By Mike Baird
With over a thousand successful house flips in my career, you can bet I’ve seen a few really bad deals along the way. Bad flip deals happen for a lot of different reasons. Sometimes the local market takes a dive after you’ve finished rehabbing, and you have to sell at little or no profit to get out from under the house. Sometimes you find out that your rehab is going to cost more than you can make on the house at market value. Sometimes you fall in love with a flip house and end up in a bidding war that takes the price out of the reasonable range.
I’ve learned a lot about turning bad flips around and making the best of these situations over the years, but there’s only so much you can do on any house. Sometimes you just have to walk away, but it pays to know how to back out gracefully so that you don’t hurt your reputation as a reliable investor in your local market.
Backing Out of a Contract
First, let’s say that you’ve made an offer on a flip house, and the seller has accepted it. You have the house under contract, when you find out that it needs a lot more rehab work than you originally bargained for. It looks like your construction costs are going to be too high to make any kind of profit off of the deal, so you want out.
The best thing to do at this point is to talk to the seller and agree to cancel the contract if possible. Politely and professionally explain to them what you’ve found and why you can’t agree to the original offer. Then you may be able to negotiate a better price, or you can just walk away without the threat of the seller suing you for breaking your contract.
Backing Out After Before You Start Rehab Work
If you’ve already bought the house, though, you’re not going to be able to go back to the seller and demand a better deal. Flip houses are sold as-is, and a lot of the time you won’t be able to even get inside to take a look before you buy. That can lead to some interesting problems once you’ve made your purchase.
If you find out that this is going to be a bad deal for you after you buy the house (but before you start rehabbing), you may want to sell it at no profit or a slight loss to a wholesaler or another house flipper. It’s not the ideal situation, but it’s a lot better than sinking a lot of money into a rehab and then watching the house sit on the market collecting dust.
Backing Out in the Middle of Rehabbing
If you’re in the middle of rehabbing a house and you find out that it has a major problem that you just can’t afford to fix, you’re almost certainly going to lose some money on the deal. If you back out now, you’ll have the best chance of recouping your losses and moving on to a better deal, but you need to be careful.
Much like finding out that your flip is a bad deal before you start rehabbing, you’re going to get the most back out of it if you sell to another real estate investor. When you do this, you need to be upfront about what you’ve done to improve the property, what’s wrong with it and why you’re selling at a loss. That way, you’ll preserve your reputation and you might even make some valuable connections with other flippers for future deals.
Backing out of house flips is never an ideal situation, but you can make the most of it if you follow these tips. And, afterward, take note of what you learned and things to look out for to avoid the same situation in the future.