This may a bit long winded but I need to learn so comments, constructive or not I need to hear them all, are welcome. Thanks in advance.
I bought my first flip in May of this year. I used hard money and went the easy route since I knew who I was borrowing from. For a little background there, the boss of a guy I used to broker a few house deals in the past was the HM lender. It was super easy but terms were a bit unfavorable. I took the easy way since I was almost guaranteed the money from recommendation alone. I have a realtor that I am working w/ and he is an investor as well. He takes on a decent amount of flips (he's got 5 or 6 going, which to me is a lot). I bought a house through a whole saler after having comps run. I didn't know all the costs going in so there's a huge problem right there. I knew the HM fees and interest payments. I knew the rehab cost and down payment. What I didn't know was how much to figure in for "unexpected" expenses. So on the surface I was all in on this house at 77%. Not great, but it seemed easy to do and I figured even if I can make a little I'd be happy. Well, a 6 week reno took 15 weeks. The contractor had other properties he was working on and his crew was stretched thin. I didn't draft a contract w/ him, another huge problem. There was work he was mentioning during the initial walk through that I assumed he would be taking care of and was included in his price but it wasn't. That plus hvac and a couple of other things set me back about $13,000. So the price I was trying to sell the house at according the comps basically meant I would break even. Ok. First house, expensive mistake. I don't mean to say this to be big headed but it'll be about a $20k hit and that's fine w/ me. My wife and I make pretty good money so what ever. I just don't want to make this kind of mistake again (yes, that is what I tell myself so I can sleep at night w/o waking up w/ no hair). I will list the numbers at the end of this post for any who are interested and are willing to poke more holes and tell me what else to look for next time or what not to do. So basically, my monthly holding costs just for interest on the HM loan is $1,400. I lowered the price to cut my losses early and just move on. Now I'm thinking of refinancing the house to pay the lender and pay off my credit cards (I used CCs to pay for the materials for the rehab). That will basically mean that the cash I put in initially could just be 20% downpayment + a little extra for reno as if I were going to buy this house to rent from the get go. There's still a ton I don't know. I just dove in head first b/c stuff has just always worked out for me in the past. I know, that's the most stupid way to approach anything but hey, it is what it is at this point. Now, what I can't figure out or get out of my head is this:
If you buy a house based on the ARV against comps in the general vicinity but the properties on the same street are only worth about half of that, I just don't get how that could work. Or can it? Maybe that was my first big mistake. When you guys flip, do you generally buy the crappiest house you can find that will make you good profit in the nicest area, or do you do what I did and find a house and fix it based on comps and not worry about the other houses on the same street? Sorry for the ignorance. In any case, here is a breakdown of what all I paid, sorry this post is so long:
- $119,000 purchase
- $4,000 HM fee
- $2,000 closing on purchase
- $5,600 HM interest (almost 4 months @ $1,400/mo)
- $60,000 rehab. Half mats, half labor. Labor was cash, mats were credit card.
- $2,000 for a drop ceiling. Though contractor could do this. Was wrong.
- $4,200 for HVAC work. Took the contractor's word again and turned out that I need a new furnace and AC unit w/ duct work.
- $2,500 landscaping.
- $3,800 asphalt drive way. Was gravel/ dirt originally.
- $500 HM reno draw. This was the only one I took and it was for $40,000.
- $20,700 - figure 6% realtor commission and 3% closing on sale @ $230,000.
So now the house is dropped in price and is listed at $229,000. What kind of pointers do you guys have?
- When buying a potential flip, what do you look for in a property? Specifically, what would deter you or excite you to buy something?
- Is there anything else in regards to numbers that I'm missing at this point to figure what I would be paying out vs what I could make?
- How do you determine whether a house is good to buy on a street where you know your house will be almost double what the others are worth? Is it even looking into at that point knowing this?
- How do you guys compare a comp? Do you do it based on sq ft, amenities, fixtures, bedrooms, bathrooms, etc? Is the neighborhood of the house in question a huge factor?
- So I've always heard real estate is cyclical. From what a lot are saying, we're at the end of the current cycle and is probably a bad time to start investing unless you find a good deal or just know what you're doing. What times of the year do you see the most growth and inversely the slowest periods? I'm an avid believer that there are buyers for whatever product in or out of season so I don't want to make a decision based solely on the premise that it's a bad season to buy something. I'd rather be making some headway than none.
- How do you determine when a buy and hold is favorable to a flip?
Thanks again for all who respond. I am genuinely curious and eager to learn. Definitely do not want to make another big mistake.
1) Thank you for posting this.
2) Don't say say it was stupid to just jump head first into this. This post is the exact kind of thing I look for as a newbie and I appreciate you posting this!
I'm going to follow this thread to see how things turn out and I wish you the best of luck!
@Lee Burns Thanks, much appreciated. And good luck to you as well.
@Myung Yi you got out and don’t lose your shirt... so you’re definitely further ahead than some trying the flipping game.
Flipping has always been hard, and it’s gotten harder with the number of people (both experienced and inexperienced) doing it. You definitely learned the big lessons - everything costs more and takes longer than you think.
Plan 4 weeks, budget 8 weeks, and in the end, it’ll take 12. But now that you know that - you’ll be pleasantly surprised and make a little extra money when it only takes 7 weeks!
In general, don’t try to time the market. People have been predicting a crash for the past 3/4 years. A good deal is usually a good deal anytime. But I will say that I’ve moved from flipping to BRRRRs since there’s a lot less stress, pressure, and reliance on everything falling into place. But there are many people still making a lot of money flipping. It’s just not as easy as it was 8-10 years ago.
Good luck and keep at it!
@Mike McCarthy Thanks for that. It's definitely a hard pill to swallow but a huge eye opener. Still a lot of things I need to learn and consider. If you don't mind, do you have any input on my question regarding comps for your flip vs the street or neighborhood the house you're buying is in? Thanks again.
Thanks for sharing the breakdown. You are away ahead of most us by actually getting into the project.
You really need to get to know your area to understand the comps. Take the time to look through every open and closed listing one the MLS. Go to as many open houses you can - and watch what they sleep for.
I’d never expect my flip to sell for significantly more than other houses on the street. The best values are the falling down eyesore I’m the street - and bring it up to the quality of others on the street. Often over-renovating will not get your money back.
As people say, you make the money on the buy, not the sale! I definitely agree with that.
@Mike McCarthy That definitely makes sense. I figured that's the most sensible way to go about things but I was so excited working w/ an experienced investor/ realtor. I'm too impulsive and get over excited too easily. Thanks for your feedback.
@Daniel Seo Thanks Daniel. Hoping the next one goes well. Good luck to you as well.