Getting a contractor to flip for you?

[Anonymous]

I'm wondering if this sort of arrangement exists:

Buyer identifies a house that needs reno. Contractor buys the house, gets the construction loan, renovates it under the guidance of the prospective buyer, then sells it to the prospective buyer. This allows the contractor to flip a house with a guaranteed buyer (although the issue is, of course, how to hold the prospective buyer to actually buying the house once the work is done), so it reduces their risk of being able to sell the house quickly and at a profit once the work is done. It allows the prospective buyer to ensure that the renovations do not exceed their budget, but basically roll the cost of the renovations into their mortgage, rather than having to take out a construction loan (where the rates are much higher) and carry two home payments while the renovations are being done.

Obviously there are a few holes, such as how you remedy the contractor's risk that the buyer purchase the house once the reno is done, and I'm sure I'm missing others. But I'm wondering if anyone has experience with this arrangement, or knows that for whatever reason, it can't be done.

[Anonymous]

What is the upside for the contractor? The plus of flipping properties is that (hopefully) you make a big profit to make up for the risk of having to buy a property with lots of unknowns. Here, the buyer and contractor would have had to agree on a price ahead of time, and if there are lots of problems the contractor eats his profit. If there are few problems, the buyer still lucks out by getting to buy a house which might go for more on the market. What is in it for the contractor?

You're not "ensuring that renovations do not exceed the budget" you're just making the contractor pay for overages.

[Anonymous]

Anonymous wrote:What is the upside for the contractor? The plus of flipping properties is that (hopefully) you make a big profit to make up for the risk of having to buy a property with lots of unknowns. Here, the buyer and contractor would have had to agree on a price ahead of time, and if there are lots of problems the contractor eats his profit. If there are few problems, the buyer still lucks out by getting to buy a house which might go for more on the market. What is in it for the contractor?

You're not "ensuring that renovations do not exceed the budget" you're just making the contractor pay for overages.

The contractor benefits because if they build the house based on the preferences (price and style) of the buyer, they ensure themselves a buyer. Whereas in a typical flip, the contractor takes a risk on a hypothetical buyer. Obviously contractors have a decent sense of the market, since they do this for a living, but given the number of flipped houses I've seen sitting and undergoing price reductions, it's not a sure thing. Further, couldn't the contract be written such that reasonable overages be taken into consideration? Otherwise, wouldn't contractors run into this with any renovation they undertake where they don't own the property?

I've seen something similar with tear downs. You put down about 20%, they do the tear down and rebuild, working with you to determine the house that's built. Once the house is built, you buy the finished product through a mortgage.