Flips

A flip is a property investing strategy where you sign a contract to buy a property and then sell your interest to a third party before having to settle or close on the deal.

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An example...

Andrew finds an absolute bargain of an investment property in Richmond - an inner city suburb of Melbourne approximately five kilometres from the CDB. He knows that it is worth about $400,000 - but the seller only wants $320,000 for a quick sale; she needs some quick cash to settle some urgent debts.

Andrew doesn't have the cash to settle on the property but he does know that he could sell the deal to someone else who does.

He completes a full due diligence before signing the contract on a 30 day settlement with a deposit of $5,000.

Elyce is a property investor with significant means behind her. A mutual friend puts her in touch with Andrew after Andrew made a post on an Internet forum outlining that he was selling a property for less than market value.

Elyce is very interested and offers Andrew $390,000. Andrew can't believe it and accepts immediately. They arrange the dates so that there is a simultaneous settlement between Andrew and the original vendor and also Andrew and Elyce.

Both feel it's a win-win outcome as Elyce picks up an investment property that fits with her wealth creation strategy (she plans to renovate it) and Andrew has made a lot of money for simply brokering a deal.

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What are the critical success factors?

The critical success factors in a flip are:

1. Finding undervalued properties

In the example above Andrew stumbles across an undervalued property.

But in reality finding cheap properties, especially in a 'hot' market where prices are rising daily and properties are selling quickly, is going to be difficult.

Like most creative investments however, the time that you allocate to sourcing opportunities will have a direct impact on your success. If you're already stretched for time because you're working long hours in a job then flips won't feature greatly in your property investing portfolio.

On the other hand, if you have lots of time then it may only take one or two deals to potentially replace your normal salary.

2. Finding someone to flip to

Your role in a flip is to dispose of your interest in the contract to another party before having to settle on the property. In other words, you are acting as a private broker by seeking to pass on the property to another person and receive a commission in the form of the difference in your buy:sell price.

While you might be able to locate a cheap property, your eventual success remains dependent on finding someone who wants to buy it off you.

That's why it's critical for flippers to maintain a database of investors who are time-poor and are happy to pay for you to bring them deals.

3. Affordability

If you can't flip the property before settlement date then you'll have to buy it. This means that you have to be conscious of the financial impact upon your wealth creation plan should this happen.

4. Lease-option profitability

Flipping in Australian is not as straightforward as it seems to be in the United States. There are three issues that I can immediately think of that will impact your lease-option profitability. They are:

1. Stamp Duty

   You may find that there will be double stamp duty payable on a filp.

   In the example above Andrew would have to pay stamp duty on a purchase price of $320,000 and Elyce would have to pay it on $390,000.

   While there may be ways around this, such as buying an option to purchase the property rather than agreeing to buy the actual property, the legalities are complex and you should consult a lawyer before setting up the flip deal.

2. Licensing Issues

   Because you are selling a property that you don't technically own and making a profit as a result, it's likely that you are going to need to be a licensed real estate agent to complete a flip.

   If you're not a real estate agent then it doesn't mean that you can't do it... you're just going to have to operate under the auspices of someone who is. This means that you'll need to pay some kind of fee to ensure you are operating within the law.

3. Capital Gains

   You should also be mindful that if you buy and sell something that triggers a capital gain in less than 12 months then you will not be eligible for the 50% Capital Gains Tax discount that individuals are otherwise entitled to. See your accountant for more information.

Taking these three issues into account, let's dissect Andrew's profit on the basis that he has to pay a real estate agent $3,000 to operate under his agency.

Contract sell price	:	$390,000
Less Contract purchase price	:	$320,000
Less Legals	:	$2,500
Less Stamp Duty	:	$14,860
Less Agent's fee	:	$3,000
Capital gain	:	$49,640
Capital gains tax @ 48.5%	=	$24,076
(assuming top marginal income tax rate)
After tax profit	:	$25,564

While this is still a great outcome for Andrew, it demonstrates how a $70,000 book profit ($390,000 - $320,000) can be whittled away to just $25,564 after tax and expenses.

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Where to next?

• Buyer Beware is an excellent resource that will help you to avoid buying a property lemon. Find out how you can protect yourself with the five templates that make the due diligence process easy!
   
• Have you considered other positive cashflow strategies? These include Buy & Hold, Lease-Options, Wraps and Renovations...
   
• Return to Property Investment Strategies introduction.