1st Flip - under contract, inspection ends Friday - Help!!!

23 Replies

Hello all,

Newbie to bigger pockets making a jump into my first flip. First a little bit about me, I am a licensed general contractor with over 10 years of experience working on mostly commercial projects, I have done about 20 residential projects over the years as well. My wife is a real estate broker who owns her own company as well. We are currently under contract to purchase a 2/2 in east Hollywood FL. See the Zillow link for the property below; interior is only 2,000 sq. ft not 2,556 (2,556 includes the garage)

https://www.zillow.com/homedetails/600-N-13th-Ave-...

Work for this house would include turning it into a 3/3 while leaving the existing 2 car garage, 3 brand new bathrooms, remove the wall separating the kitchen from family room, refinish and/or replace kitchen cabinets (countertops will be reused), replace all exterior doors and windows with new impact glass, new HVAC system with duct work, minor electrical (high hats, new fixtures, inspection repairs), paint, new casing/baseboard, and maybe new interior doors.

I have also listed below my report from bigger pocket calculator on my return for the flip. Numbers are based on list price of $575,000 but i would list at $599,000

https://bp-v-newproduction.s3.amazonaws.com/upload...

Since I am in the construction business these numbers are realistic and I would hope to complete the job at a lower cost.

I have a few concerns/fears (my inspection period expires on Friday so I need to make a decisions ASAP)

1) The street, 13th Ave is a cross street that people cut thru. It is not a highway or a major traffic street by any means but residence cut thru this street to cross Hollywood Blvd at the traffic light on 13th Ave. (not the busiest street but not the quietest) Will the street dramatically reduce our cost per sq. ft even if we are the best of the best on the market at that time?

2) This house is on a corner lot with exposure to 13th ave, house would have a side yard and not a backyard. Is this a problem for people with kids? Homeowners in general? All houses on these Avenues have side yards and they all trade. Example if the kids are playing in the backyard you would not be able to see them from inside the house (unless u were in the 3rd bedroom)

3) ARV price, not so concerned with this because people will pay top dollar for a turn key product. Currently comps are tough because we don't have a true turn key comp to compare ours too. Have other investors gone into flips expecting to sell for the highest comp in the neighborhood or is this a bad strategy? We wont be highest priced in area BTW, you can check other listing on Zillow. My $599,000 listing price isn't outrageous for the area just want it to sell quickly.

4) Multiple houses are for sale in the neighborhood. Most have been sitting on market because they are over priced and need major upgrades. Are these lower priced, outdated, old listing going to be an issue for me when people begin looking at my property?

My gut is telling me to proceed on this property as I believe we are buying at a really good price. First time flipper here maybe getting a little cold feet. Help me analysis this deal and talk me thru my concerns and let me know what I haven't considered yet.

Thanks so much in advance for all your help and responses. I wouldn't even be under contract trying to flip this house if it wasn't for finding bigger pockets!!

Thanks

Drew

Hi I am a newbie myself so I don't know much but I noticed that the 2 bathrooms were dated plus you plan on adding a 3rd.   Your budget does not reflect that, did I miss it?  I know this must be nerve racking but do it only if the numbers make sense to you.

As a seasoned investor these are my comments:

1. Spending $108K in renovations for a $50K profit is a "NO" for me. Think about "Opportunity cost".

2. Appraisers and the buyers will balk at paying almsot $200K over the purchase price within a span of 5 months. Watch out.  

3. What if it sells only for $525K? You did all that work for $25K? Again a "NO" for me. 

You are an ideal couple for real estate investing but picking a wrong project to get going.

Dominique, 

my budget reflects remodeling the one existing bathroom, and then converting the other bathroom into 2 bathrooms. Its a large bathroom size is 15' x 7'. 

extremely nerve racking - thanks for your response, hoping some more experience investors can offer some advice. What pushed them over the edge for their first deal?

I’m gonna have to agree with Vic on this one. Not enough room in this project. IMO always use the most conservative numbers when it comes to rehab and resale, and always allocate for overage/issues. Additionally, without solid comps I would pass on this one as my first flip.

Be careful. Maybe start smaller.

Good luck

Vic, 

1)What return would you want for 108K in renovations? For me as a GC its just another project. My profit margins on a $108,000 job for a paying customer is much lower than 50K, much much lower. Do you mean the "opportunity cost" on money? Or "opportunity cost" with my time 

2) Valid point - but i see it happen all the time and customers pay it. Agreed on this comment yes and no. Not really sure what other option I have with a flip. 

3) It selling for 525k is a real concern, and at that number I would only break even. But I really think for the right product the house sells for more. Customers will pay top dollar for a house that is 100% remodeled. Worst case scenario I move into the house 

Mayer, 

Thanks for your response - Im starting to think that as well, the resale and the comps concerned me. My construction numbers are good on the rehab side. Whats holding me back is the sale price. Part of me believes it could sell for 600K + if market keeps improving 

What position would you be left in if you were to lose money? Or if it sat on the market for 8 months? Is it your cash you’re investing or someone else’s?

I personally believe in starting smaller to understand fully the process and the risks. Improve upon them and that will allow for larger projects with minimal incidents.

This may be a small detail amongst much bigger issues and decisions to be made, but re-using countertops is often a no go.  They don't always demo well, store well, or go back exactly the way you want.  there may be extra cost for re-cutting them to fit, or you may decide that they just don't "go" with the new design.

Mayer - its my money for the construction and interest only from a line of credit to purchase the house, so every month is doesn't sell would cost me an additional 2k. Very slim chance i lose money, at worst i break even and sell for 510k or move into the house. I agree to start smaller, but this is a good deal for this area but its a gamble and i don't have the experience like you mention, Trying to think of other things to do with property (rent or airbnb) 

Anthony - i have been thinking about a cheap renovation of changing the windows out, adding the third bedroom, changing cabinet doors and painting cabinets, remodel of the existing baths. My wife doesn't agree with this plan, she sees property all day with clients and know what buyers are looking for. Adding a on suite master bath is essential and then unfortuantly to do the project with plans and permits for a legal 3/3 things just add up. 

Kristin - noted on countertops and normally i'm 100% with you. Gonna keep kitchen layout exactly the same, i will have my fabricator remove, store, and reinstall and i got $500 in budget for that, he likely wont even charge me. 

I can’t imagine renting it would make a worthwhile investment.

Why not find a condo/townhouse as a first flip? I would wait for another property to come up that is a more sound investment.

I would say there is uncertainty in any flip but given that you are a contractor and your wife a realtor, you probably have minimized the two most important variables - construction risk and "mis-improvement" risk. Nobody can predict if prices will go up or the other houses will affect your selling price but at least you won't be at the mercy of a dishonest contractor with sky-rocketing costs and/or poor workmanship.

Mayer - renting/airBnb doesn't work cant do that - what makes this an unsound investment? My return? I'm investing around 130k and I have 50K profit.

Vinay you basically nailed it. The contractor and realtor is huge and we currently live in the neighborhood so we know the market well. Living in the neighborhood is giving me confidence in the deal but still lot of other houses for sale and interest rates going up.  

Going to request a credit tomorrow due to property inspection results and see what money we can save

1) The street, 13th Ave is a cross street that people cut thru. It is not a highway or a major traffic street by any means but residence cut thru this street to cross Hollywood Blvd at the traffic light on 13th Ave. (not the busiest street but not the quietest) Will the street dramatically reduce our cost per sq. ft even if we are the best of the best on the market at that time?

Yes, yes and yes. I use to sell for a new home tract build and it is a PAIN to sell something that backs up to, not necessarily a busy street, but even a "busier" street. The only times I have seen it not affect it "as much" is when the lot itself is very desirable (huge lot, few neighbors, etc.)

2) This house is on a corner lot with exposure to 13th ave, house would have a side yard and not a backyard. Is this a problem for people with kids? Homeowners in general? All houses on these Avenues have side yards and they all trade. Example if the kids are playing in the backyard you would not be able to see them from inside the house (unless u were in the 3rd bedroom)

Depends on the homebuyer type, if it is a family type of neighborhood then yes.

3) ARV price, not so concerned with this because people will pay top dollar for a turn key product. Currently comps are tough because we don't have a true turn key comp to compare ours too. Have other investors gone into flips expecting to sell for the highest comp in the neighborhood or is this a bad strategy? We wont be highest priced in area BTW, you can check other listing on Zillow. My $599,000 listing price isn't outrageous for the area just want it to sell quickly.

I always like to lean on the safe side when doing my comps. When I look at my comps I price them per square foot, and Days on Market (DOM). I want to know what the highest comps sold for, and did they sell under 30 days? You tend to notice where the "less desirable" homes sell at, and the "more desirable" homes sell at. And while this next part may not be true for your market, I have noticed in my local market, the bigger the property is, expect a lower price per square foot. So for example, if your best comp is @ 180/Square foot, and that house is only 1700 Square feet, do not expect 180/Square foot for your 2000/square foot home. Expect it to sell for a little less per square foot.

4) Multiple houses are for sale in the neighborhood. Most have been sitting on market because they are over priced and need major upgrades. Are these lower priced, outdated, old listing going to be an issue for me when people begin looking at my property?

Not in my opinion, you should be fine unless it is a neighborhood with first time homeowners trying to get in.

Also Airbnb--Is your town a year-round destination? If so, it's always worth looking into. A great resource to start is Airdna.com (it is fee based fyi)

Let me know if this helps!

Sincerely,

Travis Rasmussen

SoCal Real Estate agent 

Airbnb Investor/Superhost

Just my two cents as a certified appraiser, you should point more weight on the comps in the market. As your wife is a real estate broker she should be able to complete a CMA, plus be able to set up showings of other competing listings in the market so you can see what level of finishing competing property have. I wouldn't recommend being the best home in the market. Unless you get a cash Buyer, the Buyer is more an likely going to get financing. Which means the Bank is going to get an appraisal. If there are not good comps in the market that could support the sale price, it's unlikely the appraisal will come in at the sale price. And even if the appraisal does, if the banks underwriter doesn't like the comps in the report, or they don't feel that the appraiser provided a strong enough case for the value, the underwriter has the power to over ride the appraisal. I've seen this on both sides as the appraiser and as a Realtor.

Travis - thanks for response - street isn’t a major issue but it’s not perfect, would need to back out of driveway into 13th Ave. I could create a side entrance off alley but will cost more money. airBnb is an option but prefer not to. Good to know old low priced houses on market shouldn’t effect my property 

Matthew - we have previewed all houses in the area already. No true comp, all renovations have been done most of most but haven’t complete the full project. I am super concerned about appraisal and comps if we don’t get a cash buyer. Also that price per sq ft will be a little lower even though our house is larger than others. Thanks for your response 

As a professional investor, this is the last time I am going to advice U on this project:

1. Investing $480K and hoping for a $50K return and hedging on an appraiser giving U a $200K bump and savy buyers looking at Zillow and feeling they are paying a 60% premium within 5 months is risky.

2. As a first project go for a smaller project. I am getting a sense of feeeling that you are getting emotional and trying to pull the trigger. 

3. After closing for $380K you are oing to invest another $100K in cash, time, and efforts . Seriously? Most optimistic return $50K for $480K cash, time, and effort. What is the pessimistic return? Think about it. Are you ready to rent it if it doesn't sell? What about the rent?

4. You are taking up this massive renovation project just at the beginning of hurricane season. You renovation time could get longer. 

Be conservative! That's the mantra.You have done a nice job with the number crunching. But seriously this is not the right kind of project for you to start! Don't feel bad or worried when U let go of one opportunity there are many more on the pipeline.

Let me summarize the risks:

1. You don't have COMPS to ustify your potential sales price. Zillow, appriaser, Bank underwriters, and savvy buyers will undercut the sales price.

2. You are pumping in over $100K in renovation that a potential buyer may not even like. For a $380K purchase you should not be spending more than 10% of the sales price. 

3. I never estimate the sale price to be over 40% of my purchase price. There are isntances where a buyer may be willing but the appraiser who is under the watchful eyes of bank's underwriting will come up short and hurt you with you projected margin.

Other thing to consider is if there are no truly good comparable sales in the market, is the property you are looking to flip that outlier in the area? Plus if there are no other similar higher price homes selling in the market, this is likely a sign that Buyers in this market/area, are simply not willing to pay more to live in this market/area. I wouldn't put a ton of weight on active listing, short of this data telling you what homes are not selling for. Because anyone can ask anything they want.  Look at the recent comparable closed sales in the market, because that is what the appraiser is going to due. Plus this data will give you a true picture of what is going on in the market.

Final decision is i'm gonna pass on this deal. The comps are going to be a major issue when comes time to sell. I do feel like i was also trying to force my first deal. I'm currently looking for another deal either fix and flip or multi family. Thanks to everybody who responded, I learned some important things I will use for my future real estate investments.