I really like this. I was thinking the other day about this same model. Here are the conclusions I came to:
I think some of the strengths are;
Less cash out of pocket. This is the big one. No down payment. No paying a pile of cash to the hard money guy. No transaction fees.
Less time getting going. You don't have to qualify and do escrow etc.
I think some of the problems are;
Where do they live while you are doing the remodel? It would be nightmare trying to rehab with them living in the house and you'd have a fight (understandably) about everything from the work schedule to the carpet color. Who picks the realtor, what's the sale price etc etc etc.
How do you get them out/get them to sell? What if they decide they like the house just fine now and want to stay? A lien is not sufficient insurance for your money. It's only activated when they transact the property. You could literally NEVER see your money back.
Technically the control of everything is still theirs. What if they have obligations, back child support etc, anything or anyone laying claim to the proceeds of the sale. Ouch!
I think the real opportunity is;
Control. What you want is control of the property. You don't have to "own" the property, you have to control it. If you can control it with a little money down you can do the fix and profit off the flip.
For instance using your scenario, they owe 100k on a home that would sell for 200k with 20k improvements. They are aware of this but their predicament is they have bad credit or otherwise no ability to borrow. The market value of the home (142-156 k) is still above what they owe and they could walk away with some cash in their pocket even if they fixed nothing. But let's say they are super motivated, like someone, died, lost a job or got a transfer. Or they just don't want deal with the hassle of listing and showing and feeling all the pressure to clean and fix and stage etc. So they're motivated in a couple ways and totally realistic about their situation.
If you did a lease option, you could come to them and illustrate the idea of partnering and say "Hey, I'll give you the max amount that you could probably get out of this place and you don't have to bother with anything, I'll handle all the difficult parts. I'm going to agree to buy your house and at 142k today, as is. You do nothing. I'll give you a five grand option fee right now so you can move, find another place to rent etc and get on with life. It's your money, you can spend it, do whatever you need with it. I'll also pay you a lease payment every month which will cover your mortgage. We'll set it up so the money goes straight to the bank. Meanwhile I'll fix the place up and list it with a realtor etc. I'll deal with all the headaches and hassles, if anything breaks I'll fix it, you have no worries." When it sells you'll get your remaining 137k, which means a total net profit of $42,000 in your bank account and I did all the hard work while you focused on taking care of your life. If in a year I haven't been able to sell it you get your new, improved house back, freshly remodeled, payments up-to-date and you keep the 5k. How's that sound?"
They accept, they move out, you put 20k in the rehab and sell it at 200k and now upon sale you've got 25k in it plus realtor fees of 17k in realtor fees and closing costs then the 137k option you're paying the owners, of which they keep 37k which all is done out of escrow. Plus, lets say you paid 3 months of $700 mortgage payments so $2,100. So you put $25,000 in and got $18,900 out in 3 months. Not too bad especially if your not doing the repairs with your own time.
I think numbers wise the only difference from your scenario is paying the mortgage payment, that could be anywhere from $500 to $1,000 or more depending on when they bought, at what price and interest rate etc. But logistics wise it's way more realistic.
Ideally you would negotiate a lower price with them, that's the easiest way to pick up extra money in the deal. They should also probably be paying their share (the majority) of Realtor fees and closing costs (12k in this scenario) Also, you could give them a smaller option fee. Depends on what your and their needs are. I could see doubling your money in this scenario pretty easily if you watch your margins and how you do your contracts.
Off course you're also at risk if the house doesn't sell but then again there's always that risk, you're just buying the potential upside cheaper. And if the whole market tanks you walk away without having to default.
So I started out to talk you and myself out of it but maybe I've talked myself into it now! I would love to hear opinions from more experienced flippers. I have only done one flip and the hard money guy made more than I did. That was the worst part. In this scenario, sure the owner makes a bunch for essentially financing it for you but you're not plunking 25% down up front and the paying big interest only payments each month. You're essentially getting great terms.
