My First Flip !!

Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes

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

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Paul B.

Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes

15y

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.

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Paul B.
Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
15y
I do not understand who you are giving money to or why you are walking a property without having it under contract.
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Josh Green
Financial Advisor · Tampa Area, FL · Member since 2008 · 956 posts · 214 votes
15y
Originally posted by DeuceSevenOff:
I do not understand who you are giving money to or why you are walking a property without having it under contract.

i'm lost too...so it seems like he is having inspections, interviewing contractors, etc without even having it under contract?
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Thats just the way this brokerage works. Here is what their website says about it.

Do you inspect all of your properties?
We do not have a formal inspection done on a property. We address all issues that are visibly noticeable and figure a number that will remedy those problems. If there is a problem with a main component of the property (such as electrical, air conditioner, roofing, etc.), we will acquire a price for repairs from a licensed contractor in that particular field. It is in the investorâ€™s interest to do all of their own due diligence before entering into a contract on one of our properties. In the event of unforeseen repairs, we will aid you in every way possible.

Can I do my own inspections?
Yes you are welcome to do any and all inspections while the property is accessible. However, your inspections must be completed prior to contracting the property with us
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
Danny -

Did you verify the ARV with a local realtor. Personally, I would NEVER trust comps provided by the seller. Just because the comps they sent look good doesn't mean there aren't another half-dozen comps that would indicate a value that's much lower.

You need access to all the comps for this property (sold within 3-6 months and within .5 miles of subject property). Getting just a few comps from the seller would indicate to me that the ARV is probably 10-20% lower than what is represented.

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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Yes I checked comps throughout the MLS. The ARV I calculated with my formula was $125k, there are comps in the MLS that support it less than 1 month ago.

Right now there are houses listed at the $140k range with the finish we will have on this house. I am using the $125k as a conservative estimate and if we decide that we can list it in the $130's then that would be great. The DOM is what worries me about the comps. I think we'll be alright though. I want to price the house aggressively to sell fast.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
Originally posted by Danny Day:

Right now there are houses listed at the $140k range with the finish we will have on this house.

Hopefully you know this, but houses that are currently listed are NOT comps. If they're currently active -- and have been on the market at that price for more than a couple weeks -- then they're overpriced...

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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Yeah I understand that.. The houses listed at the $125k range have nothing upgrade and look like they were built in 78. We will be doing noticeable upgrades throughout the house.

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Kyle Weimer
Real Estate Investor · Aurora, CO · Member since 2009 · 155 posts · 60 votes
15y
Never use just a DBA when buying a property.
Never buy a property without an entity.
If you are flipping houses you probably should use a S Corp or C Corp.
Only use an LLC on your buy and hold properties, or when using a disposable LLC to wholesale assign a contract to another investor.
Just a thought. Good luck!
1 Reply
Kyle Weimer
Real Estate Investor · Aurora, CO · Member since 2009 · 155 posts · 60 votes
15y
Also, just because the comps in that area that are for 125k won't be as nice of yours, doesn't necessarily mean your house with upgrades will sell for 15k more. Price is very neighborhood dependent and some neighborhoods won't justify the higher purchase price just because you have tile and other upgrades and the others dont. Just something to think about. Don't get burned.
1 Reply
Account Closed
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
15y
Danny, I'm glad that you have taken time to share your first property purchase experience. You have a lot of experienced investors trying to help you ask the right questions.

In many respects it seems this brokerage house may have other incentives besides helping you in your home purchase.

1 Reply
Paul B.
Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
15y
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.
10 Reply
Alice Green
Real Estate Investor · Salt Lake City, UT · Member since 2010 · 47 posts · 6 votes
15y
I would also agree with Charles that it looks like the brokerage has some other hidden benefits as well. This whole process, which you are going through also seems quite tedious. First of all inspecting the property without getting it under contract is questionable. The other important thing is that you said that the utilities aren't working properly. What does that mean? Do they have a continuous problem or it was for the time being? Please do keep us updated. I would be really glad if I would be any help.
1 Reply
Adam B.
Houston, TX · Member since 2010 · 26 posts · 10 votes
15y
Danny,

What part of town is this property in? I have yet to flip my first house, but I do have several years in the construction business in Houston.

Also, I have dealt with NWR in the past. they sent me approx. 20 properties about 2 years ago. After doing my own research on them, the numbers came up too thin. They finally told me that most of their investors don't end up selling and they just keep them to rent out... Not really what I was looking for.

Anyway, good luck and let me know if I can offer any assistance. I look forward to your updates on this...
0 Reply
Des Shei
Investor · Southern CT, CT · Member since 2010 · 211 posts · 41 votes
15y
I think i got a headache trying to follow your entire process Dan. Purchasing a property, the way you are going about really shouldn't be that complex.

You tie up the property>send EM to escrow acct if applicable>perform inspections> if inspections are good> line up funding> perform title search, line up insurance etc> set closing date> close and get keys...obviously i'm over simplifying here but that's the general progression. Your process was a bit all over the place. And as others have mentioned, it might serve you well to perform better due diligence on your numbers. You don't want to go through all that work to realize that you have a marginal deal at best.
Happy Investing.
Des.
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Thanks for the response everyone! I appreciate all the feedback.

I knew the learning curve would be huge on this first deal. I can understand why you would want to get the property under contract before you sink any of your money into it. It just makes sense. Unfortunately I was not able to do that with this deal.. but I also would not have heard about this deal without the help of a wholesaler.

I can understand the importance of getting houses in pre-foreclosure now and negotiating directly with home owners themselves. Also, another thing that I have realized is cost estimations and projections. This is something I have multi-family knowledge in, but not residential. Thankfully I have itemized prices on everything I need done.. now I know what prices are for the next deals.

I've been meeting with contractors to get bids on the work I need done. After meeting with a GC and getting the 1st bid, I've realized I am going to sub everything out myself. I think I'll be alright manging the project on this house. I've got some experience rehabbing multi-family.

Again, thanks for all the responses. I started this thread so I would have a log of my first deal on a daily basis. If you notice, the thread was started about 4 months ago. It was at least a year before I was ready to start even thinking about looking for a house. I've spent a lot of time reading on here and trying to absorb as much as I can.

Hopefully this thread will help someone out in the future.

Danny
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Seeking the advice of BP Nation on this one. I'm in a dilemma, but I wouldn't say its bad..

I contacted the local RE agent for this neighborhood. He has a few properties listed and his signs are everywhere. He specializes in the neighborhood I'm in. I wanted to confirm my ARV with him, and get his opinion on the house.

He told me he could list the property, AS IS - NO REHAB for $103k and it would move quick. I have the property under contract for $65k, and got it about 3 days after it was on the market.

So I could list for $103k and take a little less, and walk with no work and smaller time frame.. or put $20k into rehab and list for $128,900

Any input would be appreciated
0 Reply
Jordynn W.
Real Estate Consultant · Detroit, MI · Member since 2011 · 8 posts · 0 votes
15y
Danny,

Have you considered going after a distressed homeowner who may be interested in a short sale? I'm not sure if your state has a redemption period or not, but if you can't find the inventory, create it yourself!

They take a bit longer, but considering the seller is still living in the property and it hasn't been vacant for long, it's typically going to be in better condition and require less work.

Jordynn
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Paul B.
Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
15y
Danny, I'd like to hear from people who have more experience than I do (I've only done 5 flips), but I've had two situations that you might consider here.

First, if you were to sell it as it is, would that be to an owner-occupant or another investor? If to an owner-occupant, and if that buyer needs a conventional mortgage, then you might be subject to seasoning the property. Some lenders won't make loans for people to buy flipped property; they feel the value is inflated. I had a buyer for a duplex pull out of a deal because the lender did just this. They could not get comfortable with my $115K purchase price against her $175 purchase price only 5 months later.

Now, as to listing it in its current condition. I tried this once, too, thinking I could make a smaller but faster, less risky profit. I am not 100% sure why that didn't work out, but you have to remember that in this market, people have many options as far as houses go, and most people don't want to deal with fixers. They want their place ready-to-go and immaculate when they move in. How bad is the condition of the property you're talking about? I would think very hard about trying to retail a property that needs paint, carpet, updating, and some mechanical work. A retail buyer will require an inspection that is going to uncover a host of issues that will inevitably kill your deal because retail buyers do not want to deal with all that stuff -- especially nowadays.

Another thing to think about if you go the MLS route now and don't succeed, your previous fixer listing will still be on the books when you present your updated, higher-priced property, so everyone will know how much more money you're making on your updated version, and they will also see pictures from the "before" version. It may not be an image that you want potential new buyers to see.

How well do you know this Realtor? Are you confident in his/her experience? Have you talked to other investor clients of this Realtor to be sure that s/he understands your business?
2 Reply
Kyle Weimer
Real Estate Investor · Aurora, CO · Member since 2009 · 155 posts · 60 votes
15y
So, if I see this right, you will only be making 5k more if you don't do a rehab.
As the last poster mentioned, unless you sell to another investor, which is highly unlikely at that price, you may be taking a risk. Unless your selling to someone with alot of money down(20%), you have problems moving this to someone trying to get an FHA loan.

Personally, if your numbers work and it is truly only a 20k rehab, I would fix it up and put a nice first time home buyer in that puppy! Good luck.
1 Reply
Kyle Weimer
Real Estate Investor · Aurora, CO · Member since 2009 · 155 posts · 60 votes
15y
The 90 seasoning rule has once again been waived for 2011, but you will likely need two appraisals depending on the lender. I think a rehab is your best bet unless you stumble upon an all cash buyer that will fix it to live in. Unlikely though.
0 Reply
Mat Lewczenko
Investor · Lenexa, KS · Member since 2010 · 215 posts · 121 votes
15y
I would tend to agree withPaul and Kyle here.
More than 60% of buyers in that price range, at least in my market, are FHA buyers, maybe even closer to 80%.
Would your home, prior to any renovations pass FHA requiremnts?

If your numbers work, then lets get a little dirty and make a pretty home for this neighborhood. Keep us updated!
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
It can be very difficult to sell a property quickly for an inflated price without doing any work (especially to an FHA buyer). But, if you plan to do rehab on the property and can document the costs and support the value, there really shouldn't be any issue reselling quickly and for a much higher price, even to FHA buyers.

As an example, I just recently sold a property to an FHA buyer for $97,000 that I bought for $31,500 just 80 days earlier.

The underwriter required two appraisals and asked for copies of receipts and contracts, but once they were comfortable that we did the work and that the value was supported by two appraisals, the deal went through underwriting in less than a week.
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Paul - Thanks for the advice. We would be doing owner occupied on this house. I agree with you about the title seasoning, and I spoke to the RE agent about this. He told me it would at least me on the market for 40-60 days before anyone could get financing / etc so it wouldn't be a problem. In that time period, I'll be doing some minimal painting inside and some clean up outside. I have already had the property inspected and will be making the necessary repairs for the next buyer. The biggest issue with the inspection is switching out some plugs. No big deal here. This was my first time speaking with the realtor, but this neighborhood is what he works the most. He has about 6 listings in the neighborhood, and he has been working it about 10 years. I got his name / number from the neighborhood news letter. I am getting a second opinion from other agents as well.

Jordynn - Yes I have considered doing that. After this deal I'll have some money to put into marketing looking for people in that type of situation.

Kyle - The house will pass FHA requirements. Everything in the house works fine. We will be doing minor paint (interior). Exterior paint looks great. See attached pics below, in current condition.

Mat - The profit margin on selling the house as in with minimal rehab is very much larger than sinking $20-25k into it, 4-5 months, and hoping to return the same that I would selling at $103k. Check out pictures below

Front
Back
Kitchen
Living room
Master

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Paul B.
Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
15y
Originally posted by Danny Day:
I spoke to the RE agent about this. He told me it would at least me on the market for 40-60 days before anyone could get financing / etc so it wouldn't be a problem. In that time period, I'll be doing some minimal painting inside and some clean up outside.

I don't follow. You plan to have the property on the market for 40-60 days while you wait for someone to get financing? Why does it take 60 days to get a loan? Because of the seasoning issue?

Also, are you suggesting that you're going to list the house, THEN do minor painting and outside cleanup? I am not a fan of that at all. When that house hits MLS, assuming you have it priced right, that is when you're going to get most of your traffic, if you're going to get any at all. You absolutely want the house done 100% before you put it on MLS or show it. One hundred percent.

Most people can't look past things like paint in progress or outside cleanup. They lack vision. All they see is something that's not done, and off to the next house they go. Don't be in a rush to get on the market. Get your product in tip-top shape first.
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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
15y
I see the refrigerator is still there. Unless electricity is on and it is plugged in, the doors being closed will cause the inside of the refrigerator to stink. Either prop the doors open, or get it plugged into power.
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