I'm starting this thread because I am going to keep a running update on my first flip.
Today I have got the OK for all the funding I will need for my 1st home purchase / flip !! :cool:
I'm talking with a few wholesalers looking for something under $80k that needs minor work - nothing structural or foundation.
I'm meeting with a mortgage broker this week to get pre-qualified for the loan.
Now all I need is HOUSE to come my way...but I do want to have all my ducks in a row.
Question: A friend of mine told me you can not purchase homes from a wholesaler with a conventional mortgage loan. Is this true? I don't see why you couldn't.
Keeping my fingers crossed!! I'll keep you guys updated
Danny
As with any investment, you need to be very careful here. I do not like that you're walking properties without having a contract of some sort in place. How do you even know that they have a lock on the property?
I have a pretty good idea who you're using (NetWorth Realty, correct?). I am not in any way saying that they are shady, because I know nothing about them as a company. The president of the company in Houston is a licensed, active broker, and he has a stable of agents working under him. So that's a plus; at least you're dealing with someone other than your typical bird-dog.
However, here's a look at one of the "deals" they currently offer, a house located at 3816 Brandt Street. They say the ARV is $275,000 and that the cost to remodel is $45,000. With their asking price of $165,000, that leaves a profit "potential" of $65,000, according to them. We all know that's baloney, though, since there are usually other considerable costs in selling a house.
Since I am not in Houston, I can't say what the house is really worth fixed up, but I'll wager it's not $275,000. While I would not stake my life or reputation on a Zillow.com value, this site says the house is worth $224,000 -- and Zillow is usually high, not low by 20%. So that's another number that I would question.
Lastly, they are offering this house as a deal at $165,000, when it was on MLS recently for $175,000, then dropped to $149,900 with the listing removed. So, no takers at $149,900 as a listed property, but a deal at $165,000?
It's just not adding up for me.
I am not suggesting that people don't make money buying properties from wholesalers. I am sure many of them do. But, in my experience, I have never, ever seen a wholesaler give real world numbers with respect to the true ARV or repair cost, and I've caught many of them trying to sell properties that they don't even control. It always made me laugh to see a wholesaler offer me a "deal" that was $20,000 higher than the property was currently listed on MLS.
That just goes to show that some wholesalers -- not necessarily NWR, of course -- rely on lack of buyer knowledge to make their business work.
As with any investment, caveat emptor.
Absolutely false. You are not purchasing the home from the wholesaler - you are purchasing a contract. The contract allows you to buy the home from the owner and you can certainly use your financing to do that. Many wholesalers look for cash buyers due to time constraints and that's where you may have an issue if you are purchasing with a mortgage.
:cool:
There will be deals you will be able to fund with a conventional mortgage and there will be deal you won't be able to get because you will not be able to move fast enough. Make sure you tell your wholesalers how your financing is set up so that they know what kind of deals to offer you. Good luck
Danny, congratulations on taking the necessary steps to do your first deal. I am hopeful that you do indeed keep us updated on your progress.
I find many 'first deal' threads get started but not many of them are seen through to the finish.
Are you getting a construction loan for the repairs? Are you going to do the work, sub it out, or hire a GC?
Thanks for all the positive feedback.
Terry - I am not getting a construction loan for the repairs. I have been fortunate enough to secure a loan to cover this with a private investor.
I've got a guy who runs a crew of GC's ready to go. He has over 10 yrs experience flipping homes.
I'm going to look at my first house this weekend. The house is listed on the MLS for $70,000.
Exciting times!
Danny, the list price is only one factor. You need to care about the after repair value, repair costs, holding costs, and purchase price. Base your offer on those versus the list price. I would recommend you screen your REO's prior to visiting them. If your purchase price is more than 20% below list price, you may have a hard time getting the offer accepted.
Thanks for the info Justin.
How do you calculate ARV without walking the property?
The property I checked out this weekend was a "patio" community with no yards. Not what I was interested in.
I'm still looking for houses. If anyone has anything in Houston let me know.
Adam
Haven't been looking recently for deals. I've been tied up all through December, and have been waiting for the banks to unload the Jan. foreclosures.
I've been working with Shawn from Networth Realty in Houston, which is a wholesale brokerage, and they have provided me with excellent service and unparalleled advice. I highly recommended them in the Houston area if you're looking for deals.
Currently, I am working to secure financing through a HML or Private Lender (credit union) to finance these deals. Once everything gets established, it hopefully should be easier from then on...
How do you calculate ARV without walking the property?
The property I checked out this weekend was a "patio" community with no yards. Not what I was interested in.
I'm still looking for houses. If anyone has anything in Houston let me know.
Hi Danny,
I am by no means an experienced flipper so take my advice for what its worth. I am so happy for you that you are taking the first steps. Doing something is much better for learning then just sitting on the sidelines.
As for as calculating ARV, you will need to find an agent or someone that can provide you with comps for the neighborhood you are looking in, they need to be similar in size (within 10%), number of bed/bath rooms etc. They should preferably be sold within the last three months.
The second piece of the equation is figuring out the repair costs, I saw in your earlier post that you have a GC lined up, could you bring him with you when walking through? He should be able to give you a quick estimate that should at least give you a ball park (within 10-15%) of the repairs you need to make.
Then you can calculate your max allowable offer (MAO) ARV *70% minus repairs, if the house is worth 100K and need 20K in repairs your MAO is 50K (100K *70%=70K minus repairs 20K =50K).
At least this should give you a good starting point.....
Stefan
Some updates since I started this thread
I stepped away from that $70k deal and I'm glad I did. I've invested my time in reading and learning about the Houston market. I've also been developing relationships with investors and other key people in the area. This is where I stand today:
I've branded created the logo & website and started branding my business with business cards, etc. I am a firm believer in branding.
I have applied for my LLC, but the company name I chose relates to another company with similar words. I am waiting on documentation from them agreeing that I can use the legal entity that I have chosen in the state of Texas. I have got verbal agreement, but I do need written consent to move forward. If not, I'll file a DBA and still move forward with my name. No worries here.
I have developed a relationship with a hard money lender here in town, and have got all info to them to be pre-qualified to buy when the need arises. I have shifted my strategy from using my own funds for this. I guess you could say I am more focused on ROI now.
I have been speaking with contractors and have a list of people I will be using for all sorts of work. I have about 3-4 people for each type of work needed, and for bids.
Last but not least, a house that I have had my eye on for about 6 months has recently gone back on the market. It has gone under contract 3 times now, and every time the deal has fell through. Here are the details:
The house was originally listed at $90,000 with 1,272 sq. ft. 3/2/2 in a nice neighborhood. The comps come in to this house around $109k - $120k depending on how much we put in this (granite & full tile on the high end).
Every since I have been looking at this house, there has been a leak at the water inlet into the house. About 2 months ago this was fixed. So for about 4 months, there was running water inside the wall of the house. I am hoping there is no mold.
I went by the property the other day, and low and behold it is still for sale. I contact the broker again, and spoke with a new agent. I asked him a few questions, particularly why this has been under contract 3 times. He checked with their REO department and found out the house has plumbing issues (knew about this one), roof issues (knew about this one too), and possible foundation issues. I have a feeling this is why buyers backed out. It is not move in ready.
I am going to check the inside out on Tuesday. I've ran the numbers 3 or 4 times on this deal, and this is what I come up with:
Purchase price: $65,000
Down payment: $10,000
ARV: $109,000
Buying cost: $975 (1.5% ARV)
Holding cost: $975 (1.5% ARV)
Cost of Money: $2,859
Selling Cost: $7,085 (6.5% ARV)
Budget repair cost: $13,650
Loan terms:
13.99% @ 6 months
Monthly rate: 1.17%
Total cost of interest per month: $800.34
Total cost of money (based on 3.5 months): $2,859.72
Which translates to...
ARV: $109,000
Less Improvement Cost: $13,650
Less Quiet Cost: $11,894
Less Minimum Profit: $13,239
Equals Maximum Offer Amount: $70,215
Hope these numbers add up right. I've based these numbers very conservatively, and will be listing the house myself (6.5% selling cost should be around 3.5%).
I will be happy walking away with $15k+ on this deal. I would appreciate if someone could run my numbers to make sure I'm adding/subtracting everything the right way. I hope to learn a lot on this first deal. I'm always looking to learn more.
I'll post more info and pics Tues
Danny,
In my experience, if a property has had "running water inside the wall of the house" for 4 months, you can bet there is some mold. In addition, any property that has plumbing issues, roof issues, and potential foundation issues is going to cost more than $13K to repair and get ready for resale.
As I've posted before, I don't think I could do a rehab (aimed at retail buyers) for less than about $10K, even if the house was in great shape. This includes just the basics - paint, carpet, new light fixtures, new plumbing fixtures, roof maintenance, cleaning, etc. Sure, you could do less work, but I can promise it wouldn't result in a quick sale at ARV.
Add on top of that roof, plumbing and potential mold issues, and you can easily add another $10K to the bottom line.
I'm certainly not saying this isn't a deal, but given the information and numbers you've provided, I'd be very suspicious of jumping into this as your first rehab. There are plenty of better deals out there...
danny, congrats on getting your stuff in line! sounds like you have a plan and that is super important! not to discourage you, but for the first flip, i think it's better to do a quick, mostly cosmetic fixer upper...the profit spread may not be as large, but i couldn't imagine replumbing, reroofing, remediating mold, etc all on my first flip...however, i do admire the enthusiasm!! keep us posted on the progress and good luck :D
Thanks for the replies.
I know the mold and foundation sound a lot for the 1st time. I agree with you on that. If this does come up I will be walking away from this deal. The agent was not positive about the foundation, but I think I know why they are assuming something is wrong. The agent didn't mention mold to me, but I know that pipe has been busted in the wall for months now. This is why I had the word mold in the back of my mind.
The leak I had previously mentioned had been running for sometime on the right side of the house all day for 4 months. This had soaked the ground next to the house and foundation. Could this possibly sink one side of the house?
$13k was an estimate to do the basics, but that was also estimated with a purchase price of $65k. If there is mold & foundation issues I don't understand how the bank could be asking $83k for the house.
I'll keep you updated with what I find Tuesday
Terry - I am not getting a construction loan for the repairs. I have been fortunate enough to secure a loan to cover this with a private investor.
I've got a guy who runs a crew of GC's ready to go. He has over 10 yrs experience flipping homes.
I'm going to look at my first house this weekend. The house is listed on the MLS for $70,000.
Exciting times!
I have developed a relationship with a hard money lender here in town, and have got all info to them to be pre-qualified to buy when the need arises. I have shifted my strategy from using my own funds for this. I guess you could say I am more focused on ROI now.
just curious as to why the shift in financing? did the private lender bail?
J's right I spent almost 13k on a condo flip and it didn't really involve any serious repairs.
As for water damage, mold and everything else I would definitely get some new estimates and remember to add anywhere from 5 - 10 % for the damage the contractors will uncover that you don't see. Don't be afraid to ask the contractor or foundation guy what the worst case estimate would be because this is the bank's problem now not yours so don't make it yours unless it's worth your while financially.
Josh Green- my private financing was through a family member. I would rather use HML due to avoiding risk.
I called the realtor today, and it turns out the house is under contract and in negotiations right now. He told me Fannie only reviews 1 offer at a time, and if they can not make an agreement they pass and accept the next offer. He told me I can't view the house or make any offers at the moment.. regardless of cash or conventional financing.
On that note I've been searching for other deals in the areas that I am interested in. I need to find a way to get comps from selling price, not asking price (I've been getting my comps from internet selling price listings).
I may need to call in a favor from a realtor friend.. I'll keep you guys updated.
Thanks for all the help
Got a deal sent to me last night from a wholesaler in the area. We went to the property today and checked it out. It has a lot of potential. We are getting an inspection tomorrow and a few bids from GC's over the weekend. If the numbers check out, we will be getting the house under contract this weekend and closing Wed. or Thurs.
Asking Price: $65,000
Sq. Ft: 2,240
Price per Sq. Ft: $29.08
ARV: $125k - 135k
Buying Cost (1.5% ARV): $2,025
Rehab estimates (my numbers): $28,000
Rehab per Sq. Ft: $12.50
Holding cost: $3,253.55 @ 4 months
Selling cost (6.5% ARV): $8,755
Total profit: $24,500~$30,000
The house has a nice layout, hardwood, tile & slate floors. I'll be doing a master bath remodel and some window replacements. Other than that its paint, carpet, ceiling fans and some TLC. The comps look good on this house. Hopefully the inspection goes well.
Does anyone actually have the property tied up? I assume that is your wholesaler.
I wish you were not paying for an inspection without having your own contract (or assignment agreement) in place. Do you?
Your numbers look pretty good, but I'll bet that you also end up contributing to your buyer's closing costs and down payment. You might want to prepare yourself for at least a 3% contribution towards that, if not closer to 5-6%. Thankfully, you appear to have the wiggle room to do that.
Good luck, and keep us posted.
Yea I only move forward with my inspections if I have the property under contract. Otherwise you could be spending $300 for no reason.
Yes it is a "wholesale brokerage"
They find deals here in the Houston area and get them under contract. They get 3 bids and write up an estimated repair list (with real bids behind the numbers) and send this along with 3-5 comps on the property.
In order for you to secure the deal with them you typically pay $2,500 which goes to your closing cost. In this deal the payment is $5,000 which will be subtracted at closing.. so when we close, if closing cost are $7,500, I would pay $1,500 at closing.
What I'm worried about is that the water and gas have been turned off for winterization. I spoke with my inspector about this and he let me know he won't be able to give a full inspection on the house today. So when we close, he is going to come back and finish the rest that he can't do today.
But, you're not writing a check directly to this "wholesale brokerage," are you? The money is going into escrow at an attorney's office, right?
Also, I don't follow your numbers in the second paragraph.
Lastly, I do not like the idea of buying a property without having the utilities on. I know that this is sometimes how it is (like when you buy on the courthouse steps), but it's not for first-timers.
It's unlikely that you'll find anything that will completely sink your deal, but if it were my first deal, I'd want to have as much uncertainty removed as possible.
Just got done with the inspection on the property and meeting with the 1st GC.
The inspection came back great. Nothing really too big.. all small stuff. Some outlets need to be replaced to GFCI and other little things like that.
The roof, foundation, and structure are all good. There are some minor changes I need to make to bring the house up to code in the attic. The inspector is emailing me the report tomorrow with pictures of what needs to be changed. I was happy to hear we don't need to convert the 150 amp panel to 200. He said unless we're putting a pool in then we won't need it.
Interviewing 2-3 more GC's tomorrow then we'll close on Wed.
02/14/2011 Update
Something very interesting happened at the property today..
I was a getting a bid from a GC just walking around the house, and a man walked up to me neither one of us knew. He asked me if I was the broker, and when I told him no, he walked back through the house and sped off.
I realized he was probably another buyer, so I cut my meeting short with the GC and headed down to the other side of town and got the property under contract. The broker told me I would probably be getting back about $2,500 at closing since we put $5,000 down as an earnest money deposit.
We close in 10 days, on the 24th.
Excited!