will do the work for equity.

If (and that's a BIG if) you can pull all of that off, then you can make about $60k on this one.

Is $60k what you make on flips? I figured 20 - 30K would be decent (not that this deal in particular fits the bill) . All of the figures I provided were basic rough estimates to give a sense situation. It's only the listing agent so 3%  and we can negotiate the lien because it's about to forclose. 

This is honestly the first deal I've even looked at and haven't done all of the numbers. I am mainly trying to find out if the strategy to get it in the first place. 

Based off all of the feedback so far I will most likely be running the other direction but I would like to know how people feel about quit claim deed transfer as a low money down strategy.

Originally posted by @Doug Pretorius :

@Gabriel Smith $330k + 6% commission + $26k + $11k = full market value before you even do the repairs. FMV is a range, not a specific dollar amount. In this case if the realtors are right about their estimate, the FMV range is $390-$430k. As an investor you can't be all-in for more than $390k on this one otherwise you're paying OVER market value.

The only way I would consider doing this one is if the seller can negotiate to have their arrears added to the end of the mortgage, that $11k lien wiped clean, and buy sub2 for $330k. Then get a contractor tenant/buyer who will do the work for equity.

If (and that's a BIG if) you can pull all of that off, then you can make about $60k on this one.

 Gabriel says the house is in pre-foreclosure with at least $26,000 in arrears. Sub To is too risky in a situation like this. 

Also the question of Quit Claim, I did a few early on, years ago. What you have to be aware of is that Quit Claim simply says the person Quit Claiming doesn't have any interest in the property. It doesn't Warrant that they ever even HAD an an interest Or more importantly that they will defend the Title in court. It puts you in a very weak position. It also almost always cancels any title insurance, at least with the title companies I work with. You have to ask a local title company.

Originally posted by @Gabriel Smith :

Is $60k what you make on flips? I figured 20 - 30K would be decent (not that this deal in particular fits the bill) . All of the figures I provided were basic rough estimates to give a sense situation. It's only the listing agent so 3%  and we can negotiate the lien because it's about to forclose. 

This is honestly the first deal I've even looked at and haven't done all of the numbers. I am mainly trying to find out if the strategy to get it in the first place. 

Based off all of the feedback so far I will most likely be running the other direction but I would like to know how people feel about quit claim deed transfer as a low money down strategy.

Are you concerned about Gross Profit? (Before you subtract costs of acquisition, lending costs, carrying costs, cost of rehab, cost of sales, capital gains, etc) that number is about $67,000 on a national average according to ATTOM Data Solutions. 

https://www.attomdata.com/news/home-flipping/q2-20...

Or, are you concerned about Net Profit (The money you get for doing all the work and taking all of the risk?) A national study by NAR (National Association of Realtors) come up with $15,000 Net on the average flip and taking 6 months to complete and sell.

The difference is that ATTOM simply subtracts the selling price from the acquisition price and comes up with a number. They have no way of knowing how much was spent rehabbing etc.

This is the number that gets into all of the publications.

When doing semi-annual updates at AZREIA meetings, the folks from the Cromford report from Arizona State University (Maricopa County real estate market) make it really clear that Gross profits look good on paper but investors are the only ones who know what the true costs are.

Thank you ! 

I appreciate everybody having my best interest in mind. It's definitely such a small margin for-profit it doesn't take much to see that it's a lot of work for not enough pay off. If the bank would take less that might be a different story and it may not take that much in repairs but the numbers would have to change drastically. 

The guy only owes 330k on the property. It seems like the agent wants the equity , wants me to pay off the arrears,  and if I profit anything that's what I'll get.  I could see the sub2 working because of the equity but not with the agent. I'd be better off trying to work directly with the bank. I think I'll just walk away.

I like what you said about net profit Mike!

I'll I'll keep looking for deals. I don't like the idea of quick claim deeds. That's why I posted this because it made me uncomfortable in the first place. I'm still not going to go sell ice cream.

@Gabriel Smith If it's about to go into foreclosure scratch everything I just said. My scenario would only work if the seller can negotiate with the bank and put the arrearage on the back end. Many lenders will allow this to be done once during the life of a mortgage.

I don't do fix and flips. I make most of my money from financing arbitrage, typical profit is 10-20% of the value of the property.

And @Mike M explained how a quit claim works perfectly.

Account Closed Wait...what? $15k is the average net profit on a flip? Isn't the average price in the US $250k? That's only 6%. In other words, flippers make as much money as realtors?

No wonder I never got into rehabbing :P

"...a home I found through an agent at a Meetup and I think it has some potential."

+

"It seems like the agent wants the equity , wants me to pay off the arrears, and if I profit anything that's what I'll get."

= bad deal for you

@Gabriel Smith did I read that right ARV is $410K and listed at $365? This is not even close to a deal. That is a tight deal if the property needs NO WORK, Transaction costs will eat up most of that.

I don't know much about the quit claim deed process

Quit claim deed is not a "Process."  It is a type of deed. A quit claim deed basically says "if I have any interest in this property, whatever interest I have i give to you. BUT I am not claiming I have any interest and you may be getting nothing."

You can purchase a property via a quit claim deed signing it over a kitchen table or have a title/escrow company do a traditional settlement and get title insurance. 

The big risk if you do not use a title company and do a traditional settlement is there may be title issues you do not know about.  If the seller has any judgements against him like unpaid medical bills, they those bills attach to the property.

I could see the sub2 working because of the equity

The point is there IS NO Equity. At least not enough to make it worthwhile given the risk.