BiggerPockets

It's Time To Make Lemonade

Before I get into the story here are a few things that can help you keep from failing.

Regardless of your situation the following does apply. Did you keep a running up-to-date record of all costs associated with your flip? If not, either get on the ball or get out of the business. You will FAIL!!!

Purchases
When it comes to tracking expenditures I'll give you the best piece of advise to get you on the right track. A credit card purchase should have either the "flip" items or not. Never mix for the same purchase on a CC. Get an online account at the banks where you have credit cards and use the download transactions option. You will now have the exact amount of each purchase and the vendor. For stores like LOWES they will have the store # listed too. You can open the downloaded file with your spreadsheet software.

The Story
I purchased the foreclosure well below market, fixed it up doing all the "right" things and at way below the going rates and costs. I contacted a knowledgeable broker who was recommended to me by my mentor. The broker and I sat down and reviewed our findings of area comps. Since the nearby homes are all different with none to compare to we decided to use "price per square foot" of the home sales to determine an asking price. Then I listed the house for sale at a great price (for this house). The listing company is a major brand name nationwide real estate firm.

Before I go any further let me tell you about the property. Great curb appeal. The lot is considered a "double lot". Very large size (just under 10,000 sqft) with plenty of room for anything one might think of doing with it. This property is a corner lot, with one large shade tree, new porch, solid foundation, and fairly recent aluminum siding. That's just to name a few of the positive things.

So the property gets listed and we have one showing the first weekend. Unfortunately, since the showing we have not realized any bites or interest. A week or so passes and now it's time to think this over. Taking into consideration the expected financial situation of the profiled buyer I lowered the price and I offered to pick up $5,000 of their closing costs. Granted there are many houses in the area that are for sale but they are either in a need of rehabbing or priced $30k+ above my price. So, another week or so passes without any activity. It is now time to roll up my sleeves and get creative so I prepared and sent out individual packets using high quality paper, colored picture of the property and an offer letter to every Church in the zip code (over 40 mailings). The letter presented a very generous donation offer to the church (1% of the sale price) if anyone from the church or referred by the church purchased the house. Still no bites! What gives?

Now I'm getting serious about the matter at hand. It is no longer a pricing question for me. Of course I want to find out if the price is too high but maybe it is that people are not looking to purchase a house at any price? First thing is I talk with my broker and he just happened to have spoken with another broker who focuses selling and buying homes in my area. I tell my broker to call the other broker and offer the house during the current week at a ridiculously low price that is way below value and even a steal for another investor. Mind you, this house is picture perfect and almost all new inside too. New kitchen, plumbing, bathrooms, 2-zone HVAC, electrical, washer/dryer, prepaid 3 year security system, and more. Calls are made by my broker and still no bites. But just wait a minute. Didn't I just say "way below value and a steal for an investor"? I'm an investor, ain't I? Like Da!

It's time for the Indian story
Like the Indian who stayed up all night to see where the Sun came from. It finally DAWNED on him.

No thanks there will not be any extra helping of Stupid at breakfast for this guy

And, to think I was almost going to sell the house at any price! I was going to NET $126,900.00 at the "fire sale" price. Yes, I would be making a nice profit for a flip that took me just 7 weeks. But, just wait till you see how the numbers work out for me. I've used realistic and representative dollar (I rounded) values so we all can see how this works. First, I would like to add a kind word here for my mentor. As my mentor said to me some time ago, "the way to get rich in real estate is to never sell, only buy". Yipes! He was right.

As you too will read from many other investors, "it's all in the numbers". So here is a table to reference and see where and how much I win. All of these numbers are proportional to the actual numbers. I just rounded to make it easier to demonstrate.


Description - Total Amount - Commission - Net before taxes
Property Purchase price $ 50,000.00
Property Improvements $ 50,000.00
Associated Additional costs $ 15,000.00
My Original sale price $ 165,000.00 $ 9,900.00 $ 155,100.00
My Reduced sale price $ 145,000.00 $ 8,700.00 $ 136,300.00
My Fire sale price $ 135,000.00 $ 8,100.00 $ 126,900.00
Description Monthly PMT 12 months
One year rental lease with 100% POC's $ 850.00 $ 10,200.00
Renter's purchase price $ 145,000.00 $ 4,350.00 $ 140,650.00
Monthly PMT
I Mortgage the property $ 125,000.00 $ 790.00

It's time to make lemonade
I decided to rent and offer 100% POC's (Purchase Option Credits) of the rent towards the purchase of the property at the end of the 12-month lease. At six months into the rental agreement I will start asking the tenant to think about the option and if they will be exercising it. I should note here that I am using a Property Management firm and within two weeks of contacting them they signed up a tenant and had them moved in. That means I have revenue at 4 months after I closed on the property.

Since I purchased the property with cash and funded the rehab I now need to get some working capital for my next project. At the six-month mark I will apply for a mortgage. To keep the cash flow positive I will go for $125k that I will put in my pocket to use for my next investment. Now, I do think that $125k amount covers my TOTAL investment of $115k. I can put the extra $10k aside and use it to make the monthly $790 mortgage payment or use the tenant's monthly rent for that purpose. It's all up to me.

Summary
Let's say the tenant exercises their option to purchase. I will then receive $145k minus the $10.2k Purchase Option Credit, minus the $4.35k commission, minus my mortgage of $125k, which comes out to $5.45k. I will wind up somewhere near $125k plus $6k for a total sales price of $131k. Now for the fun of applying depreciation, revenue, taxes and such. So, here you have just one "real" example of what will most likely occur for me. I hope they decide not to purchase as the house will most likely sell come early 2010 and I would expect somewhere between $155k - $195k.

From my point of view this lemonade sure tastes good to this person.

Good luck on your next investment.

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