Quote from @David Sanchez:
Hi everyone! I have been cold-calling for about 2 weeks since last December, and I've learned a good chuck about wholesaling in about a month or so, with around 90 pages worth of notes on the entire process. So far, I have visited a seller who has shingles and wants to sell but is doing his due diligence with other "big boy buyers". Either way, it's been a very eye-opening experience with real estate investing in general. Especially with how creative it can get. One of the most interesting strategies I have learned about is where a fix and flipper splits the profits with the homeowner(s) after selling the property (a.k.a. the magic closing). To me, it makes some sense to do this, because the flipper is making a very convincing offer and may be able to close the deal on the spot at a discounted price (and can do this strategy repeatedly). For the homeowner, they may be able to receive more money, than had they gone with a typical cash buyer and can feel included in the "investing process".So as a wholesaler, I was wondering if Fix and Flippers would be open to doing this themselves or along with a wholesaler who needs to find a fix and Flipper to split the profits to make the deal work. Secondly, I've only heard of 50/50 splits but I bet you could even do this at a 60/40 split of the profits (flipper/seller) if not more depending on other offers, seller motivation, and mine's or your negotiation. I would love to get your thoughts on this strategy and even feedback to revise it and make it work. Thank you in advance!
I have done what you are describing and there are a number of ways you can go about it. I have done it two different ways:
#1 A novation. A novation means to substitute one contract with another. I made a deal with the homeowner that they were going to move out, I'd use my contractors and money to improve the value of their property, then I'd list it with an agent to find an end buyer. They were guaranteed a certain amount from the sale, I'd get whatever was left. In order to somewhat protect my interests I had a purchase agreement with the homeowner that gave me the right to purchase it for the same amount that they were guaranteed from the ultimate sale that included a clause saying that I was allowed to swap that contract with that of another buyer if I was able to find one (which I did). So I never actually owned the property, we avoided one set of closing costs and I was able to increase both my profit and what the homeowner would have gotten from a sale had I just bought it and flipped it.
#2 Pretty much the same as step 1 except I skipped the "novation" part, meaning I had no purchase agreement with the homeowner. In this case we signed a simple contract laying out what I was doing, it said what the homeowner would get and what I would get. In this case we got creative and basically said any amount over X we'd split 50/50. It ended up selling for about 10k more than we expected so we were both very happy.
The key to both of these scenarios is that I never actually closed on the property myself. This not only allowed me to skip closing costs, but also prevented me from having to get an expensive short term loan and to also avoid paying carrying costs. It greatly reduced my risk so I was willing to accept smaller margins than I normally would have.
I'd strongly recommend you consult a real estate attorney to help with the contracts if you ever decide to go about either strategy or anything similar as you'll want a lot of specific language in there to CYA.
