My First Deal – How I Accidentally Flipped My Condo
(Note: This is my first post on Bigger Pockets! I’m very excited to be getting involved with the community. Thank you to everyone for providing me a great education so far!)
Let me start by saying that I know this may not qualify as a flip—or, for that matter, as a deal, period. But it is how I got started in real estate investing so I think of it as Deal #1.
In 2012, at the age of 49, I got divorced. I had been a published author for all of four years, and in two of those years my expenses were greater than my income. Between what I expected to earn that year and the support I was granted in my mediation agreement, I could not afford to rent, much less purchase, a 2-bedroom condo in Oakland, California, where I planned to move after raising my children in a suburb half an hour away.
Dad to the rescue! I will always be grateful to my dad for stepping in to help, even though I felt ashamed to be relying on a parent at my age. But we settled on an arrangement that we both were comfortable with: he bought a 2BR, 2BA condo for cash, and I paid him rent that gave him a 4% annual return over PITI—and I agreed to pay all maintenance and repair costs that came up. I also handled all the paperwork including tax, insurance, etc.
The condo was in fair shape, but many of its components were dated. In the next three years, I made several improvements—removed the asbestos/popcorn ceiling, added some can lighting, updated a few light fixtures and faucets, and bought a new stove, as well as painting the whole place myself. Meanwhile, the Oakland real estate market went nuts! Rents increased as well, and I jokingly told my dad he was charging me way too little. Thankfully, he did not take that as a signal to raise my rent!
In 2015, two significant things happened: first, my ex-husband went through the first of several layoffs and it became clear that I would not be receiving any support from him that year (or ever again, as it turned out). And second, I landed the biggest book deal of my career to date. Suddenly I had enough money to pay my bills, with a cushion to spare, and—at the urging of my sister, who had been interested in real estate for a while—I came up with the audacious plan to buy my condo from my dad.
I had been a homemaker for many years before becoming a professional author, and had relied on my husband to take care of all financial aspects of our marriage. I felt that this was a reasonable thing to do because he had an MBA in finance from the top business school in the country. Sadly, he was a very ineffective steward of our personal finances. By the last year of our marriage, we had sold our vacation home at a $100,000 loss, lost our primary residence in a short sale, and moved to successively smaller rental homes. Oh—and he somehow “forgot” to pay $40,000 in taxes and we had to enter into a repayment plan with the IRS that became a joint responsibility following the divorce.
Many of my problems were of my own making. I have no one to blame but myself for not participating in financial decision making, carrying credit card balances, being ignorant of our retirement savings and mortgage details, having no personal plan for my own financial future, and never creating a budget. (The ONE positive thing I did, over my husband’s objections, was to start education savings plans for our children that paid for their freshman years of college. As naïve as this seems to me now, my ex had been planning to fund their education with the equity in our vacation home!)
After my divorce, my standard of living plummeted, but I got something much more valuable in exchange: personal responsibility for my future. The first thing I did was to hire a budget coach to teach me the basics. After that I rolled over my 401Ks (I’m very grateful to my ex for investing the maximum the whole time he was working, and to divorce law for awarding me half), invested aggressively, and did very well in the long bull market of the last five years. I worked several side jobs to supplement my writing income, paid my half of our college-age children’s tuition and medical expenses, bought a Yaris, and lived frugally.
But home ownership was something I didn’t dare dream of until my sister laid out the facts for me. Our dad bought the condo for $246,000. We estimated that it was worth $450,000. Dad was more than happy to gift me the equity (thanks again, Dad!), and I could afford the payments.
I decided that once it was mine, I would sell the condo at what I assumed was close to the top of the market, and buy another in less overvalued bay area town. Now I know that what I was planning was a live-and-flip. I found a Realtor and made some repairs to the Oakland condo based on her suggestions: new LVP floors, new neutral paint (which I did myself), remodeling one of the bathrooms, and hiring a stager. In January 2016, the condo was mine. Better yet, it sold six months later for an astonishing $510,000! Suddenly, I was very intrigued by the idea of building my financial security through real estate.
In my next post I’ll tell you how I invested my gains.
Here’s a quick summary of the numbers:
July 2012 – Dad buys 2BR, 2BA 950 sqft condo for $246,000 (paying $21,000 over list price of $225,000)
January 6, 2016 – I bought the condo from my dad for $400,000 including a gift of equity of $143,000, leaving me with a mortgage of $257,000. (Dad also absorbed the tax consequences of that equity gift. I can’t overstate how important his generosity has been to my success.)
July 13, 2016 – I sold the condo for $510,000. My capital gains were only $42,981 after deducting improvement and selling expenses of $38,500.
Total after-tax proceeds:
510,000 sale price
-400,000 purchase price
-16,325 capital gains tax
-38,500 increase to basis expenses
+143,000 gift of equity from Dad
=======
198,175
Here are a couple of the listing photos after professional staging. Note that I turned my coat closet into my office :)