Re: Flippers, House Hustlers & Investors, oh my! (Penn: for sale, real estate)

[HarryRSpooner]

This thread sparked another area of interest which comes to mind:

What does everyone think about entities and individuals that engage in flipping "paper" instead of actual properties? You know - Acme, LLC enters into an agreement to purchase or sell 123 Main Street from Joe Smith and then flips the agreement to Jane Doe for the sales price + a so called assignment or release fee?

I've run into quite a bit of this on Craigs List. This appears to be right out of the old "Carleton Sheets" playbook of making money in real estate without using any (or much) of your own money. Without having a need for credit, etc.

Initially and instinctively, I think it's really sleazy and scummy. But it's perfectly legal and honestly I've been extremely tempted to do it myself. Sure it's work as far as researching prospective targets. It also takes some skill to market a property successfully as a non-real estate agent. But it's by no means impossible. I sold the first home I owned myself ironically to a real estate agent!

At the same time, I'm a big fan of the right to contract and freedom in general. Heck, I'm even guilty of being a capitalist pig. But I find some of this assignable contract stuff to be a bit unethical and underhanded. Perhaps, it isn't so bad when you specifically tell the property owner exactly what you are attempting to do as a flipper of paper. But even then I still find it so questionable.

Yes, I realize sometimes these paper flippers handle cases that some big wig real estate agents won't touch and they help folks dispose of an unwanted property. I also know that sometimes they help bring properties back from the grave by giving them necessary exposure. But why am I so torn on this issue? It's really love & hate!

Incidentally, I did buy one property from one of these outlets and paid their exorbitant fee because I felt it was still a good deal. It did cross my mind to contact the owners themselves and to have them cancel the contract they had entered into. But I didn't.

Another quick anecdote - I blew apart a paper flipper that was actually extremely shady with respect to a nice old black couple in Garfield. I ended up not "stealing" the deal because that house needed an immense amount of work. But I gave the property owner some good info and told them to just list their house with an agent. What does everyone here think about all of this?

[selltheburgh]

I know guys who do this and I've bought from people who do.

It is dirty mainly because you are dealing with rough properties and sellers who are usually pretty down and out.

On the other hand, those people need or want to sell.

We buy ugly houses does this as their main source of business.

[ferraris]

Could you explain what this is a little more? It sounds like it's the same model as a real estate agency, except that the agency actually buys the house before selling it to the seller. So it's kind of like selling a used CD to The Exchange for the quick money rather than putting it up for sale on eBay in order make a few more dollars, but take up more time and energy doing so?

[PreservationPioneer]

rhoproperties.com and pennpioneer.com are two that I know of. I think they market homes for sellers at a slight price markup, and keep the change. I don't see that it's particularly bad, but the sellers could market on Craigslist and online just as effectively as these people do. They could also list with a real estate agent and probably get more for their house (but maybe not after commission).

[selltheburgh]

These companies put option agreements on properties and have drawn out closing dates. Typically 180 or 365 days. Instead of closing on the property, paying transfer taxes and other fees, they instead try to find another investor to buy the house.

They obviously cherry pick the good ones and sell the rest to investors who pay cash for them.

[mdavis6890]

There is a term for this - it's called "wholesaling." It's perfectly legal, but there is some debate as to how "shady" or up-and-up it might be. Most would agree that the deciding factor is how the wholesaler is behaving. If he's disclosing his intentions up-front to both sides, he's pretty much in the clear.

It's also potentially a good way to make money without any to start with - but it's not easy, and most who try fail and give up (just like so many other things).

It works like this: Suppose that you (Abe) are selling your house and I (Bill) am the wholesaler. I go and offer to buy your house for a certain price, just like anyone else would. You like the price, so we write a contract and agree to seal the deal (close) in 30 days. The contract says "Seller: Abe, Buyer: Bill, $50000, on or before June 17th." Remember, I don't actually HAVE $50,000 to spend on this property. It's essentially an empty promise on my side, and this is one of the shady parts if it's not disclosed.

Now you can't change your mind. I have the right to buy your house as long as I come up with the money by June 17th - and I can sell that right. That's "wholesaling". I sell Chuck the right to buy your house according to the same original terms. Now the contract reads "Seller: Abe, Buyer: Chuck, $50000, on or before June 17th." (essentially, glossing over a few details)

In turn, Chuck pays me whatever I can get. Usually a few thousand. Why would he do that? Because I negotiated a good enough deal with the seller up-front that even after he pays me an "assignment" fee, he's still getting a good deal on it himself.

So why would a seller agree to this? Well, that's one of the shady aspects - often they don't know what they're getting into. They think they're selling to a regular guy, usually in what they believe is a "cash-only" sale, and therefore it can close more quickly and more certainly. Then they are surprised and angry when it doesn't turn out that way. A wholesaler is "selling" the seller a quick and easy close in exchange for a discounted price. As long as the wholesaler can deliver on that promise, everybody wins. When they fail, nobody wants to buy the contract from them, and it turns out they didn't really have any money after all, the seller loses out big - mostly the wasted time and emotion.

[Moby Hick]

Originally Posted by mdavis6890

The contract says "Seller: Abe, Buyer: Bill, $50000, on or before June 17th." Remember, I don't actually HAVE $50,000 to spend on this property. It's essentially an empty promise on my side, and this is one of the shady parts if it's not disclosed.

There's no way any seller would ever sign that contract if they knew the buyer didn't have the cash. The only reason to sell at a price that would leave a profit for a wholesaler is to get a buyer who can close quickly and doesn't stick in contingencies.

[selltheburgh]

Originally Posted by Moby Hick

There's no way any seller would ever sign that contract if they knew the buyer didn't have the cash. The only reason to sell at a price that would leave a profit for a wholesaler is to get a buyer who can close quickly and doesn't stick in contingencies.

That's very true and why there aren't as many wholesalers out there.

Penn Pioneer and RHO have the capital to buy the properties if they ultimately have to. Some other wholesalers do too.

I bought a house from a big wholesaler and at the closing I learned that they marked it up $15,000 from what the original seller agreed to. On the other hand, we bought it, put money into it and and pretty much doubled the value.

The shady thing on our end was we showed the wholesaler that we had funds to pay cash, but we ended up doing a hefty construction mortgage. We still closed around when we said we would, but didn't need as much money out of pocket.