Flipping condos is one type of what I call the reservation flip. The name comes from condo flipping, but it can apply to a wide variety of circumstances.
When a developer plans a condominium project, he or she must usually presell 50% or more of the units. This is done through a process called reservations, for which the purchaser pays an earnest money deposit. If the going rate for similar condos today is $149,000, the contract will entitle you to buy your condo when construction is finished for $149,000.
Let us say you put down earnest money in the amount of $5,000. The hope is that, eighteen months from now when the project is completed, similar condos are selling for $249,000. You have a contract that entitles you to buy a condo for $149,000. You can sell your contract to someone else for $80,000. That repays your earnest money and makes you a $75,000 profit. The buyer will be out the $80,000 he or she paid you, plus the $144,000 he or she will need to close, after crediting the earnest money. The buyer spends $224,000 total and receives a condo worth $249,000. Everyone wins as long as the market keeps going up dramatically.
That is the catch, that the music will stop before you have your seat. If the market is stagnant or declines, you will have to go through with the closing and will be stuck with a condo you cannot resell. Worse, you might be unable to borrow enough money to close and the developer will sue you. Many people have been driven into bankruptcy because of condo flips.
The reservation flip is not limited to condos. It can be done on any property for which you sign a firm purchase contract and then hope you will be able to sell the contract to someone else for a profit before you have to close. Remember, this is different from an option flip. With an option, you are under no obligation to complete the purchase. On the other hand, the money you pay for an option contract is not refundable.