What is a “Flip” Really?

By: Neil Siskind, New York Lawyer http://www.siskindlawfirm.com

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Article:

The word “flip” or “flipping” is used to describe the process of buying a piece of property and reselling it either following, or without making necessary repairs and/or improvements. But, the term is actually not meant to apply in this manner.

The word “flip” in a real estate context actually applies to a contract assignment. This occurs when a buyer of property secures a contract to buy a property and then assigns- or “flips”-  the contract to a different buyer in exchange for a fee from such new buyer. So “flipping” really applies to selling contracts- not the underlying property for which the contract was made.

Residential property contracts are not typically ever “flipped”. This is because a seller wants to know exactly who is buying their house and that they have the credit to secure a loan. Absent a clause allowing for an assignment or “flip” of the contract to a third party, residential contracts can not be flipped. Contracts for commercial real estate are more normally the subject of an assignment or “flip”, as long as no provision in the contract specifically prevents it. In this day and age, where creditworthiness and the ability to secure financing is difficult, contracts may prevent a contract flip or at least require seller approval.

The reason that it is noteworthy to explain to what the word “flip” applies is because investors who are not professional investors, but who are simply looking for a house to improve and sell can easily get caught up in the terminology. When someone sets out to “flip” a house, their own verbiage can have a psychological impact on their expectations. A “flip” of a house is exactly the same as buying a house, putting in the work needed and putting it back on the market to sell for a profit. This takes knowledge, skill and time, and has risks. When a person thinks of the transaction in these terms, rather than just spouting out the word “flip”, it can hit home that there is a risk, capital costs and possibly a long time frame needed to take into consideration in the process. People believe that if they use the term “flip” that it will all go much faster. The word “flip”, historically, is one used by professional investors to lock up “commercial” properties, the contracts for which they feel they can assign to another buyer without ever having to close. They are making a bet. Moreover, they often used a skilled lawyer to negotiate a contract they can get out of if the “flip” cannot be achieved.

Another word or term that aspiring investors use today is “wholesaling”. This is more akin to a true “flip”, in that the original contract buyer does not intend to close on the property, but, rather, seeks to assign the contract to a new buyer in exchange for a fee.

A rose by any other name is of course, still a rose. But one needs to be careful not to call  a “rose” a “rose garden” in order to convince oneself that it can only bloom and be fruitful, but never die on the vine.

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