What is a "Power Flip" and How Does it Work?

  A Power Flip occurs when you negotiate a purchase agreement with a seller, but never actually consummate a formal sales contract, and you have no plan of actually purchasing the property or taking possession of it. In a Power Flip, you execute no formal sales agreement as with a Contract Assignment. Instead, you secure control of a property with other legal instruments, and become the seller’s proxy. By becoming the seller’s proxy, you have the right to transact the sale of the property on behalf of the actual owner(s) of a property.

     Once you've executed a formal agreement with the seller using the proper legal documents, you will have control of the property (without actually owning it!). You next set out to find a formal buyer- if you haven't done so already. Once you have obtained a buyer and executed a purchase and sale agreement on behalf of the owner, you schedule closing escrow. At the closing, you execute all closing documents on behalf of the owner, including the funds disbursement authorization.

     Based on your written agreement with the seller, you will get paid your fee and be reimbursed any expenses out of the closing proceeds. This typically includes reimbursement of any money advanced to the seller, as well as the transaction profit.

MATRIX RATING: Medium Risk, Low Complexity

INVESTOR LEVEL: Novice, (with the help of a good title agent).

WHAT'S REQUIRED: Basic understanding of contracts and marketing is helpful. An investor friendly title company is a definite plus, due to the "creative" (but perfectly legal) ways you might have to get paid at closing escrow.

WHAT'S OPTIONAL: If you have no cash, but have a credit card or credit line, you might need it to pay minor expenses, or reinstate a defaulting loan if the property is in foreclosure.

WHAT'S ADVISABLE: Decide up front whether or not you are going to prepare and package the deal for another investor or keep it for yourself. If you plan to keep the deal, then you want to use the “Wholesale Purchase” Profit Model instead.  If on the other hand, you decide to sell a deal, sell your concept to potential investors in advance, so that when you actually find an opportunity and lock it down with the homeowner's consent, you can offer the deal even before executing all of the documentation.

If your investor likes the deal based on your analysis and the preliminary due diligence you've done, you can get the homeowner to execute the documents in the name of the investor so you don't have to do any "assignments." This makes for cleaner deals. We have the specific analysis tools, and documentation you will need to  properly analyze, structure and package the deal for yourself or a third party. It will give you HUGE credibility when it comes time to sell the deal to another investor.

ASSESSMENT: Power Flips are a bit more complex than Contract Assignments since they may utilize "custom agreements" such as "agreement for services," "short term loans" or other creative instruments for legitimately collecting cash at closing. However, if you take the seller’s proxy approach that we advocate, you legally become the seller, and can legitimately disburse seller proceeds to whomever you choose. No “creative” methods of compensation are needed with this approach.

Using a Power Flip, an investor-buyer can make money without having to be a licensed real estate agent, while not actually buying a property or taking title to it. Although a contract is not legally binding without consideration, investors routinely execute contracts without formal real estate earnest money deposits. Instead, they may execute other agreements with consideration such as paying the reinstatement on a defaulting mortgage loan in foreclosure, or advancing cash to the homeowner in exchange for legal control of the property. At the end of the day, the best scenario is to associate these costs and expenses with the purchase and sale contract as non-refundable earnest money deposits to bind the transaction under well defined real estate laws.

BENEFITS: With a Power Flip, the investor-buyer essentially acquires the right to sell the property by obtaining the legal right to do so on behalf of the owner. Instead of assigning the contract to another buyer who will actually execute the closing documents with a third party, the investor-buyer in a Power Flip gets paid at the formal closing from title escrow. If the investor has put up money on behalf of the seller, he will want the right to represent the seller at closing in case the seller attempts to renege on the agreement and not close per their formal, written agreements. The investor does not have to take title to the property and does not have to show up on public record as the seller or owner of record. For all intents and purposes, a Power Flip enables the investor buyer to virtually become the seller, getting all the benefits without the risk.

CHALLENGES: In very recent times, banks, other institutional lenders and title companies have become increasingly "difficult" when it comes to cash disbursements to "non-licensed" entities at settlement. The proper use of appropriate legal instruments gets around this, but finding an investor-friendly title company will mitigate most of these issues in any case.