Small profit flip - looking for feedback

28 Replies

This will be my first "quick flip", and my initial thought is that there's not enough profit to justify it many times... but just to get my feet wet, I'm going for it.

I'll apologize in advance for not knowing the proper lingo, abbreviations, acronyms, or even the right way to describe a deal... like I said, I'm new here :D

The house is owned by an acquaintance of a friend, and the friend happens to be a realtor who is killing it in my market. His opinion is that the house should be on the market for no more than 6 weeks before sold as-is for about 120k.

The neighborhood supports houses no higher than upper 130s.

We have a verbal acceptance on ~85k, and after talking to my GC I don't think we're at risk for anything more than 10k before the house would be sold at a minimum of $120,000.

We will split the costs, and the profits. If it's actually listed on the MLS, he would get a commission so we will adjust the proceeds to ensure we both come out 50/50.

$85,000 purchase

$10,000 repairs

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$95,000 invested (47,500 each)

$120,000 sale

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$25,000 profit / 2 = 12,500 each

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There is no guaranteed sale, and we both know that. In my opinion, it's a lot of cash to tie up for not a huge return, but being new at this game... I'm hoping to get some expert and experienced feedback.

TIA :)

Originally posted by @James W. :
His opinion is that the house should be on the market for no more than 6 weeks before sold as-is for about 120k.
...

We have a verbal acceptance on ~85k, and after talking to my GC I don't think we're at risk for anything more than 10k before the house would be sold at a minimum of $120,000.


I'm confused...if your agent thinks it's worth $120K as-is, why do you need to put $10K into it to sell it for $120K?

In other words, if it's worth the same amount regardless of whether you spend $10K or not, why spend the money?

Maybe if you sell it at market as is at 120k, you will get it sold in less than 6 weeks?

If you go with lenders at 70% ARV = 84k, that's your acquisition cost already, why would you need another partner? You will only need rehab cost, closing, holding, etc. Some roll everything at the end.

Originally posted by @J Scott:
Originally posted by @James W.:
His opinion is that the house should be on the market for no more than 6 weeks before sold as-is for about 120k.
...

We have a verbal acceptance on ~85k, and after talking to my GC I don't think we're at risk for anything more than 10k before the house would be sold at a minimum of $120,000.

I'm confused...if your agent thinks it's worth $120K as-is, why do you need to put $10K into it to sell it for $120K?

In other words, if it's worth the same amount regardless of whether you spend $10K or not, why spend the money?

Good question, and that's what I love about BP already - you people are all about the details, and that's important. I'm learning! :)

"As-is" would be for someone getting a conventional loan or paying cash, but since this neighborhood attracts more va/fha loans, the inspections may or may not play a factor, so we may or may not have to kick in that extra money.

I assume we aren't going to get a cash buyer, so the extra 10k is this:

1. The roof is good but if we have to slap another layer of shingles on top: $4-5k

2. There's a really nice sunroom that may need structural work: $1k

3. The Electric panel is iffy - updating it to not iffy = $1500

4. A few extra dollars to do some minor updates or changes to close the deal.

More info on the property: Foundation is solid, all brick outside, basement has no trace of leaks, it's a 3BR1BA upstairs and a very nice downstairs that is partially finished with a working fireplace. 

Anyway, back to the question - why spend the money? I don't want to, unless I have to, and I realize I might have to.

I am just hoping to get a few experienced opinions on the numbers I've presented. 

I'm not a fan of skinny deals, especially "quick"skinny deal. All about having minimum criteria and sticking to it, don't jump because you're anxious, be confident in the deal.

Now in my neck of the woods $25k in projected profits is a solid deal, $12,500 not so much. This would be 26% return on your cash though which is pretty good. My concern would be the rehab budget. $10k doesn't go far on a house and I've personally never seen a house look good after such a small budge.

Couple things to consider:

-new electrical service means old wiring. Is it aluminium? If so you're looking at a rewire. If not you still have to ground everything which isn't overly expensive but have you budgeted for that?

-if the roof is good why are you putting a new on?

-3/1 is a harder sale then 3/2 or even 2/2 imo

realtor selling you a bill of goods!   dont do it.

Or- why dont you try buying it @$85k and selling it for $120k.   If you cant sell go with the fix up.......................hahahaha.  Get your toolbelt ready

@Account Closed I forgot to mention the downstairs has a bathroom. My plan is to stick nothing at all into it if possible! But my realtor friend thinks a buyer with an fha or va type loan might need some things done to get the house to qualify for a loan... such as the roof. The electric panel is maybe 25-30 years old, and my GC mentioned it might not pass an inspection. If that's the case, we replace the panel with an updated one for ~$1500.

At the end of the day, if I had to sit on it for longer than expected, broke even, or even lose a little money on the deal, 45k isn't going to break me. I just figured I'd throw it out here and see what the BP crowd had to say about the numbers.

 @James W.

I understand clearly what you're saying. What I am saying is you are projecting $12,500 profit on a house by trying to do nothing to it. If important things like roofs and electrical panels aren't going to pass inspection as-is, it's safe to assume the remainder of the house is just as outdated. I could be wrong but that's how it generally works, people don't want outdated houses at retail prices. So to me it sounds like your numbers could be thin but I'm not on the ground there. Good luck to you.

The money you mentioned putting into it, aren't really things that are going to increase the value. Putting in new paint and carpet, updated bathroom, adding another bath, putting in new applicances and tiling or counters in the kitchen, that's what can justify selling the house for more money. I'm not sure what the comps are for the house and what it can be sold for, but it sounds like you're just buying it, fixing the foundational issues that a buyer won't notice or really appreciate, and putting it back on the market. I'm not sure if it sounds like a great opportunity. I'd recommend reading some articles on here about the 70% rule for flipping.

There are a lot of flags on this....be wary and ask for contingency of inspection.  Get that place inspected by home inspector and use that info to determine if its worth it.  Also that will allow your GC to price out what needs fixed.

Everyone seems to be missing the part about how I only want to put money into repairs if we have to do so in order to get a buyer approved for an FHA or VA loan.

I probably posted this in the wrong section, since everyone here is looking at putting money into a home to increase value. 

- The house is worth 120k as-is and we can get it for 85k (this is the reason to do the deal). 

- We believe we can get it to pass an inspection (if needed) for 10k or less.

- We believe it won't take long to find a buyer.

@Bryan C. the inspection is a good point, thank you for that. I'll order an appraisal before continuing.

@Vincent Crane  can you give me a link to a 70% rule discussion?

@Christopher B. I understand your assumptions, and they are valid. Thank you for your feedback.

Again, I was only looking for comments on the numbers. Perhaps I should have posted this in a lending section, because that's really all I'm doing - putting up X with the expectation of receiving Y returned in Z time. 

Is my % of return too low for that amount of capital and time? (That should have been my original question. I'm learning! :D )

@James W.  I love your enthusiasm but also take a step back and write down all the "potential" expenses....you always want to assume the worst to minimize the chance of a loss.  I suggest ordering a home inspection & appraisal.

 @James W.
 

I don't think we're missing the point, just based on our experiences things don't typically work the way you're describing it will. It can though so don't get me wrong, I once owned a house for about 20mins before I sold it for $30k more than I paid. That was a good day. If the house is truly worth $120k as-is then you're looking to "wholetail" as Brandon dubbed it which is awesome when it can be done. 

So to your specific question, 12,500 return is a 26% COC on your $47k investment, that's a pretty good return but not a lot of cash. If you can get in and out fairly quickly, don't expect a lot of hassles with rehab, buyer inspections, etc then consider it if you feel confident in your team and that's worth your effort. Just verify the rehab numbers. My .02. Good luck.

I agree on the inspection and the appraisal. You may have to disclose the inspection when you sell, so keep that in mind. 

You might also see if the seller will have his/her insurance adjuster out to inspect the roof, and you pay the deductible if the house needs a new roof. If possible, have your roof guy there when the adjuster is there. They can make sure the adjuster sees everything that is wrong. I did this on my last house and the settlement amount from the insurance company was enough to cover the cost of the new roof (no funds were necessary for the deductible). 

Hey @James W. ,

I read your original post but only scanned the responses so I may have missed it if someone already mentioned this: you seem to be missing a lot of other costs.  Don't forget closing costs on both sides, holding costs such as utilities, and of course the 5 or 6% your realtor friend will collect when you sell it (that alone reduces your expected profit by about a fourth).

That said, I do relatively low-yield flips that some flippers and most hard money lenders wouldn't touch.  But this is a side gig for me and I have a pretty good feel for the expenses having done this on and off for over a decade.

Good luck,

Vincent

$85k Purchase

$7200 Realtor Fees

$1500 Lawyer fees Buying and Selling

$4500 buyers closing cost.  Sounds like first time buyers type property to me.

$1000 Holding cost.

$99200 so far

$10400 profit for you

$5400 if you have to do repairs and come in on budget.

These are really quick numbers I threw together based on my experience.  Anybody see a problem with these or think they are in accurate?

Originally posted by @James W. :

There are no realtor fees. 

Since I'm replying here, I'll mention that the property is appraised higher than we thought - 130k

First, appraisal doesn't matter.  That's what a bank will lend on the property, but necessarily what a buyer will pay for the property.  Your agent should be able to tell you what the property will sell for fixed up, and what fix you'll need to do to get that price.

Next, as others have pointed out, you're missing other costs -- closing costs at purchase, title insurance, insurance, taxes, utilities, closing costs at sale, seller concessions (especially if it's an FHA buyer), home warranty, etc. In my experience, these costs typically run at least 10% of the resale price -- in this case, about $12,000.

So, if you purchase for $85K, put $10K in rehab and then $12K in fixed costs, you're looking at a profit of $13-23K on a $120-130K sale price.

That's a thin deal, but not completely unreasonable. The big thing I'd be concerned about if I were you would be the issues you run into if you get an FHA or conventional buyer. An FHA buyer will require about 4 months to close from the day you purchase, and both FHA and conventional buyers will likely run into appraisal issues if you're trying to sell at $45K above your purchase price with just $10K investing in rehab.

This is the type of deal I'd do if I knew I could sell to a cash buyer -- that would make the turnaround quick and low-risk, which is the only way it would be worth the low profit number.

@J Scott is right on - the transaction costs are what people who haven't been through this don't realize.    It's expensive to sell a house.

Make sure you are solid on your ARV and renovation costs. Then run the #'s off that.

There is no perfect transaction - good to get your feet wet to get into the game even if you don't kill it.   

This deal is a little slim in opinion though especially since your not really rehabbing why is the buyer selling it at 85K when its worth 130 as is?

I really screwed the pooch in my first flip because I didn't consider all my costs when I resold. So add me as another vote to the "10% of the resale price" line of reasoning. 

Also - are you considering your other holding costs like hazard insurance, interest on a loan (if you have this), and utilities? These can add up.