Ask Cornerstone: Our fix-and-flip has a potential end-buyer who wants to customize our flip. How do I minimize risk?
We have a property under contract and were planning on doing a typical fix-and-flip. However, we are in discussions with a potential end-buyer who would be buying the property after completion. Ideally, we would lock-in the sales price before actually closing on the property and get a contract in place for the end-sale. The end-buyer could then pick out their finishes, colors, etc. How do I minimize our risk of the buyer canceling the contract?
Approach it like new home builders do. The buyers purchase the base model, but any upgrades are paid for up-front and funds are released thru escrow to the builder. Those released funds for the upgrades are not refundable.
You create a contract with all the standard items and quality you usually put in when you are flipping a house. The features and quality you are putting in are ones that produce desired profit and fast sale. Any upgrades or changes that buyer makes that cost more or make the house less salable exposes you to a higher risk. Consequently buyer has to pay up front for all upgrades and changes. Also, I would have the buyer release reasonable nonrefundable deposit if you are customizing the house in a way that makes it less desirable.
You can’t put yourself in a position where you customized and over-improved the house and then the buyer backs out without your extra costs being covered.