flipping

Hi all great site, here goes my first post.

I have been contemplating my first ip but my parents are in the background strenuously warning me off property investment at the moment. Apart from that, as a builder, I feel that I have an obvious advantage. I also want to get into it in a short term way until I have the confidence and knowledge to buy and hold.

Now, I have a good idea that if this was easy, people would be doing it but I just have to ask anyway. If this has been brought up before, and I'm sure it has, please let me know where. Is there any way to avoid actually buying the house in the first place? I.e. a contract with the owner whereby I do it up and collect the difference between agreed value and actual sale price or some kind of delayed settlement that gets transferred to the new buyer?

I realise now, this is probably the wrong place to post this but i'm sure someone will move it

hofmann05 said:

Is there any way to avoid actually buying the house in the first place? I.e. a contract with the owner whereby I do it up and collect the difference between agreed value and actual sale price or some kind of delayed settlement that gets transferred to the new buyer?

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Yes, there is a way. It is done though an instrument called an Option to Purchase. Essentially you pay a 'premium' (say $5-10K) to the vendor to purchase the property for $x on or before a certain point in time (by 'expiry') for a certain price (share market terminology equivalent would be the 'exercise price' or the 'strike price').

You now 'control' the property. You put in place the agreement that you will reno the property (with or without the vendors staying there - whatever you can agree on).

You then "assign" your Option to Purchase (before expiry) to the end buyer for a 'fee'. (essentially your profit from the deal). The end buyer just buys the house off the original vendors for what you had agreed at the beginning.

You can do a search in here on "put & call option".

The real trick is:
1. Finding a vendor who can wait for their money
2. Finding a vendor who will allow you to reno their property when they don't know you from a bar of soap and all they have from you is $5 or $10K
3. Finding a vendor that can understand the whole 'option' thing
4. Finding a vendor's solicitor who will not advise his clients to run a mile from such a deal
5. Finding a REA who can understand the whole 'option' thing
6. Finding yourself a solicitor who can work with you and do the whole 'option' thing.

It is a very valid way to do things - but it is difficult getting the people (above) on board with the strategy......but it can be done.

Propertunity said:

Yes, there is a way. It is done though an instrument called an Option to Purchase. Essentially you pay a 'premium' (say $5-10K) to the vendor to purchase the property for $x on or before a certain point in time (by 'expiry') for a certain price (share market terminology equivalent would be the 'exercise price' or the 'strike price').

You now 'control' the property. You put in place the agreement that you will reno the property (with or without the vendors staying there - whatever you can agree on).

You then "assign" your Option to Purchase (before expiry) to the end buyer for a 'fee'. (essentially your profit from the deal). The end buyer just buys the house off the original vendors for what you had agreed at the beginning.

You can do a search in here on "put & call option".

The real trick is:
1. Finding a vendor who can wait for their money
2. Finding a vendor who will allow you to reno their property when they don't know you from a bar of soap and all they have from you is $5 or $10K
3. Finding a vendor that can understand the whole 'option' thing
4. Finding a vendor's solicitor who will not advise his clients to run a mile from such a deal
5. Finding a REA who can understand the whole 'option' thing
6. Finding yourself a solicitor who can work with you and do the whole 'option' thing.

It is a very valid way to do things - but it is difficult getting the people (above) on board with the strategy......but it can be done.

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Very interesting - have you done something like this before?

Fantastic. I've asked a number of people about this and generally been met with a blank stare. Thankyou for setting that out for me. That does mean that the purchaser knows my profit margin which is a bit unsettling. Even as an established builder I can see how it is going to take some smooth talking to make it happen. I guess the bottom line is how much money will it will actually save as far as stamp duty, legal fees etc. One thing I was wondering was how it would work with the re agent. Would he get the commission twice? If so it might be worth using him to make the approach, if not you are going to have someone else trying to talk the vendor out of it.

I tried searching for the put and call option and also option to purchase but got nothing

hofmann05 said:

Fantastic. I've asked a number of people about this and generally been met with a blank stare.

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That's right

hofmann05 said:

Thankyou for setting that out for me.

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You're welcome. It has been a while so I am a bit rusty on the specifics - but broadly speaking that's how it works.

hofmann05 said:

I guess the bottom line is how much money will it will actually save as far as stamp duty, legal fees etc.

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SD is only paid on the Option premium (in NSW) not the full house purchase price (as this is paid by the end buyer). No legals as you are not actually buying the property (hopefully, unless you get to option expiry date and you have not found an end buyer yet! In this case you have 2 alternatives:
1. Forfeit your option premium to the vendor + the reno costs and let the property return to the vendor
2. Exchange contracts on the property yourself)

hofmann05 said:

One thing I was wondering was how it would work with the re agent. Would he get the commission twice?

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The REA only gets a comm when the property is actually sold to the end buyer.

hofmann05 said:

If so it might be worth using him to make the approach, if not you are going to have someone else trying to talk the vendor out of it.

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You still need to use the REA as the vendors have hired him/her to get the property sold.

hofmann05 said:

I tried searching for the put and call option and also option to purchase but got nothing

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Do a google search: site:somersoft.com "put & call" There are plenty of results there - about 50.

Also this guy has a CD on how option contracts work:
Rob Balanda on the Gold Coast
http://www.mba-lawyers.com.au/

Melbournian said:

Very interesting - have you done something like this before?

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I did a number of standard buy, reno, revals and was all geared up for this type of strategy but at the time we were gearing up with work in the Buyers Agency and it has been all go-go there ever since.

wow, what a great reply.

You answered my next question about whether or not I could pull out.

As a builder I have had clients and other people wanting to do pre sale repairs/tart ups but don't have enough money to do what needs doing.

It seems I could offer this as a solution. I could start with something fairly minor, like 5k/10k worth of work and see how I go. I have relatively low risk as all I really need to cover is contract price plus a bonus for hassle and stress and cashflow.

I am going to do some research before I ask any dumb questions

OK, done some reading, I like this stuff. Might buy some silver options while I'm at it.

There seems to be a number of ways to do the premium. The ones I can think of might be.

1. Cash up front as mentioned
2. $1 premium plus cut of the profit (my favorite at the moment)
3. Pay the mortgage for the contract period?


Correct me if I'm wrong but it seems to me that the main sticking point will always be the time frame. Anything less than three months to sell seems dangerous and even at that it could get stressfull. Yet if I asked a vendor for 6 months, I can only imagine they will get twitchy.

Could I write the contract with option 2 above but so that if I didn't sell within the time frame, I still get my money when the owner sells?

In this case, even if they took it back off the market, at least I should get my money one day and I will be acruing capital gains in the mean time.

To be safe, it would be nice if the cost of works were to be owed upon sale, regardless of sale value.

I appreciate that this amounts to a call contract without the put, which is seen as a no no. The vendor, however, would have no outlay and little risk and a relatively short time frame on the loss of control. I am still thinking about doing this sort of thing on a small scale to start with so the risk is low while I cut my teeth.

Also, could this be done without the put and call altogether where the owner retains control, especially when it's small scale. It would make it way easier to sell (to the vendor).?

Crikey, it's complicated but it's not. Looking forward to your response.

To those who read this before editing, sorry but it was a bit too rambly.

if you want to acquire the property, why option it?

why not just have a standard purchase contract with the conditions you and the vendor require within?

remember, the same reaction that gave you the blank stare is what you will be faced with when trying to present the contract.

google carly crutchfiled for what happens when you mix options and joe average. carly has in no way acted illegally or immorally, but as a general rule, joe average won't read their contract; just check their name, address and the $$$.

Hi Hofmann05,

There is certainly some knowledgable people on this site! Well done for not just leaping in - or being scared off, and doing your research first.

Looks like you've got your answers re: how to do the purchase, but thought I would make a quick comment on the 'parents' issue! Well meaning as they are (as my parents were in the beginning), I have always found it better to make my own decisions, do my own research and be super-wary (but open-minded) at all times. A little trick I have learnt over time is to not actually tell anyone who is not going to be 100% supportive of what you're up to (least of all your parents). My father persuaded me not buy a $195k property about 8 years ago which is now worth almost $600k. Gutted!

The other side of the coin is to make sure you associate with people with real experiences. A lot of seminar speakers etc. are all 'its so easy anyone can be a millionaire' but in fact it is NOT easy and a lot of people have been burned - hence your parents concern for you. However, there are a lot of people doing REALLY well in this economic climate - which is when all the best opportunities arise.

So anyway, as many people on this site will agree - you can easily lose money in property at the moment, but you can just as easily make money as long as you are savvy about the strategy you use and the process you take to get there.

Good luck!

This is pasted from another thread and seems interesting to me

Hey there,
There ar4e a couple of ways you can do this and get some funds building up along the way.

You can do a sandwich lease option and pre-advertise a handyman special before you get a lease option to get a potential handyman buyers list and then charge an option fee or an equity partner agreement with the handyman on the final sale price.

EG you get a lease option for say 300K for 5 years $1.00 down

You have a builder that is keen to make some money and you team up with him/her and go 50/50 split on the nett sale price .... that way you do not have to pay for the renovations and you get he work done for free + get 50% of the profits.....
An add that says something like..... (just off the top of my head)
CALLING ALL BUILDERS!
I need an investment partner.
You supply labour and hardware
I supply house and we split the returns
200% return on your investment gauranteed.
call ...... for more information.
You'll Kick yourself is you miss this!

It's funny Jane because my parents still talk about the house that got away because their parents told them not to! That was because of the house itself though, not the economy. I don't really follow the economy though, barely watch the news, so I often feel that I am not in a position to offer a valid argument. Hence why I want to flip some houses until I have educated myself enough to make my own decision on holding.

I have recently come back from the UK though and I am fully aware of how bad it is there and when you look at house values in the US and the rest of Europe, I do wonder how long we can maintain our property values. Anyway, that's a different story and I am not meaning to open any hornets nest on that subject, I really don't know my $#@ from elbow.

Aaran, I'm hearing you. It would be vastly simpler. The only real difference I can see is stamp duty. Nevertheless that might be the difference between whether a job is feasible or not. Also, it seems a bit mad to actually buy a house when all you want to do is flip it. I guess I was just exploring options. What sort of conditions are you thinking about?

I am sure the backyard blitz days are over and I would have to have a very carefully thought out strategy and budget to make this work at all so that will be my next research topic after this.

Thanks again for all your time.

hofmann05

Naysayers are the first to kill your dreams, or dampen your ideas. There are brilliant investing minds in this forum to keep you aware of pro's & con's. Looking forward to seeing your next move forward

hofmann05 said:

There seems to be a number of ways to do the premium. The ones I can think of might be.

1. Cash up front as mentioned

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Yes, the most common way.

hofmann05 said:

2. $1 premium plus cut of the profit (my favorite at the moment)

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Define "profit" and how it would be calculated.

hofmann05 said:

3. Pay the mortgage for the contract period?

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...and what if there is no mortgage?

hofmann05 said:

Correct me if I'm wrong but it seems to me that the main sticking point will always be the time frame.

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No, time is not always the sticking point. The main sticking point will be the fact that almost no vendor you approach with this strategy will have a clue what you're on about......and they won't be able to talk to anyone else that has done this, and when they ask their soli for advice they will (most likely) be warned off.

hofmann05 said:

Anything less than three months to sell seems dangerous and even at that it could get stressfull. Yet if I asked a vendor for 6 months, I can only imagine they will get twitchy.

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Look, the ideal part of the cycle to be doing this (in my opinion) is when the market demand for 'renovator delights' is almost non-existent. This means that no-one wants the property and it is sitting there on the market for month after month with no takers. You then ride in on your white horse and offer to reno the property to a standard that will appeal to the market and will therefore draw out a buyer. From the vendor's perspective, they've got nothing to lose. The property is off the market for 3-6 months (but it isn't selling anyway). They pocket the option premium of $5+K whatever happens. Worst case scenario is that you let the option lapse and they keep their reno'd house. Best case is they get a sale they could not have achieved with the unattractive property.

hofmann05 said:

Could I write the contract with option 2 above but so that if I didn't sell within the time frame, I still get my money when the owner sells?

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Write whatever you like, but the more writing you do, the more unattractive your offer becomes (to the vendors)

hofmann05 said:

In this case, even if they took it back off the market, at least I should get my money one day and I will be acruing capital gains in the mean time.

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One day....pie in the sky. That's no way to run a business. You won't be attracting CG's because the property would have reverted to the vendors on option expiry.

hofmann05 said:

To be safe, it would be nice if the cost of works were to be owed upon sale, regardless of sale value.

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Nice, but it anin't gonna happen.

hofmann05 said:

I appreciate that this amounts to a call contract without the put, which is seen as a no no. The vendor, however, would have no outlay and little risk and a relatively short time frame on the loss of control.

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There is nothing wrong with just doing the 'call', or in other words the option, but not the obligation, to purchase at a set time in the future. The vendor also runs the risk (since you are an unknown quantity to them) that you rip out their kitchen, put their bathroom in the skip bin out front, and then you don't turn up, ever again........and all they have to restore their property, is the option premium of $5+K or $1 ......and it all turns to something other than gold.

Thanks again proppy.. can I call you proppy?

Propertunity said:

Yes, the most common way.

Define "profit" and how it would be calculated.

The difference between the final sale price and the agreed p&c value + cost of works. Not really sure on how to calculate who gets what slice of meat.

...and what if there is no mortgage?

OK, but I would need the tennants to move out, I suppose I meant rent costs. Unless I could turn it over quickly though I would better to offer with the lump sum. Does this mean I have no holding costs?



No, time is not always the sticking point. The main sticking point will be the fact that almost no vendor you approach with this strategy will have a clue what you're on about......and they won't be able to talk to anyone else that has done this, and when they ask their soli for advice they will (most likely) be warned off.

OK

Look, the ideal part of the cycle to be doing this (in my opinion) is when the market demand for 'renovator delights' is almost non-existent. This means that no-one wants the property and it is sitting there on the market for month after month with no takers. You then ride in on your white horse and offer to reno the property to a standard that will appeal to the market and will therefore draw out a buyer. From the vendor's perspective, they've got nothing to lose. The property is off the market for 3-6 months (but it isn't selling anyway). They pocket the option premium of $5+K whatever happens. Worst case scenario is that you let the option lapse and they keep their reno'd house. Best case is they get a sale they could not have achieved with the unattractive property.

Gotcha. What sort of time frame should I be asking for? I don't actually imagine doing major works that take 3-6 months before going back on the market, not to begin with anyway.

Write whatever you like, but the more writing you do, the more unattractive your offer becomes (to the vendors)

OK

One day....pie in the sky. That's no way to run a business. You won't be attracting CG's because the property would have reverted to the vendors on option expiry.

Agreed all round.

Nice, but it anin't gonna happen.

Fair enough

There is nothing wrong with just doing the 'call', or in other words the option, but not the obligation, to purchase at a set time in the future. The vendor also runs the risk (since you are an unknown quantity to them) that you rip out their kitchen, put their bathroom in the skip bin out front, and then you don't turn up, ever again........and all they have to restore their property, is the option premium of $5+K or $1 ......and it all turns to something other than gold. :

You did actually say that I could pull out and forfeit the renovations in the first place, were you always describing a call only contract?

/QUOTE]

([Just one other thing. I think what I was trying to ask on my previous post was if there really is no business contract to cover what we are talking about?
I.e. Do the reno with a contract price, payable on sale, plus any proceeds over an agreed amount. Somehow contract in protection for everyone.

Oh, and appologies for the lousy formatting, haven't got my forum legs back yet.

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Hey Hofmann,

Out of interest mate what state are you from? I have a house in Brisbane that could suit this sort of idea.

Thanks.

Hi Hofmann

I think something like you're suggesting would work well with some small changes.
1 Owner gets agreed value on property
2 Builder gets paid market rate for all works completed
3 All extra profits split 50/50

I'd certainly be interested in something like that - it would even be worth me buying a house for you to reno!!

Regards
Locko

hofmann05 said:

Thanks again proppy.. can I call you proppy?

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Well I have been called a lot of things in my life and proppy is not one of them. I can't stop you of course, but how about Alan, Al, or Prop (which aussies must do as they shorten eveyone's monica).

hofmann05 said:

You did actually say that I could pull out and forfeit the renovations in the first place, were you always describing a call only contract?

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Yes, I was describing a call only contract

hofmann05 said:

Just one other thing. I think what I was trying to ask on my previous post was if there really is no business contract to cover what we are talking about?
I.e. Do the reno with a contract price, payable on sale, plus any proceeds over an agreed amount. Somehow contract in protection for everyone.

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Looks like you are getting some offers already, so it might work out.

hofmann05 said:

Oh, and appologies for the lousy formatting, haven't got my forum legs back yet.

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Wow, I did attempt this last night after a long day, but I wasn't up to it.

I am in newcastle.

As I said, I want to do this for myself but I am still nervous about taking the financial leap. I make good money and have good equity in my home so I am reluctant to put it all on the line in these uncertain times. I know how to put a house together but know little about sourcing the information, interpreting it and crunching the numbers to make sure it all works. I am sure it must seem easy to you guys, but I wouldn't mind getting a couple under my belt before I strike out on my own so if any one has any propositions, let me know.

Proppy, I love your ideas, it's brilliant. There is still relatively high risk for me if it doesn't sell in the time frame. I just saw my neighbours house sit for 4 months before going. It would take some setting up too and as you said, there are always going to be obstacles with that process.

Next question. I imagine with flipping it is ok to buy in established areas. The buying price doesn't matter so much because I'm not worried about gearing etc. The most important thing is that the potential for return is there so no point buying in bad areas.

For some time I have been under the impression from the few people I have talked to that you should be starting with a real banger for as little up front as possible. As a builder however, I know how much work these places need. I often think my clients would be better off knocking down and banging up a cheap project home. Recently did a job for a new kitchen, bathroom, laundry, deck for 80k. The rest of the house was still falling to bits though and for 150k they could have had a brand new house.

To cut a long story short I imagine buying places that are more just daggy than writeoffs. The question then is, can you still make money off places that are just daggy. Some or all of the items below are the sort of thing I am imagining doing.


Bathrooms are expensive and a pain in the *** as far as having a long critical path. I can change taps and hardware in a jiffy though, vanities and shower screens. I have a good operator who can spray tiles, including the floor and bath. I've only had him do repairs thus far which seemed good and I have seen sprayed bathrooms at the holiday inn. Very impressive and must be durable for them to have done it. So daggy but servicable works for me. If it needs replacing, thats doable also.

Kitchens can be replaced also but again, they can be sprayed if in good condition and the style isn't going to make it still look dated. New bench tops and/or doors are easy but you are stuck with existing layout and usually you are best just starting again unless it's doors only.

Knocking out walls is another easy one. As builders we charge a premium because it's structural but it's really very easy. Look up the codes, throw in a beam, fix the floor and plaster that puppy up. Sometimes there's bracing issues and that can't be ignored but still not a big deal usually.

I do a fair bit of floor polishing through the business so I get bargain basement prices. Always a good'n. Unless it's cypress, then I reckon you need to be creative. Maybe it's just me. If there is an existing hardwood deck, we can also restore them in much the same way.

Roofs, again, I get good prices or do it myself if it's straight forward. I still prefer just painting where possible, maybe new sheets facing the street.

I have a great renderer, I've been making a killing out of him on jobs, always a good face lift option. He will do a bit of plaster repair too but I have a gun plasterer if there is a bit to do.

Decks and pergolas I do in my sleep. My decks are pretty damb good. Can do up to 20m2 without council and a roof if under 3m off ground but this is often not possible. 5m x 4m is a nice sized area.

Have great paving suppliers and layers. Can get a $400/m2 look for about $150Paving is good because you can go as big as you want without council.

Driveways, seems in this situation, gravel is the go, maybe some stepping stones to get to the house. neat, tidy, cheap and makes a nice crunchy sound that only gets annoying after you move in.

Landscaping obviously and front fence, both easy to make look good. Plants seem expensive though but maybe I'm not looking in the right place. It would be good to have a bunch of awesome ones on hire in pots. Take em away when you sell like the guy out of flip this house got busted doing! If they are in pots though, it seems fair enough.

Front of the house is all important, I know that's not news. Pick a theme and overdo yourself. Cutesy putsy is always an easy one to pull off. there's loads of old world detail that can be stuck on for not much money. Use modern colours and you cover all bases.

I don't necessarily think neutral is the go. If you are trying to sell the dream, you want the paint to look like a designer just blew someones budget, surely. Stand them in front of a white wall and when they get home, it will blend in with all the other houses in their mind. I think it would also distract from any imperfections. If they don't like something, they know it's easy changed. My wife recently did a colour course actually. It's more your big ticket items like bathroom and kitchen that want to be neutral. Saw a purple kitchen the other day. Looked great to me but I hope there are still plenty of hippy buyers out there.

Carports and garages are important but require council for a double and in many other circumstances. A DA also puts the brakes on the whole thing. If you put in the DA when you started and supply just that with the property, it might be a selling point, without actually building it. Lay the gravel drive and gravel parking space so they can visualise. Shade sails are good and can even provide some rain protection if done right, plus the all important leaf, sun and birdshit protection for their jalopy. Can't remember exact exempt DA guidelines on them but if there is a problem, you just take down the sail and put it back up when they leave. You need to leave something for the purchaser to do anyway, because that's part of the dream. They want to add value, just like us.

That's all I can think of right now. This list isn't meant to be a statement of facts, just what I think would work. It is posted for comments so if I have missed anything or am wrong in any way, please say. Do you all think this sort of thing will make money?

I am really supposed to be doing other things right now, like working, but this is awfully good fun.

hofmann05 said:

Hi all great site, here goes my first post.

I have been contemplating my first ip but my parents are in the background strenuously warning me off property investment at the moment. Apart from that, as a builder, I feel that I have an obvious advantage. I also want to get into it in a short term way until I have the confidence and knowledge to buy and hold.

Now, I have a good idea that if this was easy, people would be doing it but I just have to ask anyway. If this has been brought up before, and I'm sure it has, please let me know where. Is there any way to avoid actually buying the house in the first place? I.e. a contract with the owner whereby I do it up and collect the difference between agreed value and actual sale price or some kind of delayed settlement that gets transferred to the new buyer?

I realise now, this is probably the wrong place to post this but i'm sure someone will move it

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Have to just ask a lot of people and look at a lot of property before you get the answer you want with options, or you can attend an options course for many thousands of dollars and I'm told it's much easier after that

Idea being you want to profit from a renovation and sell without putting too much money down? Plenty of ways to approach this other than options.

I did a buy/reno/reval using a standard put/call with resi contract attached for my last reno, 1k option fee refundable from sale price and 1k for the contract to be drawn up. Suited both parties which is what you need to find. Owner was selling a few of his properties and wanted to push a sale into the next financial year.

I use 33%+ as a rule of thumb for quick cosmetic reno's, eg: Buy for 300k then you need the finished products to be selling for around 400k, 33% being roughly 100k in the bread and butter suburbs. As a builder you have a wonderful advantage over a person like me who's main renovation skill is writing cheques to tradies

I'm always impressed by the higher end renos in more expensive suburbs, higher risk and higher returns, doesn't mean they are better projects but you are selling to people who can afford to pay an extra 100k because they really have to own that home! Type of suburbs where there is much more upside, say a very basic 2br house that might sell for 650k where there is finished product in the suburb selling for 1.2 M+, builder goes in there, lifts, raises, builds under, extends etc.. whatever the market is requiring, probably best left till the risk can be fully understood.