Investment: Flipping Real Estate
“Flipping” real estate includes, but is not limited to, buying real property and then reselling it shortly thereafter. Many investors search for under priced “ugly” houses with the intention of merely adding some cosmetic enhancements to improve curb appeal and then selling them for a quick profit. Usually, people think of houses as the only way to make money “flipping” real estate. However, the concept can apply to other types of properties like raw land or strip centers.
Another strategy, known as “Contract Flipping,” does not require the buying and selling of the actual property. Oftentimes at the beginning of a project a developer offers homes at a reduced cost. Many accept earnest money and then payment in full is due upon completion of the home prior to moving in. The earnest money gives the buyer the right to purchase at, let’s say, $250,000. If the homes are selling for $320,000 one month before the move-in date, then the investor can exercise his option to buy and then, before closing, sell the house to another buyer and pocket the $70,000 profit without owning the actual house. This strategy has become increasingly popular in the condominium market. “Contract Flipping” is most successful in areas that experience rapid appreciation. The same strategy can be used even if the home is not new construction.
All examples are for educational purposes only, and should not be construed as investment advice. Always contact a qualified tax attorney or advisor prior to making any financial decision.
“Contract flipping” is similar to double closing. For clarity, here’s an example. Tom is selling his house for $100,000 even though it is worth $150,000 because he needs to relocate quickly for a job. Tom’s neighbor, Anne, spots the bargain property. She calls Wayne who buys under-priced properties and then resells them at market value. Wayne agrees to give Anne part of the profits for finding the property and calling him quickly, but Anne will not receive cash from him. So Tom officially signs the property over to Anne and puts the deed into escrow. Then Anne signs the deed over to Wayne and it is put into the same escrow account. To wrap up the process, Wayne signs the official papers and pays Anne $20,000 and buys the property from Tom for his asking price of $100,000. Wayne spent a total of $120,000 and now has the opportunity to sell the property for $150,000.
The Federal Housing Authority (FHA) requires that FHA-insured loan recipients own the property for 90-days to prevent double closing. These loans still work for investors that refurbish properties or wait for property values to rise. Fannie Mae, the company responsible for most residential loans, still allows double closings.
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Please note that this article is meant as an informational tool only. As such, any information contained in this article is not meant as and should not be construed as any type of advice from Provident Trust Group, LLC, as Provident Trust Group, LLC is a non-discretionary, passive, directed custodian who does not advise or solicit.
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