How to Flip a Real Estate Contract

How to Flip a Real Estate Contract

Flipping a real estate contract - often referred to as “wholesaling” - is a fast-paced strategy for turning a profit on a property without ever owning it outright. By securing a purchase agreement at one price and then assigning that contract to another buyer for a fee, you can generate income without large upfront costs or the long-term risks of property management. Whether you’re a first-time investor looking to break into real estate or a seasoned pro wanting to diversify your tactics, wholesaling can be an effective way to leverage market opportunities while minimizing financial exposure.

Here’s a comprehensive guide on how to flip a real estate contract successfully, from laying the groundwork to closing the deal.

1. Understand the Basics of Contract Flipping (Wholesaling)

1. Definition
   • You identify a property being sold at below-market value (often from a motivated seller).
   • You secure the purchase agreement with the seller (the “contract”).
   • You assign or sell your rights in that contract to a third-party buyer at a higher price than your contract price, collecting a fee (the “assignment fee”).
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2. Reasons It’s Popular
   • Minimal capital investment compared to traditional property flipping.
   • Reduced risk because you’re not closing on the property or holding it long-term (if done correctly).
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3. Legal Considerations
   • Wholesaling laws vary by state. Some states have regulations or licensing requirements (e.g., requiring a real estate license) if you repeatedly engage in wholesaling activity.
   • Always include an “assignability clause” in the contract to ensure you can legally assign the contract.
   • Consult a real estate attorney to ensure you comply with local laws and regulations.

2. Build Your Foundation

1. Assemble a Buyer’s List
   • Before you get a property under contract, it helps to know who the potential end buyers are. These can include rehabbers, landlords, and other investors looking for discounted deals.
   • Networking at real estate investment clubs, landlord associations, or online forums (e.g., BiggerPockets) can help you connect with local investors.
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2. Learn to Estimate Property Values & Repairs
   • Wholesalers typically focus on distressed or undervalued properties. You need to understand how to estimate a property’s after-repair value (ARV) and the total repair costs.
   • This knowledge helps you negotiate a deal with enough margin to attract end buyers.
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3. Secure Financing (If Necessary)
   • Often, wholesalers do not need long-term financing since the goal is to assign the contract.
   • However, sometimes you might need short-term “transactional funding” if the deal structure requires you to briefly take title before assigning to the end buyer.

3. Find & Evaluate the Property

1. Lead Generation
   • Look for motivated sellers through direct mail, driving for dollars, online ads, or local foreclosure listings.
   • Network with agents who specialize in fixer-uppers or probate properties.
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2. Due Diligence
   • Determine the property’s fair market value.
   • Assess necessary repairs and estimate rehab costs.
   • Calculate your offer price such that there’s enough spread for you to make an assignment fee while still leaving the deal attractive to your end buyer.
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3. Negotiate & Get the Property Under Contract
   • Use standard real estate purchase contracts, ensuring they include language about your right to assign the contract.
   • Put down a reasonable earnest money deposit (often refundable if your contract includes contingencies like inspection or financing).

4. Prepare the Contract for Assignment

1. Include an ‘Assignment Clause’
   • A typical assignability clause might read: “This contract may be assigned by the Buyer, without prior permission from the Seller, to another buyer/investor.”
   • Some contracts require the seller’s written approval for assignment. Make sure you have clarity on this point before finalizing the deal.
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2. Add Contingencies (When Possible)
   • Inspection contingency to ensure property condition.
   • Financing or partner approval contingencies, giving you time to line up your end buyer.
   • These contingencies protect your earnest money if the deal doesn’t work out.

5. Market the Contract to End Buyers

1. Leverage Your Buyer’s List
   • Send deal details to your investor list (property address, pictures, repair estimates, ARV, and your asking price).
   • Highlight the property’s potential profit margin after repairs.
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2. Advertise Widely (If Needed)
   • Post in online marketplaces (e.g., Zillow, Craigslist, Facebook Groups, local real estate investing groups).
   • Attend local real estate meetups and pitch the deal to landlords or rehabbers.
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3. Disclose Your Role
   • Clearly communicate that you are assigning your contract and not selling the property directly.
   • Provide the timeframe and any necessary contingencies or closing requirements.

6. Execute the Assignment

1. Use an Assignment of Contract Form
   • This is a separate document from the original purchase contract. It legally transfers your contractual interest to the new buyer.
   • Include details such as your assignment fee, the original purchase price, and the new buyer’s contact information.
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2. Collect the Assignment Fee
   • Typically, your assignment fee can be paid upfront (in escrow) or at the closing. It depends on how you structure the agreement.
   • In many cases, you will be paid at closing when the end buyer finalizes the purchase.
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3. Coordinate with the Title/Escrow Company
   • Ensure the title or escrow company has a copy of both the purchase contract and the assignment agreement.
   • They will handle the formal closing process and disperse funds according to all agreements.

7. Close the Deal

1. Confirm All Documents
   • Purchase Agreement (between you and the seller)
   • Assignment Agreement (between you and the end buyer)
   • HUD/Settlement Statement (final breakdown of costs and fees at closing)
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2. Be Prepared for Contingencies
   • If your end buyer’s financing falls through, you may need to find an alternative buyer or renegotiate.
   • Maintain open communication with all parties (seller, buyer, title company) to ensure a smooth closing.
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3. Get Paid
   • At closing, the title company will disburse your assignment fee once the transaction is completed.
   • Always double-check your final settlement statement to ensure accurate distribution.

8. After the Deal

1. Follow Up
   • Thank the seller and the end buyer for a smooth transaction.
   • Maintain relationships; they could lead to referrals or repeat business.
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2. Evaluate Your Results
   • Review what went well and what could be improved (e.g., offer price calculations, marketing efforts, timing).
   • Refine your methods for finding and securing deals.
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3. Plan Your Next Move
   • If you want to keep wholesaling, continue building your buyer’s list and refining your property acquisition strategies.
   • Consider branching into fix-and-flip or buy-and-hold strategies once you’ve built up enough experience and capital.

Key Takeaways

• Flipping a real estate contract (wholesaling) can be a profitable approach for investors who want to limit their risk and avoid large capital outlays.
• Legality and ethical practice are key: Some states require licensure, and you must disclose your intent to assign.
• Success factors include finding motivated sellers, accurately evaluating properties, negotiating attractive prices, and building a solid network of end buyers.
• Organization and communication are everything. Staying on top of documents, deadlines, and contingency periods will ensure a smoother closing process.

By following these steps, you can create a framework for identifying deals, securing properties under contract, and successfully flipping those contracts to end buyers for a profit.