Many homeowners know their houses can be sold for a handsome profit, if only they had the time, skills, or money to fix them up. Unfortunately, they lack some or all of the ingredients. Some flipping experts recommend that you partner with homeowners. The homeowner supplies the property and sometimes even the cash for improvements. You provide the know-how and the labor. At the end of the process, you market and sell the house and split the profits in a pre-agreed proportion.
I do not recommend this strategy because it has so many opportunities for misunderstandings or abuse. The biggest risk is that the homeowner will be uncooperative during the renovation or repair process and effectively sabotage your efforts. At the end, he or she could have a much more valuable home, and you could have nothing. Be careful.
If you insist on using this strategy, though, you must have two things to be successful. One is an option agreement allowing you to buy the property at its current fair market value at an amount set out in the option. The other thing you need is a very clearly written contract, in plain English, listing each party’s responsibilities and expectations. Include a budget and a timeline. Who will be responsible for lawn care and keeping the house clean during the marketing period? If some home furnishings and clutter will need to be in storage during the marketing period, put that in writing, along with who will pay for the storage.
Be sure to specify how the profits will be split and if the profits will be calculated before or after rehab, holding, and sale expenses. Include several examples of calculations, including a best-case, mostlikely-case, and worst-case scenario. Discuss and write down your agreements regarding what will happen if things go wrong. What if the homeowner does not keep the house clean during the marketing period and intentionally or accidentally sabotages your efforts, and as a result, the house does not sell? Are you just out of luck, can you force the owner to pay for the value of your services and expenses, or can you take a lien on the property? You may need the assistance of an attorney for some of these issues.
Most states will allow an option holder to market property as if it were his or her own. If you try to sell someone else’s property, but do not have some type of ownership interest or option, you could be guilty of selling real estate without a license. Check with your state’s real estate commission before embarking on this strategy. Ask specifically about your ability to market and sell property in which you have an option interest only. A list of real estate licensing authorities and their websites is in Appendix E.