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Flipping Houses With No Money – Case Study #4 (The Partnership)

by Michael LaCava on December 8, 2013 · 37 comments

  
Flipping Houses

I have to admit, I am a little bit greedy when it comes the house flipping.

I don’t normally like to partner on many deals at this stage of my career but every once in a while when our deal flow is not as robust as I think it should be, I reconsider this whole concept of having partners.

But partnering is just another GREAT way for new investors (and grizzled veterans) to flip houses with no money.

In a post here a few weeks ago, we talked about three case studies for flipping houses with no money. So here on case study #4, we’ll get into a little bit more in-depth on how it all came together…especially you cynics who still think you can’t flip houses with any money of your own :-).

As you’ll see, it absolutely can…even if you are BRAND new to this whole flipping houses thing.

Flipping House with No Money Case Study #4

About four months ago, a couple of guys approached my acquisition manager Bill Roberts about a deal that they had. They were interested to see if we would be hard money lenders for their house flip.

Bill politely declined but recognized that there was an opportunity here for a potential acquisition for us.

These two guys were relatively new in the business and although they didn’t have the connections to get the money they were looking to borrow, we did not that wouldn’t be enough for us to even consider doing the deal.

So instead of completely casting this potential house flip aside, I told Bill to invite them down to our office so we can meet with them face-to-face.

So down to our office they came…

The Importance of ARV and All Other Costs

As soon as I met these guys, I immediately liked them both. I recognized that what they lacked inexperience they made up for in enthusiasm and ambition. I tend to like go-getters like this regardless of experience.

So we started looking into their projections. The big number that stuck out to me was their cost of repairs, which having talked to them a little bit about the house, it seemed to me their numbers were a bit on the low side.

Aside from that, they seemed to have nailed the ARV pretty well. I happen to know that market and it seemed reasonable.

Their ARV was just about $300,000, they had used the 70% Rule correctly and their renovation costs were just over $37,000.

I don’t exactly recall how much they had wrapped up the contract for, but I believe it was about $175,000. Now that I think of it, it may have actually been $185,000 that they had wrapped it up for.

But for the sake of argument, let’s call it $175,000.

So the math looked a little bit like this:

ARV: $300,000

70% Rule: $210,000

Renovation costs: $37,000

MAO: $173,000

Net profit: ~$60,000

On the surface, this deal looks like a real winner.

But not so fast…

50% of Something or 100% of Nothing – Which Would You Take?

So we started negotiating. They wanted a 50-50 equity split, which for them was a pretty good deal for them. I always recommend doing this when you’re first getting started.

For them, they would get our expertise and our money and they would get 50% of the deal.

Bill and I talked about it and we felt that because we’ve done quite a few more flips than they had, we felt a 60% split was far more reasonable.

After all, we were bringing a fair amount to the table: expertise, experience and most of all cash from one of our private lenders – which we could secure with a single phone call.

Although they probably would’ve liked the 50%, but they realized that this was a pretty good deal for them at 60%, so they took it.

At this point, I didn’t have an opinion on their original repair costs when we negotiated the terms of the agreement. I took those numbers purely at face value.

Renovation Costs… The Silent but Potentially Deadly Killer

The next day we drove out to the property. And that’s when things changed and we then realized how off base their repair costs really were…

Although we were extremely impressed with their cost of repairs estimate (it was neatly typewritten instead of scrawled in pencil on-site) - looks can be deceiving.

As soon as we started making our cost of repairs estimate, a very different picture started to emerge.

Just compare their renovation numbers versus theirs:

Theirs: $37,000

Ours: $71,000

Our numbers were nearly DOUBLE theirs. Oh boy…

This is how critically important getting your repair cost right are to making money on a house flip!

We came back to them and told them that the deal was off unless we could get the property at a significant discount. That number for us was a Maximum Allowable Offer (MAO) of $135,000.

The CRITICAL Importance of Nailing Repair Costs

Bill coached them through how to go back to the seller and what tactics to use. He obviously did a pretty good job talking them through negotiations with the seller. I’m not exactly sure what he said, but whatever it was…he should bottle it up and sell it!

Quite honestly at this point, I thought the deal was totally dead!

Remarkably, the seller DID reconsider and knowing they were dealing with seasoned investors, they did in fact agree to sell it for our price.

The math more realistically needed to look like this:

ARV: $300,000

70% Rule: $210,000

Renovation costs: $75,000

MAO: $135,000

And thanks to some last-minute negotiating advice from Bill, the numbers did in fact, come out looking like that. Here is what the end profit breakdown looked like:

Soft costs: $30,000

Net profit: $60,000

Our take: $36,000

Their take: $24,000

Not too shabby for them AND for us.

New Investors – Don’t Be Afraid of the Partnership Deal

As you can see from the numbers, everyone walked away pretty happy. We were happy, our hard money lender was happy and our new house flip partners were happy as well.

It’s worthwhile to note that these investors did have another money guy lined up prior to meeting with us. They were going to do at 50 – 50 split with him and he had not realized how far off the repair costs were.

Had they done the deal with him, they probably would have made little or no money. They may have even lost money.

If you borrow money from someone who may not have the experience to verify your numbers, then you MUST verify your ARV and repair costs 1000% or you won’t make money.

The moral of the story is this: if you partner with someone who has more experience than you, take less if you have to. In the process, you’ll learn and gain so much more to start you on a successful path.

And if you do, make sure you verify your ARV and repair numbers 1000% or you risk losing credibility.

Once Again, Flipping House With No Money in a Different Way

And yes…these brand new investors DID flip this house with no money.

So for those of you who think flipping houses with money CANNOT be done (I know who you are out there), it can be done – in fact, it happens all the time. We do it ALL the time.

If you don’t have the money – someone else does. It can be a hard money lender, it can be a private money lender or it can be another investor like us.

So keep all your options open and be creative. It can get done if you think it can get done. And if you’re new, take less, learn and then move on to your next flip.

Then on the next one, you probably won’t need a partner and you can take it all the profits yourself…just make sure you nail that renovation cost!

 

If you’ve made it this far, please leave a comment below! What do you think? How have you made money flipping in unconventional ways?

Please leave a comment and share your experience or ask me anything you’d like about flipping houses below!

Photo: moondiva3174

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{ 37 comments… read them below or add one }

Mark Ferguson December 8, 2013 at 8:31 am

Nice article Michael. I don’t like to partner with anyone either, but if they bring you the deal then it’s a different story. There is an investor in my area who does a few flips a year with none of his own money, but he gives up 50% of the profit every deal. I think it is hard to get ahead if you continually do that and flipping is your main source of income.

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Michael December 9, 2013 at 7:00 pm

I agree Mark. We do very few of these and want to be careful it doesn’t replace our regular dealflow which it won’t but hard to say no to some profit when you have money at bay to put in place.

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Percy Brooks December 8, 2013 at 10:22 am

We would like to partner with Investors to market their properties to our clients across the country. We market our homeownership services through a faith-based platform that includes over 50 million perspective clients across the country.

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Michael December 9, 2013 at 7:03 pm

Sounds like a good plan Percy. How are you doing with this.

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Randy Phillips December 8, 2013 at 11:36 am

That was a good story, I have used partners several times and it has worked out very well. However, I have heard some bad stories about partners holding rentals.

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Michael December 9, 2013 at 7:05 pm

Just lay out all the ground rules ahead of time and like your deals they have gone well but can be more difficult on long term deals like buy and holds.

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Lucas Vaughn December 8, 2013 at 12:08 pm

Hi Michael, thanks for the great article. I believe partnering is great way to get started and gain some expertise. What type of agreement did you sign with the two guys? Did you create a partnership entity, sign a JV agreement or do something completely different?

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Michael December 9, 2013 at 7:08 pm

I don’t think you need to create another entity for this but it depends on many variables and who the parties are. An operating agreement may be fine as well as many other ways.
Just explain to your attorney doing the closing & they should be able to recommend based on all the parties involved.

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Patrick Flanagan December 8, 2013 at 12:22 pm

Hello Michael,
Live in NJ and have numerous opportunities to examine or have. My question is, are there any parties on BP, that would be interested?!? Please feel free to contact me, at any time you may have any thoughts on this. Your article has given me inspiration that, all is possible, when you have a big enough pocket to help….

Any help you may be able to steer in my direction, would be greatly appreciated!

Cordially,
Patrick Flanagan

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Michael December 9, 2013 at 7:12 pm

Hello Patrick – No harm in asking. You can also do a search in BP for other members in your area by a mile radius then you can contact them and possibly put together a deal with any of them. Check it out. You can always check out my website for additional information as well.
Good Luck

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Jeff McConnell December 8, 2013 at 1:38 pm

We partnered with the owner. And have done three more deals with her, she is over joyed.

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Roy Schauer December 9, 2013 at 10:45 am

Jeff, can you clarify? You partnered with what owner, of a property business? Would like to hear more details!

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Michael December 9, 2013 at 7:13 pm

Sounds like it all worked out. Maybe share more details so other members can see what you did.

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Mary B December 8, 2013 at 3:19 pm

Great article Mike. The rehab costs are always the uncertain number that sticks out. Even contractors give ‘estimates’ because one never can tell whats under the floorboards or behind the drywall until its removed. We always have heard you can’t judge a book by its cover yet even from the inside you still have to look closer. Learning to make an on point repair estimate takes time in plenty of properties.

This is the perfect strategy for so many newbies and even seasoned investors to utilize when funds are low or out and a good deal comes along. I’d choose 50% of something over 100% of nothing, especially when it comes to profit, ANYTIME. Thanks for the share and happy holidays to you.

Kudos,
Mary

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Michael December 9, 2013 at 7:16 pm

Thanks Mary. Yes rehabs can be tricky at times and is more complicated than new construction so analysis is critical and the right contractor is just as critical.
Happy Holidays to you as well.

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Jimmy December 8, 2013 at 8:23 pm

Awesome post!

Would love to see some “after” pictures.

Thanks for sharing.

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Michael December 9, 2013 at 7:18 pm

Thanks Jimmy. We don’t usually post pictures here on BP but our website has some properties with before,during and after videos of properties.

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Page December 8, 2013 at 9:26 pm

This was a fun, light-hearted post to read, right as I sit in front of a spreadsheet considering a SFR REO flip in the dead of winter up here in the frozen north. Thanks for sharing your experience and wisdom — a great reminder to double/triple-checking repair cost numbers even when you believe in your cushion. Thanks!

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Michael December 9, 2013 at 7:20 pm

yes Page you can’t be too safe in analyzing. Just don’t get paralysis analysis because that won’t get you too far as well.

All the best on your project. Where about’s is it?

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Mark December 8, 2013 at 9:28 pm

What did Bill say exactly??? Dying to know.

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Michael December 9, 2013 at 7:22 pm

Just to be honest & give them the facts on why the original price they offered was not accurate because they undervalued the cost of repairs. All they could do was say yes or no.

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MP December 9, 2013 at 12:30 pm

Great info. I am a new investor and advice from a seasoned investor is greatly appreciated.

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Michael December 9, 2013 at 7:24 pm

NO problem MP. BP is a great place for that for sure. I learn from other seasoned investors here as well. You never stop learning and improving.

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Sharon Vornholt December 9, 2013 at 3:40 pm

Mike -

Nice deal. New investors would really be smart to partner up on their first few deals. You lose a little equity, but gain a whole lot of experience in the process. And showing your numbers really helps folks see the big picture especially if they are brand new.

Sharon

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Michael December 9, 2013 at 7:26 pm

I agree Sharon. Funny because we thought we would let them run the rehab but because the bottom line is so important we are using our contractors to make sure we maximize our profits and they will follow along as much as they can learn by watching our crews run the rehab.

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Patrick Mike December 9, 2013 at 7:46 pm

What is the soft costs of $30,000?

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Michael December 10, 2013 at 7:51 am

5% realtor fee $15,000
5% for carrying cost and interest if closed out in under 6 months $15,000

It’s an average and can go up and down depending on the cost of money and time of holding until sale of property

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Jessika December 10, 2013 at 8:52 am

I like this article. I have been getting to know the business for about 2 years and just started contracting houses recently. As a newer investor, getting funded is the hardest part and these 50/50, 60/40, creative deals are exactly what we have been aiming for. Having the knowledge-base was important to me and now we have the deals pouring in. There’s such a good market in Houston, so if anyone is looking for these types of deals, feel free to contact me. *WORK SMART, NOT HARD*

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Michael December 12, 2013 at 7:34 am

thats great Jessica. Give me an example of a great deal. You said Houston has some great deals flowing in to you.

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Jessika December 14, 2013 at 11:48 am

Well Michael we just recently contracted a house in Dickinson, TX. (Galveston County) We had him do most of the rehab work that was still needed (he even used our contractor), prior to signing. It has an ARV of $165k and we got in for $115. It’s a great landlord property because that area will we worth even more in a year. They are building a Buckee’s, a Movie Theatre and recently opened an Outlet mall. The home is also close to the freeway.
We recently closed on another home in Galveston. It was an abandoned house and we found someone to purchase it for the land and shortly after, the neighbor wanted to buy it from us for more because he didn’t want any neighbors so that worked out great. They are potentially turning it into a tourist town and many people have homes there that have been destroyed from Hurricane Ike and are just sitting on valuable land. We have been getting in prior to their demolition dates and wholesaling, so we are always looking for buyers and partners.

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mike December 15, 2013 at 5:49 am

That’s awesome jessika. Great creativity and willingness
to succeed will get you there. Keep it up

Hari K December 13, 2013 at 9:58 am

There is a proper book being sold online for the same purpose of selling houses without money. Your case study is amazing and i think that people who want to flip their houses must bookmark your website.

I remember my partner proposed me to take our business in house flipping business too but because of an unknown fear, i have never tried it. Today he (my partner) is in the business of flipping houses and had a good 5 figure profit in 9 months of starting his business.

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Michael December 14, 2013 at 10:28 am

Thanks Hari I appreciate the plug. By all means share my website for more information.
Good luck with your profit APP.

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Shaun December 22, 2013 at 10:43 pm

What really stuck with me on this is how much they were going to overpay for the place.
Then how seemingly easy it was to talk the seller down to EXACTLY what you needed to get it at even though it was $40-50K less than what they had agreed to pay.

Based on how you described the follow up, unless you really sugar coated it, you still probably paid more than you had to since they set up crazy high expectations for the guy to start. My guess is if you guys had found the lead yourselves that you would have bought it at $130K tops since you would have had the good estimate and probably would have started in the $120-125K range to leave room to negotiate.

In essence if they HAD been right about the $37K in repairs they still would have left over $40K on the table by not being aggressive in their negotiations. Maybe it’s just me but I would have liked to have gotten that extra profit. :)

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Michael December 27, 2013 at 7:14 pm

All good points Shaun but the reality is in most cases you wouldn’t have the luxury of having that much on the table. You are correct in how we would of approached the offer and ended up most likely. I was quite surprised myself they were able to actually get the sellers to that price after the initial offer acceptance. It goes to show you negotiations is an art sometimes and more than a science. They were good honest guys and the sellers agreed or maybe the sellers had other offers in that lower range and thought they scored at the higher price???? I wan’t going to ask at the closing table. LOL.

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Shaun December 28, 2013 at 9:42 am

Good point that they very well might have gotten some of those $120-125K offers and figured even though they did score like they had hoped that they figured out the market and taking the $5-10K better than others was still a solid win for them.

Clearly if they had gotten the repairs right and had gotten it at the $135K price that would have been a grand slam. You don’t see those much of course, but you won’t get them if you don’t take a shot at it either. :)

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Michael December 29, 2013 at 7:53 am

Who doesn’t like grand slams. That is true Shaun and you just never know.

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