Let’s Make a Deal - Blog Post
How many of you enjoy sitting down to an episode of Flip Or Flop, or Fixer Upper, and think, it would be neat if I could make a deal like that and come away with a big payday. While real-life house flipping isn't as easy as applying trendy backsplash and stainless steel appliances, with proper wits, this can be a lucrative business.
There are many deals available in today's market that will allow a passive real estate investor to partner with an active real estate investor to make a return on your money logically. My goal as an aspiring active real estate investor is to focus my attention on flipping properties in the Connecticut real estate market.
Find
Finding the right deal is always difficult. I've developed a useful method of finding potentially profitable properties. Through that method, I'm able to scan hundreds of properties quickly to determine whether they're a good deal or not. Let's walk through a potential deal which I found currently listed on the market.
On Hubzu (an online auction site for bank owned properties), 42 Brook St. Naugatuck, CT is listed (as of 11/7/2018). Under Hubzu rules, the property must reach a reserve price for the seller (the bank) to consider the final offer. This property starting bid price is $55,000 (yes houses can be this cheap). To get a feel for what the reserve price may be, Zillow.com also lists Hubzu properties ($84,400 is the list price as of 11/7/2018). Hubzu doesn't share the math done behind the scenes on reserve values, but from my calculated assumptions, the Zillow list price tends to be within 10% of the reserve price.
Here are some quick stats on this house:
- Property Type: Single Family
- Year Built: 1948
- Square Footage: 1424
- Annual Property Taxes: $5,489
- # Beds: 3
- # Baths: 2
Here are some stats concerning the property according to Zillow.com:
- Zestimate: $186,409
- Average List Price Sq/Ft in Naugatuck, CT (October 2018): $130 sq/ft
Say you bid up to $80,715 and meet the Hubzu reserve price. After the 5% Hubzu agent commission fee, you will have put the house under contract for $84,750. Make sure there is an "inspection contingency" in the sales agreement.
Due Diligence
There are two aspects of due diligence which you need to be mindful of: how much will it cost to rehab the property and how much can you sell the property for once it's back on the market.
- The cost to rehab: Hire an inspector for $500 who will go through the entire property and uncover any issues with the unit. A good inspector will provide a "punch-list" with a list of items to repair. You will use this punch list when working with contractors to budget out rehab expenses. If you uncover a major issue as part of the inspection (e.g., structural issues), then you will have the "inspection contingency" clause in your sales agreement which will permit you to walk away from the deal unscathed.
- Comparable sales prices of similar properties: Ultimately, you need to be able to quickly tell how much the property can sell for when back on the market. To get an accurate number, work with a real estate agent who can run "comps" on the MLS (multiple listing services) for recently sold homes in the area. You can also look at average list price/sq ft by the town and "Zestimates." Although not as accurate, this is a somewhat decent ballpark number to help you project profits.
Finance
The next step is to finance the deal. If the goal is to flip this property, hard money lending is a viable option because of the ability to close and fund construction costs quickly. Hard Money Lenders provide short term mortgages, usually one year or less, at a higher interest rate than what's provided by a regular bank or other private lender. Even with the high interest rates (~11%) and points (~2), if appropriately planned you can still walk away with a nice profit.
On this deal, you'll only need to put down 10% down payment if you go through a hard money lender. They will fund the rest of the project. You will need to have the full construction funds and holding costs available on your own so this one consideration to keep in mind (the hard money lender reimburses you via draw schedule reimbursements).
Rehab
As the property is going through the purchase closing process, it's imperative to get three general contractors into the unit to provide independent rehabilitation quotes. Looking at the pictures of the property (see link), the property is generally a cosmetic rehab (you'll have your punch list from the inspector). Let's go with the following rehab cost assumptions for simplicity purposes:
- Plumbing: $2,000
- Electrical: $2,000
- Big Ticket Item (Heating System / Roof Replace): $7,500
- Flooring: $4,000
- Cabinets/Counter-tops: $2,000
- Paint: $4,000
- Walls: $500
- Landscaping: $1,000
- Appliances: $2,000
Total Rehab: $25,000
Even with other holding costs, let's go with the assumption that you're all in at $30,000. The idea here is to get the property into a desirable re-sell condition. Don't outlay any major expenses such as a total kitchen/bathroom replacement. Ensure the contractor you go with can complete the rehab in a reasonable timetable (no longer than 30 days). The idea is to get the house back on the market as soon as possible. Ensure that a contract is signed with a set draw schedule in place to ensure the contractor is not getting paid for work not performed.
Re-sell
Now the house is ready to sell; you may want to consider staging the property to set the mood for the prospective buyer. Based on our assumptions above, the average list price in Naugatuck, CT is $130 sq/ft or $185,120. It'll be imperative to work with an agent before listing the property to ensure the house has comparable properties in the nearby vicinity that have sold for similar prices recently (you'll have already done this before purchasing the property so barring any huge economic downtown, you'll have a general idea already). Looking at recently sold homes in the area via Zillow, $185,000 is quite reasonable for a 3 bed/2 bath home in Naugatuck, CT.
If you follow the steps above, rehab the home to a condition which the average person in that area would be happy to live in, and list the property at a reasonable price, there should be no problem to sell the unit in a reasonable timeframe.
Final Numbers:
- Net Sales (after agent commission, closing costs): $165,864
- Total Costs (after purchase price, purchase closing costs, interest, property taxes, rehab, holding costs, income taxes paid on profit): $133,429
- Net Profit: $24,326
- Net Cash Outlaid (Assuming construction loan): $20,032
- (The $30,000 rehab costs will have been reimbursed prior to house resale)
Net Cash on Cash return: 121.44%
# Days:
- See house to Sales Agreement: 7 days
- House Closing (buyer): 35 days
- House Renovation: 28 days
- Listed on Market to Sales Agreement: 28 days
- House Closing (seller): 42 days
Total # Days: 140 days
What do you think? Happy to have you question my assumptions. And no I'm not afraid of someone "stealing" this deal. There are dozens of them out there, you just need to know how to find the needle in the haystack!