World Wide Property Sales
Flipping Houses Ethics: What's Your Name Worth
by Steve Cook
Since starting my own career flipping houses in 1998, I’ve seen a disturbing
trend develop and continue to gain momentum with regard to ethics in real estate
investing.
In my view operating your real estate investing business with integrity is a
non-negotiable item. I’ve written entire chapters about it in my own flipping
homes continuing education materials, so my students know exactly how I feel
about this. But I believe it’s high time to write a series of articles on the
topic and address some of the ethical issues I see my fellow real estate
investors allowing themselves to give in to. And the first issue I’d like to
address is the value of your word. Here’s a common scenario I hear:
Meet Joe
“Joe” is a wholesale real estate investor – that is, his business is to find
houses at a wholesale (below market) price, get them under contract to purchase,
and then assign his interest as buyer to another real estate investor who will
close in his place. Joe will collect a fee in exchange for selling his equitable
interest in the contract, and the investor who closes on the purchase will have
a great deal to keep or fix and flip.
Joe is flipping houses on the wholesale market, which is not unethical. This is
the same way most industries work – wholesale and retail. And Joe is not
actually selling a house, but is selling his interest in the contract – but
that’s a discussion for another time. So investor Joe finds a motivated seller
with a property he thinks might be a sweet wholesale deal…but he’s not really
sure. So he makes an offer. Seller counter-offers. Bingo, Joe may have something
here.
Now as I’ve written in previous articles, this is the point where Joe should
stop and really do his due diligence on this property. Moving beyond merely
smelling a deal, Joe should stop and really analyze the numbers, the market and
even his prospective investor-buyers to see if he really feels confident about
this before moving to finalize things with the seller. But this seems like a
little too much work right now for investor Joe – and this is where things start
to go downhill. Joe decides to go ahead and ink the deal, thinking to himself,
“Hey, no problem. If this deal turns out to be a stinker, I’ll just use my
weasel clause to back out – no harm, no foul.” No harm, Joe? Really?
The Unethical Safety Net
You see, Joe has a line in his contract that says, “This contract is contingent
upon approval of Buyer’s partner.” Who is Joe’s partner? It’s probably his cat,
Fluffy. Or maybe his wife, who isn’t all that happy about Joe’s crazy house
flipping business anyway and would probably dispute all of Joe’s contracts if
he’d let her.
Here’s what’s really going on. Joe understands that later on if he realizes
things aren’t nearly as rosy as he first suspected, he can just say, “Hey, my
partner (i.e. Fluffy) decided this deal isn’t a good fit for us after all. Sorry
about that, but I’m outta here.” I ask you – does this seem fair to the seller?
Does it seem ethical? The seller, who had doubtless already made definite plans
surrounding the sale of his property, is left with shattered hopes at the very
least – and sometimes a lot worse.
But this is exactly the type of approach I hear time and time again proposed as
a “safe way” of flipping houses by many real estate investors nationwide. In
fact many of my own colleagues who are teaching house flipping and real estate
investing are also teaching people it’s OK to do business this way. Let me stand
apart from the crowd and state in no uncertain terms that I do not approve of
this – nor do I teach my students to – and nor should you.
Are All Contingencies “Weasel Clauses”?
Almost all contracts have contingency clauses – valid conditions that must be
met in order for the agreement to proceed. And the legitimate, appropriate use
of contract contingencies I take no issue with. It’s the frequent and free use
of these contingencies as a replacement for doing your homework that I find
disturbing. As a professional real estate investor, you should always be 100%
honest with all parties in a transaction. When you sign your name to a contract,
do it with honor.
You should make every offer with the full intent of settling the deal one way or
another. If not, don’t ink the deal. If certain circumstances need to fall into
place before you can settle on a deal, present the offer, but clearly disclose
those circumstances upfront. Above all, be honest with the seller about your
position and your means. Doing business this way has never caused me to lose a
deal. And even if it had, there are been plenty of other profitable
opportunities for me.
Even if you set the ethics of it aside and look at it from a purely selfish
perspective, people tend to remember someone backs out of a deal – and word gets
around. A bad reputation will inevitably catch up with you (yes, even in a large
city). On the other hand, if you sign your name with honor, experience has
taught me time and time again that you will be much more successful. In fact, as
a result of honoring my contracts, I’ve actually had my offers accepted over
other, higher offers simply because my name has reputable value. Sellers know
that I will do what I say I will do.
Building A Good Name Hasn’t Always Been Easy
There have been times when settling on a deal seemed like it was going to blow
up in my face. But every time I was able to find a way to honor my word and put
the deals together, even though they weren’t great deals for me. I broke even on
one, and made about $500 on the other. But the bottom line is that I settled
them. I didn’t wait for something to happen. I got out and hit the streets. I
was aggressive in finding a way to make things happen the way they should.
Yes, I’ve encountered several situations where I couldn’t find a wholesale buyer
for a particular deal. Though my intention when I first started flipping houses
was to exclusively do wholesale deals, I was forced by my word to honor these
contracts and settle on the homes myself. In fact, this is how I started
rehabbing houses in the first place. Believe me, anyone and everyone who focuses
on wholesale real estate flipping will find him/herself in the same position.
When you come to that point, if you’re signing your name with honor, you will
find a way to settle the deal with integrity, and either fix and flip the house
or hold it until you can find a wholesale buyer (yes, possibly even at a loss).
The Bottom Line…
As an ethical real estate investor, you should sign your name to each and every
contract with honor. Anybody can go make an offer, but your name is your name
and it has value. If you sign contracts without producing, then in time your
name will have little worth. Contingency clauses have their place, but you
shouldn’t be using them as a safety net to sign up deals you feel unsure of. You
should sign your name with integrity and always do everything within your power
to keep your worth. In the long run your reputation as a person of integrity
will bring you much more profit and prosperity than any short term gain you may
experience by being a weasel.
Bio:
Since 1998 Steve Cook has flipped many hundreds of houses as an active
Baltimore-area real estate investor. Steve's unique specialty is the "flipping
homes 1-2 punch", a proven system of real estate investing that powerfully
combines wholesaling and rehabbing houses. Steve Cook is dedicated to helping
others succeed through understanding and aggressively applying his time-tested,
step-by-step approach to flipping real estate.