By Chris Anderson, Ph.D.
"I made $50,000 in 2 months!" exclaimed the preconstruction investor. "So you were successful at flipping your project to somebody else?" I asked. "Well... no. But other condos in the same project are selling for $50,000 more than I paid!" the investor replied. "That's great," I tell the investor. But, there is a lot that this investor and many others may not know about flipping their preconstruction project.
Let's do a simple question and answer session about preconstruction flipping to make sure everybody is up to speed on this important topic.
Q1: What is meant by flipping, or assigning a contract on a preconstruction project?
A1: In some preconstruction contracts, it is possible to assign your right to purchase a specific unit before closing. Many people refer to this as flipping. These days, developers will allow flipping only with developer approval if they allow it at all.
Q2: How does a contract assignment work?
A2: This greatly depends on the developer and the contract YOU signed. Let me give you a "typical" flipping example. Let's say you purchased a preconstruction condo for $425,000 and you are now flipping it to another investor for $550,000. In addition, let's say you had to put 10% down, or $42,500. With a series of steps usually coordinated through the developer and their sales agents, the new buyer puts down 10% or $55,000. The developer may then release your funds (this does not always happen) so you may get your $42,500 back minus some fees. BUT WHERE'S MY $125,000 PROFIT you might ask. Well, your profit from flipping is typically waiting for the final buyer to close.
Q3: How much would I net by flipping this property?
A3: Whoever resells the property for you will want a commission which can vary greatly. For purposes of example, let's assume 5%. For a $550,000 resell, then you would be paying $27,500 in commission so your net profit would be a little less than $100,000. Of course, there can be several other fees tacked in so make sure you understand what will be charged in advance.
Q4: Once I have completed flipping the property, I have no further responsibility, right?
A4: Wrong in most cases. You are the original buyer of the property and if the second buyer does not complete the purchase, then the developer will then expect the person flipping to close at the original purchase price. In this way, it is quite different from selling a piece of property in which you own title.
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Q5: What if the developer does not allow flipping?
A5: This is a common situation these days. For many projects, you would do a simultaneous closing with the new buyer. That is, you will close with the developer (to purchase), and will close with the new buyer (to sell), on the same day. There are additional fees associated with this approach hence why many investors would rather assign their contracts. Your other option, before you enter into the hard contract, is to just not do business with this particular project.
Q6: Why Do Developers Not Allow Flipping?
A6: This answer can be twofold. First, they may not want investors in their project at all. While this is the topic for another complete article, suffice it to say that for many developers, investors present more difficulties than solutions. Second, the developer may have additional units to sell and they do not want to compete with the investors that are flipping their properties.
Q7: I have a reservation for a project that has now gone up in value. Can I assign it?
A7: Not really. The reservation is not a solid contract thus the person you are flipping to has no idea of what they are really buying. The price could change, the amenities could change, or the developer could cancel the project. Usually flipping only occurs after you enter into a hard contract.
Q8: How do I find a buyer for my contract?
A8: Realistically, the developer's sales staff is probably going to be your best bet unless your project is very well known. This sales staff probably already has a list of interested parties that have contacted them about the project. Once the project sells out in preconstruction, people will keep calling them and thus they have a ready made buyer's list.
Q9: Am I better off flipping now for a profit or holding until close?
A9: Take a coin out of your pocket, flip it, and then... In all seriousness, this is a question that we all face. Issues that come up include a) do you believe the market is still going up, b) how far away from closing are you, c) if you wait, will more investors be trying to sell at the same time, d) etc. Quite simply, this is a question that only you can answer based on your objectives and your assessment of the current market conditions.
Hopefully this has given you a better understanding of how you can accomplish flipping your next preconstruction project and what some of the realities of that may be.
About The Author
Dr. Chris Anderson is the founder of http://www.GetPreconstructionDeals.com and is referenced in many venues including the New York Times and USA Today. Get his weekly, thought provoking articles by signing up today!
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