First flip, and in a tough market too, is a success!
My wife and I recently closed on our first home, and it was an unintentional live-in flip. We knew we were buying under market, but we did not initially intend to flip the home. However, some life changes happened: a baby was on the way, we were expecting to take in some family, so we knew we had to upsize. We bought our home for 300,000 and the first offer at our open house was $410,000. So, here is the story...
A perfect first home was on the market in a town somewhere near where we grew up. It was on the MLS as an REO for $310,000. We see the home, we love it, but there is some water in the attic. We assumed the roof was leaking so we got the bank to accept an offer of $300,000. We were the only bidders, but that was because we are in a "no good deals" market (a suburb 45 minutes south-east of Manhattan).
The home was vacant for a year or two, but we lucked out and the home was somehow winterized (a rare find). There was a severe ant infestation, however, estimated to between 1 and 2 million ants living in our concrete slab foundation - about $600 to exterminate them. We had a hazardous tree in the back and had to do some pretty serious landscaping to make this house nice. We had to spend approximately $5,000 to make the landscaping tolerable. Next, the carpets were nasty - $2,700 to replace the carpeting for the 3 bedrooms. We got pet-friendly, 1-inch, brown carpeting; it was impervious to rips or stains. We had a 4-foot fence, but we have a dog that can jump over 5 feet. We were also behind a commercial property, and we don't want to look at people doing business - neither would any buyers, so we paid $4,600 for a PVC 6-8 foot fence. Next, we had a few broken windows. No shattering, but the windows were unclosable. We paid $1,650 for new windows. Unfortunately, our house was damaged by a hurricane, or so we were told by the village. They had a violation on the property for "no Sandy restoration permit". We had to have them inspect the home before it could be sold, and they said our circuit breaker had to be moved and we had to have a low-water cutoff installed on our boiler. $1,800 for electrical and $1,500 for the boiler cutoff.
We had some setbacks during closing... Our first buyer made it through contract after offering us 410,000 non FHA. The appraisal came in at 390K, which was definitely low. For whatever reason, they refused to adjust the appraisal. Whatever, 390 it is. We make it to the final walkthrough, and I didn't have the grass cut. Further, the front door started to rot, even though it was like that when they said they would buy it as-is. They also demanded we give them a brand new driveway because they didn't like the cracks, that again they agreed to accept as-is. They have a big freakout and demand 7500 dollars. I did not want to lose the deal, so I was ready to give it. Their agent agreed to cut his commission too to make the deal happen. Even after appeasing them, they changed their mind and wanted out. After some negotiating, we let them walk but kept $5,000 of their deposit after lawyer fees. We could have fought for the whole thing and would have won, but the courts in NY are not owner-friendly so we really didn't want to go down that rabbit hole. A week after they walk we find a new buyer, and this buyer is FHA. They offered 390, but priced at 400K with a 10k seller's concession so that they can essentially get in for $4,000. We somehow got the property to be appraised by FHA at 400k, so the deal continued. They also agreed to accept as is, and all further negotiating went smooth. All in all, we walked away from the closing with $372K after paying lawyers and brokers - my broker was a relative so I barely paid her, and their broker agreed to 2.5%. So some math now:
$372K Proceeds from sale.
About $27K in expenses I can account for (table below), there is an additional $2k in expense from a washer and dryer, and no more than $8k in total taxes. That is an all in of $337K.
The deal took us approximately 11 months to complete, however we only put in about 4 months of part-time improvements. Had we known we were flipping from the beginning, this would have been done within 6 months maximum. Now some return calculations, excluding financing.
$372K - $337K = $35K
35K / 337K = 10.38% actual ROA.
10.38% * 12/11 = 11.33% annualized ROA.
Had this only taken 6 months, and if we did not live in it, that would work out to an annualized ROA of over 20%. So, when someone tells you that there are no good deals in your market, consider a different investment approach. Just because BRRRR worked for you in the Midwest, does not mean that it is the only investment approach you can take when you move to a price-inflated, major metro. Click here for a video walkthrough of the finished home!
Here is a list of some of the expenses - not comprehensive, but the biggest ones. It is missing the washer and dryer.
