In this blog, I'm going to share with you how you can flip property without actually owning it. This means you need less cash and you make a higher return on investment (ROI). I’m going to teach you how to find these properties and how to sell them to other people at a profit. But first of all, why should you be flipping property?
Why Do People Flip Property?
Flipping property can be a great way to make your lumps of cash. Typically you need to find a property that needs some cosmetic improvements. Maybe there's another problem with it, such as it can't be mortgaged, or it's uninhabitable. You can then fix it up and sell it for a profit. Normally when you flip property, you've got to buy it, you then do it up and then you sell it on for a profit. This means you've got to buy with cash, or you can put down a 25% deposit and obviously get a 75% mortgage. You’ve then got the buying cost such as the legal costs and stamp duty. Money will be spent on doing the property up as well, and then you have to wait six months before actually selling.
The six month rule is where if someone's buying a property, if you have owned it for less than six months, they think something strange is happening. So to genuinely flip property, you have to hold it for at least six months before you sell it onto someone else. However, there is a different way. There's an easier, more profitable way for you to do this. That's what I'm going to share in this blog. Instead of buying the property, you could control it with a Purchase Option.
You don't need a big deposit or a mortgage, you don't have to pay stamp duty and you can sell it before six months. This means you make a much better return on your investment because there's less money use.
” Instead of buying the property, you could control it with a Purchase Option.”
Assisted Sale Property Investing
So how do you actually do this? Well, this is known as an assisted sale, that's the name of this particular strategy. You're not buying the property, but instead you're helping someone sell their property. Now, first of all, you need to find a motivated seller. This is someone for whom the speed and certainty of the sale is more important than the amount of money they're going to get for the transaction.
Depending on the situation, you can sell this back through an estate agent, sell it at an auction or go direct to another investor. Obviously you've got to make sure the correct paperwork is in place to protect yourself, including a power of attorney.
You might be thinking, why on earth would an owner agree to this? You know, why don’t they just do it themselves? Well, often they've been struggling to sell their property. Maybe they don't have the money required to do it up and make it more marketable. Maybe they don't want the hassle or have the time to do it themselves. You’ve got to really kind of get into their shoes and understand their perspective. The final thing is, you can actually give them more money this way than if you did a straight forward purchase with them.
“You don’t have the cost of arranging a mortgage because you don’t actually own the property.”
Options Only Work In Certain Circumstances
One thing I want to be really clear with, options only work in certain circumstances. They are just one tool you should have within your investor toolkits, and every deal could be different. In the right circumstances however, this could be better for everyone involved.
Remember you could potentially give the seller more money doing it this way than you could with a traditional sale. After all, most sellers want to get as much as they possibly can from the sale. So when you secure a purchase option, instead of buying a property, you will actually save money. You don't have to pay stamp duty because you're not buying it, someone else is going to buy it. The end buyer is going to pay stamp duty so you don't have to pay it.
You don't have the cost of arranging a mortgage because you don't actually own the property. You're not buying it, so you don't need a mortgage. You don't have six months of mortgage payments. Remember when you flip a property, if you've bought it, you have to own it for at least six months, whereas you don't have to own it for as long, so you don't have these payments. In fact, you don't even have any mortgage payments because you've never bought the property. You will have some legal costs as you need to do things correctly through solicitors, but probably not as much as an actual property purchase. All of these savings could be shared with the owner.
These are expenses you would normally incur, so instead you can give some of that money to the owner. They are then getting more than they would in the traditional sale.
Finding Purchase Option Properties
Now, how do you find these kinds of deals? Well remember, we're looking for properties with problems such that the sellers might be motivated to do an option. Maybe they're trying to sell, but they can't sell. Maybe the property needs a lot of work. Probate properties are perfect for this. So when someone dies, they might leave their property in the family. It goes through probate, very often these properties need work done to them. They're a bit dated, they might be fine but just dated. The owners don't have the money or inclination to do it. They just want to sell it cheaply and you can help them with that.
Estate agents can also be a great source of these deals. However, just to be clear here, you can't go to agents and say, can you tell me about any deals I can do as an option? Because they just don't understand it. Alternatively, you could go directly to the vendor with a marketing campaign, such as the landlord letters, newspaper adverts, leaflet drops, all those kinds of things that are great ways of finding motivated sellers.
Let's talk a little bit about working with estate agents. The reality is most estate agents have never heard of purchase options or purchase lease options. So if you go in talking about that, they just won't get it, they won't know what you're talking about. It’s then really important to understand that. For this reason, they're often not open to the idea of doing options. Particularly if you said, hey, I want to buy this policy sometime in the future not now, they're going to be thinking about their commission that they're not getting straight away. Yet it can be a great solution for everyone involved. Offshore, you're going to help the seller get rid of their property and the agent's going to get their full fee. So really everyone should be happy about this.
Right now, the agent is not making any money because they're not selling the property. There's a risk if they don't sell this property, that seller might go to another agent or try and do it privately, which is maybe how they reached out to you in the first place. So we want to work with the agent to help them get their commission, we're not trying to cut them out. Now, you might think this sounds great, but how do I actually make money from it, how do you get paid? Well, you're going to agree to an option price with the owner of the property.
You secure the property on an option using the correct paperwork. You then add value through renovation, you sell the property at the full market value to an end buyer, and then the owner receives the agreed option price. This would be lower than the sales price, so they get their money. Then you get the difference between the option price that goes to the owner, and the market value that you've achieved by selling it to a normal buyer, once the property has been done up. This way you get your money back that you've put in for the renovation plus the profit. Your flipping strategy results in the same amount of cash profit that you would get normally, but you've had to put less money. All because you haven't actually bought this property.
“You’ve got to really kind of get into their shoes and understand their perspective. The final thing is, you can actually give them more money this way than if you did a straight forward purchase with them.”
Selling the Property At the End of an Option
You want to have a backup plan just in case you can't sell the property onto someone else. A backup plan because at the end of the option period, the owner gets the property back. You don't really want to have their property up and then give it back to them. So how do you actually sell the property? Well, there are three main ways of selling.
First of all, you can get an estate agent who can sell the property for you, or you could potentially sell a property through an auction, or you could sell onto another investor. If you're the person selling it, not through an agent or through an auction, then you really need to be a compliant deal sourcer to do that.
But if the property is sold through an auction, or an estate agent, you don't need to be compliant because you're not the person selling it. It's the agent who's selling it for you and they're going to get their commission for doing that.
As part of my final words about this strategy, sometimes you don't need to do any work to the property. You could just flip it straight through the auction. Of course, you've got to have the correct paperwork in place to protect yourself, to make sure you get paid. You’ve also always got to do due diligence on the deal. It's got to be a really good deal. You can only do this deal if you would do it as a purchase, if you've got the necessary funds.
So we only do an option when it is a great solution, not just because you can do it.
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