Flipping
Flipping Purchase Contracts
By
Sep 20, 2005, 23:41

Generally, when you sign a contract to buy or option a property, you may later assign that contract to another investor. This technique, which is called contract flipping, offers significant profit opportunities with relative little up-front cash investment.

A developer announces plans to build a luxury high-rise condominium project with units priced from $225,000 to as much as $775,000. However, the units won't be ready for occupancy for 18 months. In the meantime, buyers can contract for a unit with an earnest money deposit of $5,000. Your pick a choice-view unit priced at $500,000 and give the developer $5,000 of earnest money. During the construction period, this project receives rave reviews and wonderful publicity. Buyers are now signing up on waiting lists. The value of your reserved unit jumps to $550,000. Yet your purchase contract gives you the right to buy it at a mere $500,000. What do you do? If you want to quick 45,000 profit, "flip" your contract. Assign you right to buy this unit for a payment of $50,000. You are just made a nine fold return on your original investment.

If this new project receives bad review, if mortgage interest rates skyrocket, or if the local economy goes into the tank, the market prices of these units could fall, and you may have to forfeit our $5,000 deposit. Contract flipping, then, is more like speculating than investing.

You need not limit use of this technique to projects under construction. Some savvy investors scount the market for bargain-price existing properties, place the seller under contract with a small deposit, and then locate another investor who will pay them a fee (premium) for the right to step in and buy the property on the favorable terms previously negotiated. Although any type of contract flipping has its risks, for investors who are skilled in spotting under priced properties, this technique can yield high returns in short time period.