$135K Fix and Flip Profit In Seattle WA! Success or Not?
Hey BP! I have not posted in BP for many months, and I miss it. I really enjoy posting topics that break down our failures and troubles so that others can learn from them.
Based on the title of this post...$135k Fix and Flip Profit in Seattle WA! Success or Not?...you may first think "wtf? you made $135k and you are asking if its a success or not? That's BS!"
I would think the same thing, however I believe we got lucky. I believe the market saved us on this one, on top of how we structured the purchase. Where we failed was in the execution of the project, managing the rehab, hiring the WRONG contractors, and having far too many projects going on at once. So Please read on and let me know if you think this was a success or not? Hopefully you can learn from our challenges!
Before Pics!! (After is at the bottom of post)
The Crack Head House!
We always come up with clever names for our houses. Can you guess why this one is named Crack Head? Thats right, we bought it from a major drug attic who housed lots of crack heads in it where they were trying to rehab the house themselves for the past five years. The man we purchased it from kept showing up throughout the course of us owning the house, trying to get in, stealing stuff, and looking for more drugs! Fun. Its a bummer dealing with guys like this...But its how you get the best deals! Seattle is full of charming homes, and people like these.
We acquired this seattle house directly from a wholesaler who actually beat us out of our negotiations with the seller directly. Funny how things work. We lose the negotiation, we wanted it for $395k, and through a series of very odd events, a wholesaler ended up beating us out of the negotiations. BUT the funny thing is, he got the crack head to accept $385k instead of our $395k. AND THEN the wholesaler, not knowing we were the ones competing, sent it to us (we regularly buy from him), for $395k! So in the end, we got the house for the price we wanted...so weird.
The Initial Numbers for Seattle Crack Head:
As - Is: 830 sqft finished (1200 sqft unfinished attic and basement), 2 bed, 1 bath 1928 craftsman
Purchase: $395,000
Estimated initial Rehab costs: $120,000
Estimated time to complete: 6 months
Holding costs: Buy all cash by partnering with a local private lender 60/40 split (60% us, 40% him) and have no holding costs for project (this saved us...)
Estimated ARV: $650,000
After rehab needs: 4 bedroom 3 bath, 2020 sqft finished
Why did we buy cash and give up 40% of profit instead of leverage on our side?
We typically do not partner with people anymore. And usually choose to use our own funds and or leverage with private money at 10% annual for the project. HOWEVER! At the time of buying this house (June 2016), we also purchased NINE other homes in the same month (10 total) and this tapped us out of funds for the month. We also were afraid of possibly running out of contractors and thought this may delay the project, making us want to have zero holding costs just in case. Looking back, this was the only smart decision we made. If we would have leveraged, we would have made LESS than we did partnering (house took us 12 months to complete...!)
Scope of Work
- Full gut job house - bring it to the studs
- All new electrical and plumbing for entire house
- Build three new decks
- Finish basement fully, add bathroom and bedroom, and family room
- Finish the attic space, add new Master Suite with full 5 piece master bath
- New kitchen
- New everything - flooring, windows, base/trim/doors, paint, tile, and any thing you can think of..yes, we did that too.
Where did it all go wrong...? And lessons to learn...
- First, go back to the last BEFORE pic above. See anything wrong with the power line? The crack heads had been stealing power for over a year, so the city came and physically removed the power cable from the city (popping the meter didnt work), accumulating over a $7000 electrical bill and fine. Crack heads paid that. But we paid in having the city drag FORTY Five (45) Days to get our power reconnected...delays from the start.
- We ran out of contractors...June 2016 was a super insane time for us and the rest of Seattle in the real estate market. We bought 10 houses that month, and apparently so did everyone else. Contractor prices soared, and finding contractor labor inside Seattle for that summer was the toughest id experienced. We also had 8 other projects (18 total)...so that didnt help. Because we bought so many so fast, we didnt plan ahead for labor and contractors...ended up struggling to find people and delaying the project
- Bought too many COMPLICATED houses...we bought too many too fast. Which normally isnt an issue for us. However, we bought too many COMPLICATED houses too fast (full gut jobs to the studs, full remodels all systems, etc). And due to the rising contractor costs and lack of affordable GC's in our area, we had begun GC'ing our own jobs. With my self and only two other employees...we had a battle to fight up hill.
- Our normal contractors jacked up prices...lots of stories here, but our electrician for instance, who at the time had done 38 houses for us, went from a normal 10k full re-wire on a house like this, to bidding OUT OF NOWHERE $22,000!! For the re-wire. He literally just finished two houses for us for half of that. Summer rates...well...he never got the job and never got another job since.
- Our drywaller took 60 days to drywall...our trusty drywaller who did multiple houses for us, took nearly 60 days to fully complete the project. Now, normally we would have let them go earlier...but we were stuck. There was no one else to jump on it. The drywall was up, but it was HORRIBLE. Waves everywhere, not completed in spots, poor texture. We found out that he subbed out to the lowest bidder he could find, and then went on vacation...charge backs towards him, and no more jobs for him since. However, delayed us again.
- We hired the worst GC for all finishes...We personally handled all rough in for the house. Mistake after mistake, mis management after mismangement, and finally sheet rock is up and we can get a GC in there to finish the rest (trim, doors, cabinets, tile, decks, fences, flooring). We hired a new GC for us. Smelled good, looked good, sounded good. Good docs, everything in order. So we took a chance...worst mistake.
- We had no one else, so felt stuck
- Only thing that saved us was SUPER SOLID contracts. We make the GC sign OUR contracts (5 pages) and OUR SOWs (4 pages this house). Saved us from litigation and major costs later in the job.
- Contractor started December 2016, and we fired April 2017...having to rip our portions of their work, finish what they didnt, and back charge them for the rest.
- We managed them almost daily. Our contracts protected us. We gave them every chance. Once our other jobs quieted down, we were able to fire the GC and sub things our selves
- GC was not paying ANY of their subs or labor...we had to find the subs and get lien releases from each person and settle with them so they did not get screwed by the gc
- GC attempted to sue us for the entire SOW budget.
- Our constant photos, docs, and contracts, and emails, got their attorney to drop the case completely
- Delayed completion another 30 days after firing
- Full rehab took us 11months to complete...12 months from start to finish for acquisition to disposition. Can we now get long term capital gains since we had the house for 12months? Im not a CPA, but i can tell you that by the letter of the tax code...NO. Its still ordinary income, ask your accountant why that is.
- The entire basement FLOODED after we finished it!! Seattle has water issues...the problem with buying houses in the summer, no rain. In December 2016, after we just got done drywalling the entire basement, it flooded due to ground water rising. We then had to install an interior french drain by breaking out the concrete, damaging the new drywall, and putting the drain system in...yay!
- We mismanaged and this house took up so much of our mental power and physical power...the drain this property took from our focus and our team was the greatest loss.
Bottom Line
House took us 12 months to purchase, rehab and sell. Closed today June 9th 2017, purchased June 6th 2016. We had experienced the worst handling of a project my team has ever had. We got lucky. This could have been worse for us. We could have leveraged and paid high holding costs. We could have not used our contracts and been taken to the cleaners by the bad GC. The market could have dropped. We could have been WAY over budget, and i am still surprised we werent. Everything that could have gone wrong, did. Even right now we just found out we forgot to add a dryer vent! ;)
Final Numbers:
Final Rehab costs: $130,000 (10k over budget, despite issues)
Listed House: $600,000 (tactic here was list low in this hot market, lots of activity, sell for $650k)
House sold for $730,000 with 30 day closing and buyer willing to cover up to $60k out of pocket if low appraisal. House appraised for $710k, buyer had to come with 20k out of pocket.
Total Profit of Project (rounded): $135,500
Our profit with 60%: $81,300
My final thoughts are that this house has profited us well. But the time, headaches, mental energy, distraction from other jobs and opportunities was not worth the profit. Not to mention the potential of ruining a private money relationship (partner on house). Luckily, we have a great relationship with the lender, and they have been understanding and had our back the whole way. Despite this, the market saved us from wasting even more of our time. We got lucky in my opinion. A professional business like mine should never have failed this bad. Almost all mistakes on this property can be pointed to one thing, my mis management of the project...period.
AFTER PHOTOS!!
See our event coming up here too at the Bigger Pockets Networking section: PNW Bad *** Expo - Networking events
