Flipping Houses Ethics: Helping Motivated Sellers - Without Ripping Them Off
Since starting as a real estate investor in Baltimore in 1998, I’ve been of the firm conviction (and have consistently taught others) that running your real estate investing business with integrity is a non-negotiable.
In fact 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 a troublesome trend of investors in the flipping houses business who are all too willing to bend the rules – or even break them outright – for the sake of a deal has led me to pen a series of articles on the ethics of real estate investing – and particularly in the area of flipping real estate, which is my specialty.
To this end I feel it would be appropriate to talk about how to ethically navigate the often murky waters of fairly working with motivated sellers when flipping real estate.
But before we go there, we should clarify exactly what a “motivated seller” is.
Sellers Versus Motivated Sellers
A seller of real estate is someone who wants to sell a piece of property, whereas a motivated seller is someone who truly NEEDS to sell their property. This house has become a monkey on their back, and they’re willing to do a lot more than the average person to get out from underneath it.
Now most people typically decide to sell a piece of property for an ordinary reason, like a growing family needing more space, better school district, job opportunity, simple convenience, “moving on up” to the east side, etc.
But when someone really NEEDS to sell, it’s a different story. These people are typically dealing with things like foreclosure, a time-sensitive job transfer, medical expenses, divorce, notable damage, unpaid taxes, settling an estate, pending bankruptcy, and the like. We’ve all either known or actually been the people who find themselves in these unfortunate circumstances.
These people don’t just want to sell, the truly need to. And they’ve reached a point that their motivation is big enough to warrant selling the property through unconventional means, and probably at an unconventional, below market price.
The fact is, motivated sellers are the life-blood of real estate investing and the house flipping business. In order for real estate investors to be able to purchase a property at a low enough price to be a good investment, the property owner must typically be in a situation in which a distress sale makes sense.
Is Flipping Houses a Moral Dilemma?
To many, this presents a moral dilemma. Aren’t real estate investors really just feeding off the desperate situations of needy people? Isn’t this unethical?
It’s a fair enough question. But I quickly and with all integrity submit to you that the answer is unequivocally “NO”, but it bears further explanation.
Let’s imagine for a moment a world without real estate investing. There are a heap of issues with this, but let’s just look at the one of motivated sellers.
In each of our lives, we will find ourselves in bad circumstances, and feeling some level of desperation. It’s unavoidable. None of us can escape it. It’s really just a matter of “when” not “if”.
And when desperate times hit, all we really want and need is a solution, if one is to be found. And if we can find a solution, we will (and should) aggressively pursue it because of the relief it will afford us from our desperate situation, whatever in fact it may be.
Solving “House Problems”
Motivated sellers are people who have a house problem of some sort on their hands. And the longer they have to deal with it, the more it feels like a ticking time bomb. They’re looking – no, they’re earnestly hoping and praying for a solution. And you, Mr. or Mrs. Real Estate Investor, can be just that solution.
In a world of no real estate investors, who’s going to be willing to take a piece of property off your hands immediately, in “as is” condition, and with as few questions asked as possible? In a world without this person, how the desperate property owners in the world ever hope to escape the house problem that’s now sucking the very life out of them?
I would submit to you with absolute conviction and integrity that the relationship of motivated seller and real estate entrepreneur is a very healthy, mutually beneficial one, when practiced with integrity and fairness.
But be careful, O savvy investor, that you don’t cross a line. It can be all too easy.
Houses Versus People (People Win)
You see, the more imminent the reason pressing the seller, the more motivated they tend to be to get their problem solved as quickly and cheaply as possible.
They’re looking for a way out. And if you tell a motivated seller who absolutely must have $25,000 in two weeks that you will buy his or her home within two weeks and he or she will walk away with that $25,000, you can imagine the immediate relief they must be feeling.
To you, it’s a business deal. Your goal is to try to stay as unemotional and unattached to any one property or deal as possible, lest you make a poor business decision.
But to the seller, it’s all about the emotions – and particularly the relief they will feel when this house problem is no longer on their back.
So while you don’t want to make emotional business decision, you cannot forget the human factor. This is not a “house business” we’re in. It’s a “people business”.
When you contract with a motivated seller, he or she immediately starts making specific and definite plans based upon that transaction, and the money and/or relief it will afford them. They expect you to honor your commitments because you’re a professional in whom they’ve made the often very scary decision to place a very large amount of trust.
Now What Do You Do?
Now what do you do in two weeks if you haven’t been able to flip their house to a wholesale buyer?
Do you “weasel” out with an escape clause? How about the one that says your partner, who is actually your dog, must approve of the purchase?
What happens to the seller at this point? With you backing out of the deal, they can no longer live up to their obligations and commitments. Their plans have been shattered. Maybe they’ll lose an important opportunity. Perhaps their child won’t receive a college education. Maybe they’ll lose their home altogether and get nothing. Maybe they will have to risk their life and delay a necessary medical procedure.
Personally, I don’t know how some people do it. I can’t sleep at night signing a contract knowing that I’m going to stick it to the seller if I can’t find someone else to flip the home to.
The relationship between the motivated seller and the real estate investor is a vital, essential one, when practices fairly for all parties.
But the moral of the story is that you should be firmly and absolutely resolved to do whatever it takes to do what you say you’ll do, and to not take advantage of motivated sellers. It will always come back to haunt you.
About The Author: W. Steve Cook
Since 1998 Steve Cook has been actively flipping houses (www.flippinghomes.com) as a full time, Baltimore-area real estate investor and has taught thousands of his students how to follow successfully in his footsteps.
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