The Biggest House Flipping Mistake

House_FlippingThe biggest house flipping mistake most real estate investors make is so simple to avoid, yet so devastating when it happens. Experts and beginners alike fall victim to it and sadly, they rarely recognize it as a mistake at all. Instead, house flipping investors tend to blame the economy, the real estate market or just plain, bad luck when it occurs. The reality is that this mistake can effect any property owner looking to sell his/her property and it has nothing to do with outside factors like the market or the economy. The reason why so many investors make this mistake is because they don’t know any better. In this article, you’re going to discover how to avoid the biggest mistake investors make when house flipping.

 

House Flipping Fundamental Truth

Studies show that some 60% of signed real estate contracts never make it to closing. In fact, this figure was taken from a period of time when the real estate market was booming, in the mid 2000s. That means that less than half of the buyers who make offers on houses ever actually close. That should be a wake up call to anyone who earns any income from selling real estate, especially those who specialize in house flipping. If any of your money is ever dependent on a prospective buyer purchasing your house and statistics prove that in 60% of cases, that buyer won’t make it to closing, wouldn’t you like to know how to ensure that the deal closes and you get paid?

 

How to Avoid the Biggest House Flipping Mistake

The most successful house flipping investors have at least one technique in common. Wait for it. The moment you’ve been waiting for is here. Drum roll please….The way to avoid the biggest house flipping mistake is to control the buyer, always, on every deal. What does that mean, “to control the buyer”? When you control the buyer, you are the one calling the shots in the deal. The problem is that most sellers of real estate are so scared of losing a prospective buyer that they let the buyer and his/her agent run all over them. This is especially true with house flippers because oftentimes, they are a twinge desperate to get rid of the property so they can realize their profits. Every day that the property is not sold is either costing the investor money from holding costs or at the very least, is not putting any money in their pocket. Real estate investors are notorious for allowing buyers to take control, call the shots and push them around because they are so scared of losing that buyer. Fascinatingly enough though, the more desperate you are, the more you need to control the buyer. If you don’t control your buyer, you will experience the 60% failure rate that is the norm. The only way to prevent it, is to control the buyer.

 

Top 3 Ways to Control the Buyer

My mentor is the one who introduced me to this concept of controlling the buyer when house flipping. I vividly recall being apprehensive to such a concept because I wasn’t keen on the idea of controlling anyone. I don’t like the idea of forcing anything upon anyone. I far prefer letting others make their own decisions. My fears subsided though, when he shared with me that applying this technique actually helps all parties involved. It helps the buyer purchase a home that they truly want to own. It helps the buyer’s agent representing the buyer get their commission. It helps the closing company get their fees. It helps the mortgage company originate a loan and it helps you get your property sold. Plus, you flush out the tire kickers and time wasters so that they don’t waste your time and you don’t waste theirs. So rather than feeling like you are being manipulative when you control the buyer, you are actually creating a better outcome for all parties involved. Here are the three main ways to control the buyer.

 

#1 – Pre-Approve the Buyer with Your Preferred Lender

Controlling the buyer starts before you ever get in contact with a Buyer. It starts with the listing remarks. We have our students add a sentence into the Realtor remarks on the MLS listing of any house flipping deal that reads, “Buyer may use their own lender to purchase this property but Buyer must get pre approved with Seller’s preferred lender upon submission of offer.” Why? Because a pre-approval letter from a buyer’s lender is not nearly as powerful as one from your own. When your preferred mortgage professional reviews the buyer’s ability to get a loan, you will then have a much more accurate and reliable picture of the likelihood that the buyer will actually close. Plus, for many house flipping deals, if you are not the owner of record for at least 90 days, other lenders may not be able to get the buyer a loan due to title seasoning restrictions whereas your mortgage person can. (and if you haven’t developed a relationship with a mortgage banker who can get no title seasoning loans closed, if you are flipping houses right now, you best get that fixed real quick!)

The scary thing you will actually experience out there is that Buyers’ Agents will drive prospective buyers around for days, weeks, even months, showing them houses and once they get knee deep into a deal, discover that the buyer can’t even qualify for a loan. It sounds crazy but it’s the real world. Some buyers’ agents are so desperate for a commission, that they will throw up a Hail Mary pass hoping for a miracle to occur in the end zone. You don’t need to tie your property up with these wing-and-a-prayer buyers. Instead, verify the buyer with your mortgage person.

What if the new buyer is an investor paying all cash? Then have that buyer send you an official statement from their bank showing the money is available in an account.

What if the new buyer is an investor who will be getting a hard money loan? Talk to the hard money lender directly, verify that this person is actually a hard money lender and not the buyer’s cousin and finally, make sure that the hard money lender is willing to fund the deal.

What if your mortgage person thinks the buyer is shaky and getting a loan for them would be very tough? Move on. If the buyer isn’t solid, you will tie your property up for a month or more, and when a real buyer does come along, your deal will be tied up with the lousy buyer and you will miss out. Have the courage to say no, or otherwise it will cost you more later. Besides, there are hundreds of buyers out there for your property. You only need one. Don’t sweat it. If the person can’t get a loan, don’t sell them your property, move on.

 

#2 – Require Non Refundable Earnest Money

This is hands down the most not-followed advice we give in house flipping. Hopefully you won’t have to learn this lesson the hard way. The concept is so simple yet rarely implemented. Simply put, you require that the buyer’s earnest money become non-refundable once the inspection period is over. Our experience over the past decade with more than 1,000 real estate transactions is that if the buyer will not agree to allow their earnest money to go non-refundable after the inspection period, they are not a real buyer at all, but instead, a time waster. Most house flipping investors are too scared to make this demand until they have been burned a few times. Then, magically, they muster up the courage to take the non-refundable-earnest-money stand because they don’t want to experience the pain again. Hopefully you don’t have to touch the hot stove to know that it will burn your finger. I’ve got news for you. It burns. And it hurts.

But you may say, “getting non-refundable earnest money is much easier said than done.” Yes, it can be against the grain, out of the box, and not the norm, but it helps everyone in the deal, including the agent representing the buyer. In fact, the buyers’ agent is usually the biggest opponent to the whole idea of non refundable earnest money. They will use phrases like, “In my 10 years as a Realtor, I have never done a deal where my buyer’s earnest money is non-refundable.” To which you can reply, “There’s a first time for everything.”

When a buyer is serious about your property and is not concerned about being able to qualify for a loan, they won’t run away when you ask for non refundable earnest money after the inspection period. But the more a buyer balks at a non-refundable earnest money request, the more likely they can’t get a loan or they aren’t serious about your property. The end result of NOT requiring non-refundable earnest money is that a buyer will string everyone in the deal out for 30 days or more and then, when the loan doesn’t go through, or they find another home that interests them that week, they will leave the deal scot-free having wasted everyone’s time. Requiring non-refundable earnest money on house flipping deals is the essence of controlling the buyer.

 

#3 – Your Post Inspection Response

After the inspection is complete on a house flipping deal and the report is provided to the prospective buyer, the buyer sometimes freaks out. Inspectors are paid to find problems. If they provide a report to a buyer that is basically blank, the buyer gets upset and wonders why they paid someone $300 for a blank piece of paper. So the inspector must justify their existence on beautiful. perfect, even new built homes. In other cases, inspectors find legitimate issues that were crucial for the buyer to discover prior to purchasing. Be prepared for a mini-meltdown from the Buyer when they read the inspection report. It’s normal. However, your post inspection response is critical to controlling the buyer.

If they send you a list of demands that must be fixed prior to closing, you have a few options. The first option, which most people do, is to frantically call contractors, licensed and bonded electricians and plumbers, and other tradesmen, to hammer out the huge punch list the buyer required. This response is the opposite of controlling the buyer. The second option is to ensure the earnest money is non refundable and then to go to work on knocking out the post inspection demands of the Buyer. Although better, its not the best response. The third option is the one we usually recommend, which is to whittle down the list with the Buyer (or buyers’ agent) to just the absolute necessities, the things that must get done or they will walk away. The deal killers on the list. Then, with help from a general contractor or handyman, come up with the cost to fix those items. Then, reduce the purchase price by that amount and let the new buyers decide on their own if they want those things fixed or not. They may just take the reduced sale price and leave everything as it is. Meanwhile, you didn’t have to come out of pocket to fix anything or deal with any further delays that could occur if the contractors didn’t get the work done on time. But most people choose option 1, they handle all the line items on the post inspection counter, and then, once all the work is done, the buyer doesn’t close for one reason or another and the investor is now out more money out of pocket, is blaming the economy, the real estate market or just plain bad luck and then vow that house flipping doesn’t work. I’ve seen that unfortunate result from beginners and experts alike.

 

The way to avoid the biggest house flipping mistake is to control the buyer. You control the buyer by having your mortgage banker per approve the buyer, requiring non refundable earnest money after the inspection period and offering to reduce the purchase price for just the deal killing inspection items. You’ve heard my take on this subject, what’s your response to all this? Any house flipping horror stories you want to share about letting the buyer take control of the deal?

Comments

  1. Heidi Herrera says:

    Thanks for sharing these tips regarding house flipping.

  2. Excellent video! Please keep me on your email list.

  3. Thanks for sharing how to control the buyer in a positive wi win way onboth sides. My question is how do go about finding a Broke who will only review the loan only? What type of arrangement do you establish with this Beoker as they may never close on this mortgage? Also how do you figure the amount for earnest money? I would like to do these right when I get started Thank you very much for your great presentation of just enough and very important information.

    • Phil Pustejovsky says:

      Wow, quite a few questions. I’ll do my best to answer them. Q#1 – Where to find the right mortgage broker takes up several pages in my book How to be a Real Estate Investor. Check it out to learn how to do that. Q#2 – If you call a mortgage banker and ask if they would be OK with you requiring every prospective buyer of your property to get pre-approved with them, what do you think they would say? Exactly. They would be thrilled. The more prospects they get, the better. Q#3 – GREAT question! And the answer isn’t a neat and clean “1% of the sales price” or “at least $2,000”. No. It’s truly a case by case basis. Here’s the two questions you want to ask yourself:
      1. What amount is enough to cause the prospective Buyer some pain if they want to walk away?
      2. What amount is going to cover at least the costs associated with the time the deal will be tied up with this Buyer?
      You want the minimum amount where those two questions to intersect.
      If you want to take your real estate investing to the next level, consider applying to be my next apprentice.

      • Hi Phil,

        Thank You… for sharing your expertise on how we can close more deals. A 60% failure rate is just too high. Many GURU’s say, “Control The Deal”… but they never say how. Your the first one that put it in “Black and White” Your engineering background exposes the “Not-So-Obvious” What a GREAT tip! Thanks for being our virtual coach.

  4. Kurt Spitzer says:

    I just want to thank you for the FREE advice on 3 ways to control the Buyer- great stuff and that will be implemented with every deal from now on. Am putting out offers on houses weekly now and need to make 2013 profitable. Best to you.

  5. Guy anders says:

    That video was great a house I flip years ago, the buyer gave me a list of repairs and replacements an arm long it was a control method to get the asking price down,however I countered with locking in the earnest money. Instead they ask for closing cost of 2,000which they didnt have (the hidden problem) I closed wrote it off on my taxes my broker wasnt nervous any longer . Win win deal control THE BUYER

  6. I love the part about the non-refundable earnest money deposit after the inspection period! Being in this great business you come across all kinds of people who can “talk the talk”. But you and I know that the only thing that truly talks is MONEY. Thanks for the tips!

  7. Another method for dealing with the overzealous inspector that points out every unimportant thing wrong with the house is to allow the buyer to hold money in escrow. Then, you agree to fix the problems within thirty days AFTER the sale or buyer keeps the escrow amount. Obviously this goes through both attorneys. I never make the fixes. It is a small amount as a discount to the buyer, but gets the deal done.

  8. Sound advice!

  9. Bob Cherry says:

    Excellent advice Phil, thank you.

  10. Skot Mason says:

    True pearl of wisdom delivered with amazing clarity and brevity!

  11. Darrel Simon says:

    Its funny Phil…..I just had a situation that confirms this need to control the buyer. In our case? We had a problem because we had to go through an agent on this transaction (long story). The agent destroyed the deal because suddenly with a new “screen” the buyer got bold! The thing is that the deal was inchoate arms length, discounted for the buyer and exactly what the buyer wanted…..but the minute the agent got involved the buyer suddenly wanted this and that.

    I will say this: there is not doubt that without control there can be no leverage. Without leverage human nature being what it is, and with the need to complete a transaction? One is asking for trouble when they give up any control they have over the deal.

  12. How do I go about finding a no title seasoning mortgage person?

    • Phil Pustejovsky says:

      I apologize if this sounds like a shameless plug in answering your questions in the following manner……In my book How to Be a Real Estate Investor, I have an entire chapter devoted to building your team and I spend several pages describing step by step, in detail, how to find a no title seasoning mortgage person. Again, sorry I can’t just drop several pages of text into this little comment box.

  13. Jeffrey Smith says:

    I would suggest for item #3 (Your Post Inspection Response) to offer a credit to buyer at closing for the cost of the deal killers, provided that his lender will approve it (some lenders don’t allow cash back at closing to the buyer). Cash back at closing is a very strong incentive for the buyer even when they are secretly not intending to perform the “repairs” or when their lender wants the credit escrowed to pay for actual repairs. This tactic also allows the higher price to be recorded in the public records which helps to boost comparable sales for the neighborhood.

    • Phil Pustejovsky says:

      Agreed. I should have made that point more clear in #3 because that was my intent. You give the buyers a credit and whether they take it in cash or just reduce some of their expenses, it means either less cash out of pocket to pay closing costs or more cash in their pocket; which either way, usually really makes the buyer happy.

  14. Good job. Thank you for the info. I love your advises. I’m just starting to get into the flipping business and I just paid some smock (big real estate Guru from TV) a set of CDs along with a bus ride for $1500.00. Man if regrets could kill. Phil, may be you could hock me up with your book.

  15. Richard Dutton says:

    Hi Phil,
    In the video you stated that there were examples of the verbiage used in your MLS and real estate listings that people could use in the blog below the video. I have been unable to find these examples. Is there a specific way to access this info. Any help would be greatly appreciated.

    • Phil Pustejovsky says:

      The language is written in the article here on this page. You may have to read the entire article to grab the exact language.

  16. hi Phil great info thank you for sharing I’m trying to get into flipping houses where can I get more info on this subject.. Thanks

  17. Controlling your buyer…not quite as drastic as it sounds but more like making sure you have a truly interested and qualified buyer to avoid spinning your wheels with the ‘tire-kickers’ and ‘lookie-loos’ – these are great tips that create a win-win with as little time wasted as possible. Great advice and I’ll be recommending your book 🙂

  18. Hi Phil,

    i started to watch your presentations these days and Your presentation approach is very passionate, easy to follow, clear and understandable.
    I just have seen this video and I can only to mention that topic two is very understandable, in country I am coming form is MUST, usually fixed as percentage ( 1%-3%) of sales value of property.
    Even more, if You are selling high value property, percentage is higher and only serious player will come on stand.
    It is so common that nobody makes any objection regarding topic No2, but different countries, different rules.

    Anyhow, I will continue to watch Your videos and learn as mach and fast as possible.

    Thank You for all of them.

  19. Ederson Ordonez says:

    Hi I am Real estate agent in Florida and I doing this for two year but i think the best way to make money is flipping houses so I bought my first property. so I think I am doing very good but I learn good tricks in yours video.

    thanks for this videos. thanks for your help

  20. I really appreciated this advice on improving prospective buyers. The video mentioned links to exact phrases for requiring a pre-approved buyer (5:45 in video). Can you help me find these links? Thank you, Kevin.

  21. Hi, may be I am missing something here but i have a hard time understanding why a buyer would agree to non refundable earnest money before having inspection report in it’s desk? there could be a million things wrong with the property that are not visible from first sight (asbestos, termites are just few examples….) Inspection report could exposed deal breaker issues, like these two mentioned above. Astute buyer, would not agree to that. Correct me if I am wrong and thanks for your feedback.

  22. Really enjoy your teaching style. Still not understanding why on earth a buyer would agree to non-refundable earnest money. So the inspection report comes back with all kind of crazy problems and the Buyer says “Yikes!” What am I still not seeing here? I want to be able to articulate this idea to the buyers agent. Yes I am new at this…Thank you

    • Phil Pustejovsky says:

      That’s why you hear me say, “non-refundable earnest money AFTER the inspection” AFTER is the key term in that phrase. AFTER the inspection. Of course the buyer can get their money bac if the inspection comes back with items that they are uncomfortable with.

      • Hi Phil,

        I too am new at this and not quite grasping the logic. Let’s say the buyer puts down the earnest money and schedule inspection. After the inspection is done and the buyer gets the inspection report, and the content of the inspection report scares them from moving ahead with the purchase, how can I at that point tell them “too bad”? Doesn’t the buyer at least get a chance to vet the property before they make a big ticket purchase? My apologies in advance for bothering you on the same topic, and my gratitude for all your training and guidance.

  23. I am a investor who always bought the properties and hold for long term. but this property I decided I want to fix and sell it. I am ready to sell my house now. I sell the house FSBO(I never sell a house before). I did everything as you mention “Pre-Approve the Buyer with Your Preferred Lender” and “Require Non Refundable Earnest Money”. but one thing buyer realtor brought up is that if my lender put up their credit, it will hurt their credit score. is that true?

    • Phil Pustejovsky says:

      I have no idea what you asking.

      • The Investor says:

        I think the question is confusing because they used the wrong word in explaining how the buyers credit score would be hurt. Instead of saying that his (the seller) lender would “pull” up the buyers credit info. OR make an “inquiry” into the buyers credit and by doing so the buyers agent is saying that inquiry would be a negative mark on the buyers credit history.

        After watching the video if the buyer is balking about a mark against their credit history then you should move onto another buyer. The way I understand credit scores that one inquiry would not be significant and if they are in fact already pre-approved then that mark should not be detrimental to their obtaining that loan. I my opinion it just one of the many ways the buying agent will attempt to not allow you to control the buyer and when these issues present themselves ….well…. politely explain to that buyers agent there is always a first time…..

        Hope I understood and explained that properly and it was helpful . Good Luck !

      • Your “asking for nonrefundable ernest money” works great. I just closed my second house with the way you have taught. buyer agent are tough. They will do what ever they can and tried to go around it. a lot of buyer turn away from the property. but I stand on my ground. The lesson I learned is that you only need one buyer to close.

  24. Hey Phil,
    I was taking your free classes on real for beginners and I can’t get back to the website can you help

  25. Phil,

    Do you have a link for (or a copy of) the “Lender Approval” and “Non-Refundable Deposit” verbiage for the Realtor Remarks in MLS.

    Keep up the great work!

  26. Hi Phil,

    I really like and enjoy your youtube presentation. I live in Australia. I wish I could get help from you in investing property.

    Thanks for sharing

  27. Alan Dolensky says:

    Hi Phil,
    Spent countless hours listening to your You Tube videos. Simply fantastic! I could not find the verbiage for for the lender approval and non refundable deposit in the MLS. Please send email. Thanking you in advance.

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