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A Home Run House Flip: Details, Numbers, & How You Can Do It Too

by Michael LaCava on November 17, 2012 · 28 comments

  
house flip - granite counters

How I Made $56,135 on 1 House Flip!

You’ve probably heard hype-filled headlines like that in the real estate investing space before. And chances are pretty good you’ve gotten e-mails from “gurus” claiming even bigger profits.

Yep, I know.

They come in my e-mail inbox nearly every day. I get way too many of them, in fact. The difference is that this “hype-filled headline” is actually true.

Hyped Up Real Estate Investing Profit Claim Revealed!

Haven’t we all gotten sick and tired of these kinds of over-hyped headlines from the gurus?

I have. So let’s not go down that road. Instead, let’s be perfectly clear: not all of my house flips end up with profits like this. In fact, most of them don’t.

Most of them usually net me between $20,000 and $30,000 (not too shabby), but this one was one of the best ones I’ve done so far — although still not THE best.

In fact, about 14 months before this one I had what I would consider a “failure” where I made a profit of only $14,015.

But I’ll save that one for another post.

Until then, let’s get into this one, the one that I now affectionately referr to as “The Home Run.”

The Home Run: Behind The Numbers

Many real estate investors claim that you shouldn’t use wholesalers. I found this deal through a real estate wholesaler, so that should be enough to quiet the critics. In fact, even though I had to pay him a $5,000 commission, it still was a home run.

So, if anyone tells you that you can’t make money flipping houses while using wholesalers, don’t listen to them. This blog has outlined some of the many benefits of using wholesalers in real estate investing, so there’s no need for me to get into that right now.

Let’s just get right into the really good stuff.

Here are the vital stats:

  • Where: Wareham (Onset), MA
  • Type of house: 3 Bedroom, 2 bath cape style
  • ARV (after repair value): $209,000
  • 70% Rule: $209,000 x 70% = $146,300
  • Projected profit at 20%: $41,800
  • Projected other expenses at 10%: $20,900 (including closing costs, attorney fees, real estate commissions and financing interest)
  • Estimated Repairs: $90,150
  • MAO (maximum allowed offer): $56,150

Financing: No Money

On this flip, I didn’t use any money of my own. As I’ve talked about here before, it is possible to flip houses with no money. And this flip is proof positive that it can be done.

Of course, the money has to come from somewhere (it’s not like you actually flip it for free), you’re just using other people’s money or “OPM”, instead of your own.

In most cases, especially if you’re new to flipping houses, you may not be able to flip a house without any money of your own, especially if you’re using private money lenders. They usually do want you have some skin in the game. However, the more you do it, the better your relationships become with your lenders.

Even though I did use a hard money lender for this deal, I have a very good relationship with him. He knows that I’ve done plenty of other flips, and I’ve gotten him consistently good returns. So he gave me preferred lending rates.

This is one of the real benefits of having a successful track record, as well as one of the benefits of networking and building solid relationships when investing in real estate. For this reason alone, if you’re first starting out, don’t discount hard money lenders. I use them all the time on my flips.

From the profits that you see here, this flip would still be a “home run” even if I had used “traditional” hard money lender terms.

Hard money lenders can definitely get you into deals, and you can still turn a profit with them as long as you follow all the other rules like the 70% rule, sticking to your MAO and using highly accurate ARVs.

The Home Run: What Went Right

I think it goes without saying that there were a number of things that went right on this house flip.

The market did get just a bit hotter during the six months between initial purchase and final sale, but not much. Even without market-based price appreciation, I still would’ve made a pretty nice profit on this one.

It’s “the system” that made me the big profit…not the market.

But “the pluses” on this deal far outweighed “the minuses” as you can see:

  • Although my MAO was $56,150, I paid $48,000. So immediately I was + $8,150
  • My cost of repairs was projected at $90,150 , but came in at $104,668, making me a - $14,518
  • Other expenses were projected on $20,900, but they actually came in at $22,697, so there I was - $1,797
  • And lastly, and perhaps best of all my ARV was projected at 209,000, but we ended up selling it for $231,500, making me + $22,500
  • Total upside over projection: +$14,335
  • Projected profit was $41,800 , but we were + $14,335
  • Netting +$56,135 before taxes

Although most of the factors in this flip were in the positive, the only cost overruns were on the repairs.

This was primarily due to some extra unexpected framing repairs we had to do to make the space behind the walls as beautiful as the space in front of the walls.

Although these were additional framing details we probably didn’t need to do, I’m not in this business to “put lipstick on a pig.” If we know that there’s something we need to do, even if we know that we could probably “get away with it” at the inspection, my house flipping team is committed to doing the right thing.

We do responsible rehabbing, period. No exceptions.

Why Was It a Home Run?

  • Granite countertops in the kitchen

Although this house didn’t necessarily require granite, I really felt that Formica countertops just wouldn’t look as good. The kitchen wasn’t enormous and counter space was relatively small. But making the countertops granite instead of Formica definitely added a lot to look and feel of the house, while only adding less than $500 in costs.

  • Cathedral ceilings in the master bedroom

We had to do a lot of framing anyway, so I talked to my builder and I suggested doing cathedral ceilings in the master bedroom. He agreed and felt it would only add a little bit to our costs, so we went for. We expanded two-bedrooms to make them into one very large master bedroom and totally changed the look and feel of the upper floor, which made it very attractive, light and airy – a beautiful space to live.

  • Deck off the back of the house

Adding a back deck was a killer idea from my builder Billy Bachant. Of course, it certainly added a few dollars to his bill, but I gotta hand to him, it was a great idea. The backyard was fairly small anyway and probably not that usable. So, adding the deck was a great addition. During the open house, people were even hanging out back there as it was a beautiful day. It’s ideas like this that come from people on your team that show how important having a good house flipping team really is.

Big Profits, But REAL Ones

What I didn’t mention before is that we staged this house, and I believe it really helped sell the house quickly. Although I normally don’t stage lower end flips, because this house came out so nice, it seemed appropriate.

We had an open house on a Sunday and we had an accepted offer two days later on Tuesday; I think the staging had a lot to do with that. As I said, I don’t do staging on every house flip, but on this one, it was definitely worth it.

When you get a $78,670.43 check at a closing, it feels pretty nice. These are the numbers most people will typically use to show how much money they made on a house flip.

No, no, no…it’s just not true.

Yes, the check we got it closing was $78,670.43…but my actual pre-tax profit was $56,135.

You see, there’s things like attorneys fees, broker fees, financing fees and holding costs that diminish those profits. I don’t hide them because they are a part of this business. Even WITH those costs reducing my net, there’s no doubt this flip was a total “home run.”

Although you hear of tales of people making five and even six-figure profits flipping houses, so many people either don’t believe it or they just feel that it’s not possible. Although it doesn’t happen on every flip, it is very possible.

I’m certainly not saying you’re going to go out and do this kind of thing on your first flip – especially if you’re first starting out. But if you have a solid plan, have the discipline to stick to the rules and use a trusted and systematize your business, you too can make profits like this.

What do you think? Please leave a comment below to tell me about YOUR best house flip or real estate investing deal – or just ask about anything about real estate investing or house flipping.

Photo: granite-charlotte

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{ 28 comments… read them below or add one }

Curtis Gabhart November 17, 2012 at 9:16 am

Congratulations Mike, it’s always nice to hit a homer here or there.

Reply

mike November 18, 2012 at 5:15 pm

Thanks Curtis.
Just keeping it real!

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Jim Pratt November 17, 2012 at 10:55 am

Hi Mike, my kind of truthfull article. I wish more people would tell about thier experiances, the do’s and don’ts and how to’s. The only thing not mention is how much taxes will be taken out of the $56,135 ($19,000 +/-). I purchase properties at 50 cents on the dollar (avg), rehab and then rent out (avg. $350/month positive cash flow). With that kind of cash flow, it’s hard for me to sell them! I’m mainly a buy and hold person, don’t like silent partners. Everyone has thier own way of earning a living, what works for one may not work foe another. The neat part is your way, thier is no headaches after the sale (renters).

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Mike November 18, 2012 at 5:18 pm

Thanks Jim. I am buying and holding as well. Its a great time to accumulate. Where you buying?

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Jim Pratt November 19, 2012 at 1:10 pm

Hi Mike, mainly buy in western Washington (45 years) now mostly retired. If the market ever goes up, I’ll sale some and start buying notes or more properties. Way too much fun in buying:)

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Michael November 19, 2012 at 4:12 pm

Well you have been through few cycles and must be a wealth of knowledge.
Thanks for sharing Jim!

Jeffrey Hare November 18, 2012 at 1:43 pm

Congratulations on the great job, Mike, and for providing a detailed breakdown of estimated and actual costs. The problem with those who “hype” these transactions is they fail to emphasize (as you did) that for every major success there are multiple failures. Those considering getting into the “flip” business should take note that you had a plan and experience. You also did the math – before the deal! And watch out for unexpected costs – always allow for a contingency. Foundation and roof repairs can be both hidden and costly!

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Mike November 18, 2012 at 5:25 pm

So true Jeffrey.
Building a new house is more predictable in construction cost but rehabbing is all together different and most will go over a budget even with a % added for overage.
Those unexpected cost can cripple your profits.
Thanks for your comment.

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Hunter November 18, 2012 at 7:41 pm

Mike

I also think that it is unwise to not use wholesalers. I would say that the vast majority of their “deals” are not deals, but like most acquisition strategies it is a numbers game.

Congrats on the deal!

Hunter

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Michael November 19, 2012 at 4:14 pm

Thanks Hunter. It sure is a #’s game & one you want to get right.

Thanks for your comments.

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Gary Parker November 18, 2012 at 7:45 pm

Great article Mike. My best rehab to date has been $50,988.64 sold this last summer; however, in the $20K’s is common for me. I am listing one this Wednesday that should be in the $40′s. Cost was $65 and rehab will be $104. It is a little overdone for the area, but it should move fast and at top of market. I am very grateful to have two like that in a year.The competition is quite fierce in my neck of the woods and experienced rehabbers are bidding up the acquisition costs.

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Michael November 19, 2012 at 4:16 pm

That is great Gary. I see some of that as well but I do not get emotionally involved The #’s don’t lie unless you use eraser math. Where you investing?

Reply

Gary Parker November 20, 2012 at 1:49 pm

Salt Lake City Michael.

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neilinmadison November 18, 2012 at 9:39 pm

Mike
Thanks for the post.
Couple of quick questions from a buy and hold invester.
1- What is the 70% rule?
2- Once you have your own funds to finance your projects, why use a hard money lender for flips? I understand that your ROI looks better on paper, but it also increases your interest costs which means you take home less at the end. Isnt there a point where it makes sense to use your own money for financing flips -especially when the bank won’t pay much interest on your reserves anyway?
3- How many hours do you spend on deals like this? Put another way, how many can you do in a year?
4- What do you pay in taxes on these kinds of deals? Is there any way to use like kind transfers to reduce your taxes when flipping?
Congrats and thanks for your thoughts.
Neil Rainford

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Michael November 20, 2012 at 2:33 pm

Hi Neil,
Good point. It all depends on your cash & cash flow. If you have plenty of it & it does not prevent you from doing more deals if that is your plan then sure you can pay cash to save on the interest. Most are not in that position but it is certainly an option if they are.
The 70% rule is the formula I use and many other Investor’s to determine their MAO based on the
ARV & cost of repairs. I think you may be referring to a 1031 exchange & is unlikely you can do that with flips. Certainly a good strategy after you owned and rented for a while.
Thanks for your comments!

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Richard Dale-Mesaros November 19, 2012 at 4:11 am

I agree….. our average is down around $20k/deal, but we’ve made in excess of $40k on some deals, with $56k being our best net so far (after 30+ flips over 3 years). Average purchase closing to resale closing WAS 4.2 months until about 18 months ago, but that’s slowed down some. I think the key is to STICK to your parameters for purchases on sizes/types of houses, towns you decide are worth buying in and not stray outside of that, unless you have a very good reason to do so backed up by careful due diligence with the right contingencies!

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Michael November 19, 2012 at 4:18 pm

Hi Richard. Thanks for sharing your success. keep crushing it!

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Karen Rittenhouse November 19, 2012 at 7:47 am

Mike:
Love that you do responsible rehabbing. Thanks for that.

And thanks for showing your true pre-tax profit. That number was certainly big enough!

Congratulations on a job well done. Those are the ones that keep us all motivated and working hard. Here’s to believing your next one will be just as big!

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Michael November 19, 2012 at 4:19 pm

Thanks Karen! You as well.

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Shaun November 21, 2012 at 1:58 pm

Great article.
I like when guys go into the numbers to show the stuff you might not think about (and rarely talk about on TV).

My best rehab to date got me a little over $61K.
Actually not far from you in Norton, MA.
In addition to this I am an agent and got a commission on both the buy and the sell adding up to about another $5K.

Thankfully it was a BIG payday since it was NOT an easy one.
Contractor took way to long to finish it (at least double the time), and will not be used again.
First contract (from first showing!) fell apart 6 weeks in.
Final contract did come together finally, after 6.5 months in escrow.
Only other silver lining is after all that BS I ended up selling it 12.5 months after buying it so taxes will be Cap Gains!

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Michael November 26, 2012 at 6:06 am

Thanks Shaun. All good points. Been there done that! Thanks for sharing your comments.

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Jerry November 24, 2012 at 3:25 pm

Incredible numbers. Thanks for sharing all the behind the scenes numbers. Interested to see exactly how you found the property? Did the wholesaler cost alot? Very good job.

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Michael November 26, 2012 at 6:11 am

I did find the property through a wholesaler & it is included in the expenses. It is only expensive if the wholesaler try’s to make too much and takes me out of the 70% rule. Good wholesalers know not to do that. The other’s? well I don’t do business with them.

Thanks for you comments Jerry.

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adam July 2, 2013 at 1:56 pm

I wanted to be proactive and start talking to hard money lenders before I find that first deal.

Are they going to concentrate on the actual deal, or is my experience in flipping going to come into play? I’ve heard find someone local, and I’ve also heard to contact the Bigger Pockets list of lenders.

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Michael July 8, 2013 at 10:51 am

Hi Adam –
If you have good credit and have some experience that helps but most important they will be looking at the deal and your ability to handle the process. Hope that helps.
consider partnering which you give up more but may be more attractive on your first few flips to lenders.

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Matias October 14, 2013 at 9:20 am

Mike, great post.
I am curios as for the cost of Staging you used in this deal? Stagers would charge you monthly for their services or once at the beginning? What is the typical cost of these services in your area and at what point a deal would require (be cost effective) to use these kind of services?
Thanks in advance Mike!

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mike October 19, 2013 at 11:35 am

Hi Matias
On this deal we were able to pull the furniture from another house we sold quickly. We just paid the delivery charge and an additional fee to our designer. I use to hire a designer to do all this in the middle to higher end homes and it was costing on av er average around $1000 a month with furniture. We are now doing it in house and on all our properties. Its about half that cost now. Hope this helps. Depending on your time and budget will determine your best course of action. What prices are you getting.

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Preston August 17, 2014 at 6:35 am

Wow, I never thought about flipping after buying from a wholeseller. Not that this is important but the wholeseller must have gotten the property at an absolute steal for your purchase price to be so low. The property must of been a “diamond in the rough”. Were you aware of property before the wholesell?

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