Follow Us on Social Media

email icon rss icon linked.in icon google plus icon twitter icon facebook icon

How to Use Creativity to Make Money Flipping Houses

by Michael LaCava on April 21, 2013 · 12 comments

  
Make Money Flipping Houses

There are countless ways to make money flipping houses, and in real estate in general. You will see what I mean if you take a look at the author bios here on this blog.

Some BiggerPockets bloggers work as short sale Realtors, investors, and consultant to real estate investors. Others do rehab and retail, as well as some wholesaling. Of course the list of ways to make money in real estate goes on and on.

The one thing that many BiggerPockets bloggers have in common is that real estate has changed their life in ways they never imagined. Regardless of how you make money in this business, it will change your life (hopefully for the better!) if you stick to it.

Needless to say creativity can take you far in this business. For me as a house flipper, creativity allows me to piece together deals that at first glance do not look possible.

This week I want to talk about one particular deal that I almost did not do. Fortunately, I was able to get creative, think outside the box and make this specific deal work.

How to Make Money Flipping Houses by Partnering with a General Contractor

There are many ways to a partner on a house flip deal. In this particular flip, I partnered up with a general contractor.

I recently came across a Massachusetts deal that caught my attention. The asking price was $81,000, yet my numbers worked out so my maximum allowed offer was $71,000. Therefore the deal did not fit my investment model and I decided to not further pursue it.

Some time went by and as life would have it, I bumped into a friend of mine who works as a general contractor. I mentioned this particular deal which did not fit into my investment model. In other words, I told him that based on the $81,000 purchase price, and my estimated cost of repairs ($55,000), I would not be able to make a profit on this flip.

Well we talked for a little while and agreed that we could partner on this deal, split the profits 50/50 and both walk away with some money. The reason why this arrangement would work is because he was going to go in and do a lot of the hands on labor himself. This would significantly cut back on the rehab costs.

On top of that, he was also going to manage the entire renovation. He would be managing the plumbers, electricians and roofers. In addition, he would negotiate all of the contracts with those individual contractors.

In doing so, we were able to cut our rehab costs from $55,000 down to $34,000.

How the Numbers Worked

According to my 70% rule calculations, I ideally would have purchased this property for $70,000 to $75,000. However because of the GC partnership, I was able to significantly reduce my estimated cost of repairs. All of a sudden the deal made sense.

Let me explain…

In the end we projected our sale price to be between $175,000 and $180,000. If we take that price and subtract our $34,000 cost of repairs, our estimated $20,000 in soft costs and our $81,000 purchase price we are left with $45,000 in profit.

Of course we split that $45,000 in half because of the partnership. This leaves both my GC and I with $22,500 in profit – which is pretty good for a deal that we almost did not do.

The real nice thing for me as the investor is that I did not have to do anything on this project with regards to the renovation. My GC handled the entire show, and I just appeared every now and then with coffees for him and his crew.

The one thing you want to remember if you go into a deal like this is to align yourself with a good general contractor. It really helps if you have an honest, trustworthy friend or a reliable referral to work off of.

Remember that you are relying on your GC to get the job done in the time he or she says it is going to get done. Your GC also needs to be spot-on with expenses. There really cannot be any excuses when entering a partnership deal like this, where profit margins are potentially quite slim.

In Conclusion

I wanted to share with you this experience because it capitalizes on creativity in real estate. This is just one way of being creative – there are many, many different ways to piece together a profitable deal.

If you can present an opportunity to someone who can help you get into a deal, then you both can walk away with a profit. All it takes is trust, reliability and some thinking outside the box.

How have you pieced together a real estate deal by getting creative?

Photo: Ignorant Walking

Email *
  



{ 12 comments… read them below or add one }

Mark Ferguson April 21, 2013 at 8:52 am

Great article. Finding a good contractor is one of the most important steps when flipping or rehabbing of any kind. Our contracts is a retired builder and loves to find us deals off Craigslist on supplies. Its hard to beat that.

Reply

Michael April 21, 2013 at 9:19 am

Thanks Mark. It certainly is and if your new in this business a bad contractor can set you back enough and cause you to not want to do another flip. On the flip side a good one will make you want to get started on the next one.

Reply

Sharon Vornholt April 21, 2013 at 10:03 am

Mike -

I think it is really hard especially when you are new, to figure out what to do with a deal that falls outside of your current business model. But that’s exactly what you need to do; try to find a different solution rather than to throw away the lead. Once you can begin to do that, it opens up other avenues of investing and you have the ability to make more money. Great case study.

Sharon

Reply

Michael April 21, 2013 at 10:21 am

Thanks Sharon. It is like being a transactional engineer and getting those creative juices going. That’s what I love about Real Estate.

Reply

Terry P April 21, 2013 at 2:09 pm

Transaction Engineer is a good name for it.

I’m a GC and if I understand your deal above I took a $21,000 cut in my normal margins to gain $22,500 in profit by doing the work myself? Probably not going to happen when I can make more in my business model. I don’t have time to do work myself, I am too busy paper contracting and managing, and also do not have the expertise some of my subs have, quality would suffer as well as DOM.

Reply

mike April 21, 2013 at 5:29 pm

Hi Terry
It may not be right for you at that time but my contractor did not have anything going on and it made perfect sense for him to partner up on this. He does have all the skills as well.
Took him 30 days so it was a great deal for him if you figure the weekly net.
Definitely a win win.
Thanks for your comments.

Reply

Glenn Espinosa April 21, 2013 at 10:19 pm

Mike,

I’ve been proposing the same set up with a few GC’s that I trust enough. The problem always comes down to the change orders and how to split unexpected rehab costs.

Also, with the reduction in rehab expenses, there is a potential for cut corners and a final product that just isn’t in line with the quality that my company produces – we do have a brand that we are trying to maintain after all. I know the answer is to lay all this out in the beginning and to have air tight contracts and scope of works… but that doesn’t change the fact that their will be a butting of the heads when stuff goes down… know what I mean?

Thanks for the neat article.

Glenn

Reply

Michael April 22, 2013 at 12:55 pm

Hi Glenn – I know exactly what you mean & the more you put your cards on the table in the beginning the better it will be. Be proactive and not reactive. Have all these discussions ahead of time and take your contractor on previous houses you have done if you are able to show him the quality of work you aim for. As far as change orders the only thing that should really come up is unforeseen repairs like maybe rotted frame work in bathroom as an example because you couldn’t
see it. Depending on the scope of work for the rehab for instance I recently did $100,000 renovation and was not sure what we could expect for framing repairs because we could not see behind the walls. Have those discussions ahead of time and ask for #’s incase. I had my contractor budget $5000 for this. If it didn’t need it so be it and if it needed more than the same.
We ran into several framing issues that resulted in in around $7000 but that is only $2000 difference and we made that up in other area’s.
Nothing or no system is perfect but I think if you find the right contractor that has the same business values as you and can be a wonderful thing. Try one at a time and don’t develop a long term partnership to protect both your interest. Best of Luck and feel free to ask me any more questions or just comment.

Reply

Athena Todd April 22, 2013 at 8:37 am

Hi Mike, If I understand you correctly. Did you say you put up all the money and your contractor put up all the labor and you guys split 50/50?

Athena

Reply

Michael April 22, 2013 at 1:00 pm

Hi Athena- You can do it a number of different ways depending on you and your contractor and your financial situation will determine that. this particular deal I funded the purchase and the contractor funded the entire rehab including materials. Hope that answers your question!

TY

Reply

Athena Todd April 23, 2013 at 8:10 am

Hi Michael,

That is a great idea! :) Thanks.

Athena

Reply

Michael April 23, 2013 at 8:21 am

Thanks Athena. Good luck and let me know if you have any more questions.

Reply

Leave a Comment

Comment Policy:

• Use your real name and only your name in the field designated for your name.
• No keywords allowed as anchor text in the name or comment fields.
• No signature links allowed under your comments
• You may use links in the body of your comment, but it must be relevant to the discussion at hand, and not merely be some promotional link.
• We will have NO reservations about deleting your content if we feel you are posting merely to get a link without adding value to our discussion.
If you add value, but still post keywords, we'll use your comment, but remove your link and keywords.
• For more information about acceptable practice, see our site rules.

Want your photo to appear next to your comments? Set up your Gravatar today.

Previous post:

Next post: