LA, Ca flip scenario, please analyze and critique...thx!

24 Replies

Hello to All,

My business partner and I (both Realtors in southern Ca)have decided to take the plunge and purchase our first flip. After running the comps and walking through with my dad and Uncle (both in the business of property maintenance) I have decided to pay for an inspection today to make sure there are no unforeseen issues. I'm in communication with the listing agent and he is very receptive to working with us. Please analyze the deal and the proposed terms of our hard money loan, all input, recommendations and suggestions are welcome. Thanks in advance!

Home Specs: 3/1.75 1500 sq ft, 5400 sq feet lot

List price: $375,000

Purchase price: $340,000

ARV:$440,000 (comps verified with homes sold in 1/4 mile radius in last 30 days, not to mention a few pending listing at $460ish)

Rehab: $20,000

-Scope of work:

-Paint int and ext

-finish original hardwood floors 1200 sq ft

-new windows

- install 1 ext double door

-landscape back and front yards

-bath1: new shower pan/tile, vanity, bathroom flooring, light fixture

-bath2: epoxy coat tub and add tile border, new vanity, new flooring, light fixture

-3 new mirrored closet doors

-1 water heater

-kitchen tile

-retouch white cabinets and add modern hardware

-5 int doors

-door hardware, hinges, electric plate covers

Hard Money Loan Terms: $300,000 with 3.5 points and 12% interest

$40,000 cash for purchase

$11,000 possible payout for selling agent commission

$9,000 closing cost (will attempt to have seller pay closing)

$10,500 cash for hard $ points

$9,000 holding for 3 months (1.5 month rehab, 1.5 month market and sale)

The largest concern is the shower pan in the bathroom caused flooding and destroyed a portion of the bathroom subfloor, I made sure to mention to my inspector that I need him to verify that there are no signs of mold under the home. The other concern of mine is

that there was a fire in the home (which explains why the kitchen is practically new) and I am having the inspector look into the attic space to ensure there is no hidden fire damage. My last concern is making a purchase in early Sept means that my listing will hit the market Mid Oct-Early Nov. I would like to know if the experienced flippers break around this time in consideration of the winter market slow down.

Once again, any and all questions, suggestions, criticisms etc are welcome, the inspection is being conducted as I type. Also, if anyone has a hardmoney lender with more favorable terms please give me their contact information.

(310) 630-9805

Total expenses (purchase, holding, points/int, rehab, and resale): $400,500

Min comps are are $440,000

$40,000 profit

(310) 630-9805

$20k rehab looks light at a glance, with no unforseens

You'll have closing costs on both ends

3 month holding time is probably optimistic, and need to include property taxes, insurance, utilities

Wayne,

My inspector said that he estimates repairs to be about $30k.  I definitely thank you for reminding me about property tax, insurance, and utilities.  The aforementioned can easily add up and eat away at our profit.  We will add another month to our holding time just as a cushion.  We will also lower our offer price around $15-20k.  How do you feel about our listing hitting the market near the holidays/slow season?  

Thanks!

(310) 630-9805

So no funds allocated to the exterior other than paint?  No cleaning, no repairs, no irrigation?  Driveway and/or garage totally ready to go?  No landscaping, no landscape or hardscape maintenance?

Originally posted by K. M.:

So no funds allocated to the exterior other than paint?  No cleaning, no repairs, no irrigation?  Driveway and/or garage totally ready to go?  No landscaping, no landscape or hardscape maintenance?

 Hey Kristine, I know my post was a little disjointed but I did cover the int/ext painting and front and backyard landscaping under scope of work.  How do you feel about the listing hitting the market in Oct-Nov.  Do you think pricing or holding time would decrease/increase?  Thanks.

(310) 630-9805

If your $30K covers exterior and interior paint and repairs and landscaping, how much are you allocating?

I'm not an agent so can't comment on listing activity in the fall in your area.  Other than to say I personally am not that concerned about it in active So Cal markets.  

While it's never a good idea to base your price or purchase on what others are doing, I'm thinking you might be underestimating repairs or over valuing resale.  There are several volume rehabbers in your area that work on thinner margins.  They would pay close to asking and it would be off the market by now.

Are your comps for 1.75 baths as well? Or are they for 2 baths?

Watch out, @Clarence Johnson . If your numbers hold up, you will net about $27k or a meager 6.3% of ARV. This shouldn't be a surprise since your project cost (Purchase price + Rehab) is 82% of ARV. Here's our income and expense estimate using your input:

I don't agree with your numbers, however.

Your scope of work is probably closer to $40k to $43k and there is no way you will complete this job in 1.5 months and sell in another 1.5. Six months is more realistic. You should also be getting repair estimates from a trusted contractor. Here, your project cost is 87% of ARV and you'll likely lose about $6k, as shown below:

To make matter worse for you, we funded an Inglewood flip several months ago that's just coming to the market. It's a 4/2.75 and asking price is $440k. This was a full blown, down to the studs gut job, so the house is virtually new. It also has a guesthouse in back. I don't know where you are getting your comps but you might revisit them.

The only good news here is that, though the best time to sell a house is always in the spring, southern California's fair weather climate doesn't really restrict sales any time during the year. More important is to select a qualified buyer and quickly get them cross-qualified with a lender you can rely upon. It's not the weather that will kill you, but a deal that falls through a few times.

Be careful Clarence, and good luck.

Originally posted by Jeff S Na:

To make matter worse for you, we funded an Inglewood flip several months ago that's just coming to the market. It's a 4/2.75 and asking price is $440k. This was a full blown, down to the studs gut job, so the house is virtually new. It also has a guesthouse in back. I don't know where you are getting your comps but you might revisit them..

Well.  That's invaluable information. A full gut rehab priced at $440K when the OP's planning a rehab with a reglazed tub for the same price.

And it's not worse for the OP if it changes his numbers and/or purchase offer.  Thanks Jeff!

Originally posted by K. M.:
Originally posted by @Jeff S:

To make matter worse for you, we funded an Inglewood flip several months ago that's just coming to the market. It's a 4/2.75 and asking price is $440k. This was a full blown, down to the studs gut job, so the house is virtually new. It also has a guesthouse in back. I don't know where you are getting your comps but you might revisit them..

Well.  That's invaluable information. A full gut rehab priced at $440K when the OP's planning a rehab with a reglazed tub for the same price.

And it's not worse for the OP if it changes his numbers and/or purchase offer.  Thanks Jeff!

Jeff made some very valid points but his full gut rehab is in Lennox (only new to market for $440k with guest hs im Inglewood) where my flip is in an area where homes are selling $400-420k untouched.  I actually rehabbed a duplex in the same area 3 years ago for about $25k as a buy and hold investment,  so I was basing my construction budget on that project.  Jeffs insight did just make me adjust our offer amount and my partner and I greatly appreciate the time and effort you put into analyzing our deal.  He actually was surprised that a stranger in this industry full of sharks would reach out to help.  Comps were pulled from a 1/4 mile radius within 45 days.  Jeff, can your company offer competitive terms on the loan?  We are not locked in until later this week.

(310) 630-9805
Originally posted by @Clarence Johnson :
Originally posted by @K. marie P.:
Originally posted by @Jeff S:

To make matter worse for you, we funded an Inglewood flip several months ago that's just coming to the market. It's a 4/2.75 and asking price is $440k. This was a full blown, down to the studs gut job, so the house is virtually new. It also has a guesthouse in back. I don't know where you are getting your comps but you might revisit them..

Well.  That's invaluable information. A full gut rehab priced at $440K when the OP's planning a rehab with a reglazed tub for the same price.

And it's not worse for the OP if it changes his numbers and/or purchase offer.  Thanks Jeff!

Jeff made some very valid points but his full gut rehab is in Lennox (only new to market for $440k with guest hs im Inglewood) where my flip is in an area where homes are selling $400-420k untouched.  I actually rehabbed a duplex in the same area 3 years ago for about $25k as a buy and hold investment,  so I was basing my construction budget on that project.  Jeffs insight did just make me adjust our offer amount and my partner and I greatly appreciate the time and effort you put into analyzing our deal.  He actually was surprised that a stranger in this industry full of sharks would reach out to help.  Comps were pulled from a 1/4 mile radius within 45 days.  Jeff, can your company offer competitive terms on the loan?  We are not locked in until later this week.

OK, now I gotta ask. Why hasn't this property sold untouched in this price range? If you could get it for less than $375K, why not just sell it untouched for $410K? 

Not trying to give you a hard time or test your defenses.  In my experience when there's an answer for everything that means you're doing the deal regardless if feedback.

Originally posted by K. marie P.:
Originally posted by @Clarence Johnson:
Originally posted by K. marie P.:
Originally posted by @Jeff S:

To make matter worse for you, we funded an Inglewood flip several months ago that's just coming to the market. It's a 4/2.75 and asking price is $440k. This was a full blown, down to the studs gut job, so the house is virtually new. It also has a guesthouse in back. I don't know where you are getting your comps but you might revisit them..

Well.  That's invaluable information. A full gut rehab priced at $440K when the OP's planning a rehab with a reglazed tub for the same price.

And it's not worse for the OP if it changes his numbers and/or purchase offer.  Thanks Jeff!

Jeff made some very valid points but his full gut rehab is in Lennox (only new to market for $440k with guest hs im Inglewood) where my flip is in an area where homes are selling $400-420k untouched.  I actually rehabbed a duplex in the same area 3 years ago for about $25k as a buy and hold investment,  so I was basing my construction budget on that project.  Jeffs insight did just make me adjust our offer amount and my partner and I greatly appreciate the time and effort you put into analyzing our deal.  He actually was surprised that a stranger in this industry full of sharks would reach out to help.  Comps were pulled from a 1/4 mile radius within 45 days.  Jeff, can your company offer competitive terms on the loan?  We are not locked in until later this week.

OK, now I gotta ask. Why hasn't this property sold untouched in this price range? If you could get it for less than $375K, why not just sell it untouched for $410K? 

Not trying to give you a hard time or test your defenses.  In my experience when there's an answer for everything that means you're doing the deal regardless if feedback.

 No worries, I would rather you guys break the deal down on here than for me to lose my shirt lol.  I truly do appreciate all imput.  When I say homes are selling for $400-420 untouched I mean in liveable but not upgraded condition.  This house is not liveable; several broken windows, squatters were evicted within the month, no water heater, no closet doors etc.  

(310) 630-9805

No, @Clarence Johnson , the legal description and address is Inglewood. I don't know if that's the house you're referring to or not, but it doesn't matter. I can't tell anymore what you are paying and what your rehab estimate or duration is. Also doesn't matter. We don't do business like this.

We have to have met you and gotten to know you and your experience a little before we do a loan. It also matters a great deal to us that your flip is profitable for you. Some lenders care and some don't and there are pros and cons both ways.

Profitable to us means your project cost is no more than about 75% of the ARV. Using our rehab estimate and duration, since I don't understand yours, means you really can't pay more than about $285k for this property. In this case, you'll make about 12% of ARV or $54k. Much less and both you and your lender are taking risks you probably shouldn't, considering you're obtaining a high LTV loan. We actually loan like this as well, but have a process we like to follow.

@Clarence Johnson Your rehab numbers won't work, that is A LOT of scope to be done, by just looking at it, I would even disagree with your inspector and put it around 35k. Plus, you are not expecting pit falls of construction, what if your contractor walks out, what if you have a sub-floor problem, what if you run into some issues with your contractor and will hit a delay of 1 month to get everything settled? Since this is your first flip, don't expect everything will go smoothly on construction.

Originally posted by Jeff S Na:

No, @Clarence Johnson , the legal description and address is Inglewood. I don't know if that's the house you're referring to or not, but it doesn't matter. I can't tell anymore what you are paying and what your rehab estimate or duration is. Also doesn't matter. We don't do business like this.

We have to have met you and gotten to know you and your experience a little before we do a loan. It also matters a great deal to us that your flip is profitable for you. Some lenders care and some don't and there are pros and cons both ways.

Profitable to us means your project cost is no more than about 75% of the ARV. Using our rehab estimate and duration, since I don't understand yours, means you really can't pay more than about $285k for this property. In this case, you'll make about 12% of ARV or $54k. Much less and both you and your lender are taking risks you probably shouldn't, considering you're obtaining a high LTV loan. We actually loan like this as well, but have a process we like to follow.

Jeff: without giving away any market or trade secrets, how are your borrowers finding props at 75% of ARV these days? Seems like too many players with thinner margins for there to be any volume of 75% of ARV props in most of So Cal. Of course you don't need volume as the lender if the numbers are right.

Hi Clarence,

Thanks for sharing with us! I have to agree with most people here, 20k for renovations is definitely too low. I don't know how many windows there are in the property, but here in Canada you have to expect around $1000 per opening (window). Last flip I did, we changed 12 windows so that was $12 000 just there. I think 35k to 40k makes more sense for the job you have ahead. You also have to consider potential surprises you might get when renovating. We all get these!

The seasonality or the timing to sell should not be a big issue when flipping as you always want to price your property below market value to get rid of it fast and avoid high possession costs (especially when you are using private money at high interest rates). At the right price, the house won't sit on the market, regardless of the time of the year. Also, in my experience, home staging and furniture rental always does the trick (for me anyway). Just sold my last flip in 36 hours this month, higher than asking price. 

Lastly, your profit scenarios should always include an optimistic, realistic, and pessimistic version. For me, optimistic is selling within 1 month, realistic is selling in 6 months, and pessimistic is 1 full year. If I cannot live with the pessimistic scenario, I don't buy.

Hope this helps and keep us posted :)!

I think if you can negotiate the price down further you will have a solid deal. The 3 homes I've sold in 90302 in the last 4 months (around centinela park - 67th st, Buckler Ave, Hyde Park) have been 3/2 purchase price ~295k, rehabbed costs 40k, sold on avg ~ $435k, DOM ~15, holding time ~ 4.5 months, all have been conventional buyers. If you are going to compete in this price range, new bathrooms, new kitchen, recessed lighting, staging are a must. (recently sold 7325 8th ave, LA which is adjacent to 90302 and buyers are looking for hgtv style homes if you wanna reach high sales price) The more north you get into the 90302 the higher the comps. Then again, you are a realtor so you know this better than i do.

Originally posted by @Guillaume D. :

Hi Clarence,

Thanks for sharing with us! I have to agree with most people here, 20k for renovations is definitely too low. I don't know how many windows there are in the property, but here in Canada you have to expect around $1000 per opening (window). Last flip I did, we changed 12 windows so that was $12 000 just there. I think 35k to 40k makes more sense for the job you have ahead. You also have to consider potential surprises you might get when renovating. We all get these!

The seasonality or the timing to sell should not be a big issue when flipping as you always want to price your property below market value to get rid of it fast and avoid high possession costs (especially when you are using private money at high interest rates). At the right price, the house won't sit on the market, regardless of the time of the year. Also, in my experience, home staging and furniture rental always does the trick (for me anyway). Just sold my last flip in 36 hours this month, higher than asking price. 

Lastly, your profit scenarios should always include an optimistic, realistic, and pessimistic version. For me, optimistic is selling within 1 month, realistic is selling in 6 months, and pessimistic is 1 full year. If I cannot live with the pessimistic scenario, I don't buy.

Hope this helps and keep us posted :)!

 Thank for staging and holding advice.  Definetely will take heed to the best and worst case scenarios you suggested.  Based on window cost in Canada I may be in the wrong business lol.  A few thousand dollars in LA can get windows installed with trim.  My family deals with manufacturers thst hire out contractors to do their installs.  Also, thanks for staging advice, that can make a large difference in moving the property fast.

(310) 630-9805
Originally posted by @Victor Argueta :

I think if you can negotiate the price down further you will have a solid deal. The 3 homes I've sold in 90302 in the last 4 months (around centinela park - 67th st, Buckler Ave, Hyde Park) have been 3/2 purchase price ~295k, rehabbed costs 40k, sold on avg ~ $435k, DOM ~15, holding time ~ 4.5 months, all have been conventional buyers. If you are going to compete in this price range, new bathrooms, new kitchen, recessed lighting, staging are a must. (recently sold 7325 8th ave, LA which is adjacent to 90302 and buyers are looking for hgtv style homes if you wanna reach high sales price) The more north you get into the 90302 the higher the comps. Then again, you are a realtor so you know this better than i do.

 Thanks for the advice and insight.  You sold the Buckler property?  I walked some buyers into that house the first day it was available to view last year.  The home wasn't for them but I didn't have the vision to attempt a flip.  That Buckler property sold for almost $500k.  I told myself I will never loose $100k chasing $10k again.  The aforementioned actually happened with 3-4 properties I showed my clients last year, all selling for over $100k more than purchase.  

(310) 630-9805
@Clarence Johnson :

I expected US prices to be lower :P! That's why I put emphasis on the cost of windows in Canada. If you have contacts, you will definitely save a great deal. Keep us posted on your project!

@Guillaume D.

We typically use triple glazed windows in all of our retrofits and our costs tend to be in the $600 - $800 / window {labour in}.  If we use double glazed, our costs are $350 - $600.

1(506) 471-4126
Originally posted by @Roy N. :

@Guillaume D.

We typically use triple glazed windows in all of our retrofits and our costs tend to be in the $600 - $800 / window {labour in}.  If we use double glazed, our costs are $350 - $600.

 I guess it all depends on the quality and size of the windows as well! I was using ballpark numbers based on our latest flip ;). At 800$ / window, add Quebec taxes (15%) and you will get fairly close to my number. 

Originally posted by K.marie P.:

Jeff: without giving away any market or trade secrets, how are your borrowers finding props at 75% of ARV these days? Seems like too many players with thinner margins for there to be any volume of 75% of ARV props in most of So Cal. Of course you don't need volume as the lender if the numbers are right.

There are no market or trade secrets here, @Account Closed . We don't have to find the properties. As lenders, we have to find borrowers who can, which is much easier.

"Of course you don't need volume as the lender if the numbers are right."

Bingo. It really is hit or miss and I'll share that we are loaning more money on fewer properties. Still, business is very good.

None of this is to say that only certain borrowers are able to find good deals. While everyone is working their butt off, some are more skilled at this than others; posses better judgment, have been doing it longer, and have deeper connections. We see three types of borrowers.

The first are those that are inexperienced and trying to break into the business. We don't do business with these but they'll approach us every once in a while with a property. Most are terrible deals but every once in a while they are viable. I suppose everyone who works hard deserves to get lucky now and then. Still, we usually pass, though there have been occasions where they found an experienced partner which led us to do the deal.

The second are those who have been around a while and are full time. Lately, they find most of their deals by direct mail, door knocking, probates, REO, and even off the MLS. We often have to caution them when they bring a deal that's close, but too risky for them and for us. After a while they get tired of hearing it and tend to bring us properties they know we'll say yes to. This is not to say they won't find another lender for that deal, but they don't put us on the spot. Over time, these borrowers tend to come and go.

The third are those who have maybe five plus years doing this full time, have deep connections in certain cities, and are often doing dozens of flips at a time. I know no one wants to believe this but there is a subculture of agents that focus mostly (not exclusively) on distressed properties. They know the players, the players know them over the years, and it's a relatively tight community, which can be tough to break into. Our goal as lenders is to meet the players and develop our relationships. This is really not too difficult, and we are very loyal to one another.

For this third group, most deals are brought to the flipper. They might be pocket listings, MLS, probates, and even an occasional REO. There is no door knocking or direct mail. The agent's usually know not to bring the crap they might bring to those who are less experienced. No one wants to waste his or her own time or lose credibility.

As I think, there is actually a fourth group that we have done some business with. Just a handful of experience flippers are starting real estate clubs through Meetup, focused exclusively on teaching newbies how to flip. They provide the expertise, training, and the resources. The students provide the labor -- knocking on doors, mailing flyers, making the initial contacts, etc. In effect, these clubs train their own private bird dogs. The longest running club in southern CA who does this is the Invest Club for Women, who have offered their 60-Day Challenge for years. Other "lone-wolf" flippers are now starting their own clubs in a less formal manner.

Way off topic K, but that was a good question everyone asks us. Maybe should have been a separate thread.

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