My first flip - story, analysis, and numbers

11 Replies


Acquisition

  • Newly licensed agent with a handful of residential units (sfh and duplexes)
  • On the market for about 6 months. Started 130, and sat for a while. When it dropped to 120 I made my offer and had it under contract for 100.
  • Used my new credit line for the down payment 25k and got a conventional loan for the rest. The plan was to BRRRR.

Renovation

  • Cosmetic only
  • Refinished floors, all new kitchen appliances, new laundry machines, added dishwasher.
  • Improved layout - Added a small wall to create a hallway on the first floor. This enabled people to walk from the kitchen to the back deck without having to go through the first floor bedroom.
  • Did the same thing on the 2nd floor, so that people could walk up the spiral stairs and not have to pass through the 2nd floor bedroom. This created a master suite out of the 2nd floor with its own private bathroom.
  • Eliminated a closet in the 2nd floor bedroom to make the room bigger. Added an 8ft closet to the walkway between that bedroom and bathroom to make up for the lost closet and make good use of previously unused space.
  • Deep clean and fresh paint everywhere, upgraded a few light fixtures and fans.
  • First time not doing all of the work myself.

Marketing

  • Purchased in October 2016. Rehab complete in under 2 months. Now we’re in late December/January and the leads are coming in SLOW.
  • I figure, what the heck. I’m licensed now, let’s put it on the market and see what happens.

First Contract

  • FHA buyer, needs a lot of sellers assist. We agree to 158 with 8 in SA, so 150 net for me.
  • Wants me to split the cost of the appraisal with him because he’s doubtful it will appraise. I agree.
  • After inspection he wants to max out his seller’s assist, and perform some costly repairs (upgrading the old ungrounded electrical). I offer him another $700 in SA instead. He terminates the contract.
  • My thoughts - this deal fell apart partly due to issues with the home, but mostly because the buyer didn't have enough money for closing costs.

Second Contract

  • Cash buyer, another investor. We agree to 147,500 and I place a tenant. I already had a qualified applicant at that time.
  • After the inspection he gets me down to 140,625. This kills much of what is left of my profit, but at this point I just want to get my money back and get into a new project.

Lessons learned

  • Stay away from homes with small spiral staircases. This was a deal breaker for many of the potential buyers and renters,
  • Stay away from homes with a lot of existing handyman work (unless you are going to re-do it). Inspectors can tell and it will hurt you on the back end in negotiations with buyers. This probably wouldn’t have hurt me if I had stuck to my original plan to keep this as a rental.
  • Market timing is important. This property sat for several months without getting a qualified tenant or buyer. This made my holding costs higher than they would have been if the property was avaialbe in spring or summer. This was not a deal-breaker but it did cost me more money.

Judgments

  • Success! - A 55% Cash on cash return isn’t bad! Especially for my 1st try at a flip.
  • Failure! - Just over 10k in profit is far less than what I was expecting when I first listed the property for sale. I expected to get around 155k for it, with a profit just shy of 25k,
  • More failure - if I was not a licensed agent I would have had to pay double commission. This would have pushed me down close to break-even... NOT good!

All the numbers:

Although not seen as a win from some, 10K is better than a sharp stick in the eye. Repeat this 10 times and you won't need that bank anymore.

@Max T. congrats on the first flip! Thanks for sharing. I am in the process of trying to get my first project under contract. Have made multiple offers but no takers thus far. Persistence is the key to success! Thanks again for sharing and any amount in the positive column should be considered a win/invaluable education. Here is to wishing you a successful 2017 in your REI ventures! Thanks for allowing me to share.

congratulations first of all for profiting.  10k may sound like peanuts based on what numbers other seasoned investors mention here. that's really not a small amount of money and it would take many hours to make that on a 9-5 job.  I see saving on seller agent fees saved you money.  I was curious if the buyer,  who happened to be an investor,  recognized you were the owner agent flipping a house and used it to their advantage to negotiate? If so,  would having an agent represent you possibly have got you a little more since they'd negotiate and market without the influence of their money being at stake or do you feel you would have had the same result or worse? 

Wow! Thanks for the detailed breakdown & congratulations. 

Originally posted by @Rodney Sums :

congratulations first of all for profiting.  10k may sound like peanuts based on what numbers other seasoned investors mention here. that's really not a small amount of money and it would take many hours to make that on a 9-5 job.  I see saving on seller agent fees saved you money.  I was curious if the buyer,  who happened to be an investor,  recognized you were the owner agent flipping a house and used it to their advantage to negotiate? If so,  would having an agent represent you possibly have got you a little more since they'd negotiate and market without the influence of their money being at stake or do you feel you would have had the same result or worse? 

 Good question Rodney. I'm not sure. Perhaps I would have done better on negotiations, but then I would have had to pay a commission. It is hard to say if that would have changed the numbers in my favor but it is interesting to think about.

@Max T. Still, you got your initial investment back plus MADE money to learn, it usually costs to get educated.  What I also found interesting is that an investor, not an occupant, was attracted to your property at a price that appears would have been retail.  What do you suspect the reason was?  Buy and hold for them?  Would it have been a good buy and hold for you or you more interested in the fast return on a flip?

@Rodney Sums retail price would have been in the 150s... But this house had some issues that retail buyers wouldn't want to deal with (knob and tube wiring).

This investor was utilizing a 1031 exchange program. He was buying several other properties in addition to mine. He is an older guy who is more interested in tax savings and appreciation than cash flow. Therefore, he is willing to hold a rental that doesn't meet the 1% rule.

For me this would have been a good rental to keep but I would have had to refi and leave some money in the deal. Not the end of the world but I wanted the experience. Another reason I didn't want to hold it was the small spiral staircase. That feature was a deal breaker for a lot of buyers and renters and I wouldn't want the trouble of dealing with that at every vacancy.

I love holding rentals but I want to only keep the properties that are most profitable and with the least hassle. This would have been fine as a rental but I thought I could do better elsewhere.

@Max T. ahh the electrical, that's why he wanted a discount.  Good to know about that staircase, I almost bought a condo that had one but debated about that spiral staircase.  It looks cool but walking up those joints...isn't cool and I can only imagine moving furniture on those things.  I can see why that would be a deal breaker

Max,

We also just finished up our first flip in AZ.  Unfortunately, we found out about an obscure rule that says if you complete more than $1000 of repairs in labor/materials outside of work done by a licensed contractor, you have to wait a full year before you can sell or rent it.  It was not fun to learn that and completely ruined our plans.  We're not sure how we're going to make a profit flipping in AZ if we have to use expensive GC's.  The law is called the Handyman Law.  As a flipper and a Realtor, have you come across this at all?  Or could you explain this further to us?

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here