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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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
Paul hit the nail on the head above...

First, there are no title seasoning requirements for FHA if you find a lender who can get the deal done...so if you plan to sell to an FHA buyer, don't worry about seasoning...

Second, as Paul pointed out, the biggest bang from your listing will come in the first week. If the property isn't in perfect condition and ready to be sold, DON'T PUT IT ON THE MARKET. Once you miss that first week of traffic, it gets much more difficult to sell.

Lastly, great job finding an agent who specializes in that neighborhood. Given that he is familiar with your competition, he should be able to tell you EXACTLY what's needed during the rehab and give you a very good idea of what the final selling price will be.

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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Wow. Now I've got a headache. I just got off the phone with the agent I'm working with on the deal. Hopefully everything works out....

The HML got word of me wanting to put minor rehab into it ($2-3k) and relisting the property at $103k. The agent told me to touch base with the lender on this that they were uneasy about this.

Keep in mind, I am only financing $6k in rehab from them - the rest was to be out of pocket due to a 20% Fannie Mae requirement on the house.

I spoke with the lender and they are urging me to spend $25k to rehab this house. They told me that the appraisal came back on the house for $70k as is today. I find that very low, but regardless of the appraisal, they are trying to tell me how much I need to put into the rehab amount - even when I'm not financing it through them.

Have you ever heard of this? We are going to close later today or tomorrow. I told them I wouldn't be signing anything that requires me to put X amount into the rehab. That seems a little ridiculous for them to require that.

They said they are lending based on the ARV of the house, and that it wont have the ARV unless we throw $25k into it.

I asked for the loan documents, and the loan terms and they couldn't send me over either right away. They requested my scope of work and I sent it over to them.

I feel like there is something fishy going on.
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Paul B.
Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
15y
Apologies for not having time to go through all of your prior numbers with a fine-tooth comb, but it seems to me that your HML is antsy because you're paying $65K for a property that is appraised for $70K. HMLs are usually into deals where the buyer is getting a great deal on the property, not paying 93% of the appraised value.

How much of the $65K price are you borrowing?

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
Do you have an agent representing you on either the purchase or the sale of this house?

If so, what does he say the as-is value of the property is? Seems weird that you believe the value is $100K+ and the lender is getting an appraisal at $70K. I think both sides need to "show their work" and compare comps to determine what the real value is.

If the resale value is actually closer to $70K, obviously this could be an issue, and if you can't/won't put the money in to raise the value enough to make a profit, you need to get out of this one.

All that said, it seems weird that the lender would be telling you that you need to spend $X in order to get a loan; if anything, he should be asking YOU for a Plan B...
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Paul - We're borrowing roughly $57,500 with a $6,000 allowance in an escrow account that we can use for rehab. The rest of the rehab comes out of pocket.

J Scott - No there is not an agent representing me in this deal. The agent who wants to list the house came up with that number. He gave me active comps to look at that he has listed right now that he is basing his numbers on. I spoke with the agent about the appraised value and he thinks we can get $103k easy, but we may have a problem showing we purchased for $65k and did minor improvements. He said expect to get about $97k as a back up offer.

Some of the houses he sent me are very similar and have full renovations which is what we originally planned. I think we can still make good money on the rehab if we come in around $20k on the deal and plan to list in the $134k ballpark.
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Just got off the phone with the agent and everything is smoothed over. It was miscommunication, his broker relayed that there will be nothing in the contract on how much we will have to rehab.

Good news, closing delayed until tomorrow afternoon.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
Originally posted by Danny Day:

J Scott - No there is not an agent representing me in this deal. The agent who wants to list the house came up with that number. He gave me active comps to look at that he has listed right now that he is basing his numbers on.

Active comps are meaningless.

Someone could list an active comp for $30,000,000, but that doesn't mean it would sell for more than $100K. The fact that the comps are active only tells you that they're probably not worth what they're listed for (or else they'd have gotten quick offers).

More likely, those comps are overpriced, and until the price drops and they get a sale, there's really no telling what the value is.

You need to ask your agent for a list of SOLD comps, and base you ARV on those. Without that, the information your agent is giving you is meaningless, and you're setting yourself up for a risk you probably don't want to take.
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Jeff NA
Involved In Real Estate · Portland, OR · Member since 2008 · 117 posts · 44 votes
15y
Originally posted by Danny Day:
He gave me active comps to look at that he has listed right now that he is basing his numbers on.

I think someone already pointed this out, but I think the term "active comp" is incorrect use. I would think that you should either be using "recent comp" or "active listing." In your context, saying that "comps. . .listed right now," I take it that you mean active listings. Which are not comps at all.

A REO that I had watched over the past year finally just closed. It was, for the past year, an "active listing" at $109,000 - $139,000. It is now, having closed, a "recent comp,". . .at $60,900. Big difference, obviously.

edit: Guess J Scott beat me to it. Sorry for the redundancy.

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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Thanks for all the help guys, I agree with you.

I am going forward with the rehab on this house. There are sold properties similar to this one on my CMA for $138k. If I can get $134k from it with a $20k rehab I'll come out alright.

We delayed the close until tomorrow.
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
We closed on the deal today!

GC walk through is tomorrow and rehab starts on Sunday.

Thanks for all the support BP nation. This is the best resource out there.
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Adam B.
Houston, TX · Member since 2010 · 26 posts · 10 votes
15y
Nice! If you have time can you break down what your rehab will consist of and what your budget is?
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Account Closed
Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
15y
danny, congrats! from talking to you privately, i know you're a highly motivated and ambitious youngster (much like someone else i know)....this almost killed me at the beginning of my career however, bc i was such an eager beaver...make sure to control those little extra's, as there'll be plenty, control the rehab costs, and control your contractors!!! best of luck, and i hope it works out great for ya!! congrats again....keep us posted
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
We're right in the middle of our rehab right now. We've installed canned lights in the front room, done all the sheetrock repair, sprayed the entire interior, and started working on the master bath shower.

My GC is telling me in the next 10 days we'll have all the tile work (ceramic master bath shower, guest bath floor, slate entry extension, and kitchen backsplash), exterior trim, fence, new appliances, counters, fixtures, windows, and hard wood resurface done.

I'm not expecting this, but we'll see what happens. In my contract we have a fee per day that they do not complete on time.

It looks like my asking price on the house will come in around $132,000 based on a recent CMA I did. The average sales price per sq. foot on sold comps at 6 months was $65.50, but the DOM was usually all over 100+ days. We are going to price the house aggressively and list at $59 per sq. foot, and include a 1 year AHS warranty.

Things are looking good!

Danny
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Andrew Brown
Member since 2011 · 7 posts · 1 vote
15y
That sounded like a lot of work... nice job though. I'm curious.. where did the money come from on your deal?
1 Reply
Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Good news. I showed the house today to a couple who might be interested in buying the property, at the price I am asking.

We'll see how it falls together, but if I could have this under contract before the house is finished with rehab that would be great.

Andrew- I funded this deal with a local hard money lender.
1 Reply
Brendan J.
Homeowner · Knoxville, TN · Member since 2011 · 207 posts · 73 votes
15y
Sounds like it's going well. Keep us updated Danny!
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
The house is coming along very nice. We are about 90% done. We will be finished this week.

Some cost we have incurred along the way that we did not plan on were:

Windows - This house had double pane windows that were cracked or leaking. We thought we could break one pane and clean the glass inside, salvaging the windows. This was not the case. I got a call today from my GC to replace all our windows for $4,700

Furnace - The furnace would not light, and I found out today it was leaking carbon monoxide into the house. This was $1,800 for a new furnace.

Luckily, my spreadsheet was super conservative. Even though we went about $7k over budget, we will still be making about $23k on this deal. Not bad for the 1st one.

I'll post before and after pics soon.

Danny
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Account Closed
Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes
15y
danny, sounds like you're doing well, and learning a lot.congrats! as far as the overages, did you have a few different heating contractors take a look at the furnace? also, instead of replacing the entire window, can you just replace the sashes that are busted? that will save some cash as well...good luck
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
15y
To add to what Bryan suggested on the windows, your options are:

- Replace the whole window. Likely, this is what your GC will want, as it will put the most money in his pocket;

- Replace one sash instead of the whole window. This works if only half of most of the windows are damaged, as two sashes are generally the same cost as replacing a window;

- Replace the glass only. Oftentimes, a window company or a glass company can replace the glass without having to replace the entire sash. This is generally the most economical way to go if the rest of the window (the track, the latch, the trim/sills, etc) are in good condition.

I would recommend that you get a couple bids from local window and/or glass companies...you may be able to save up to 40% off the replacement bid.
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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
15y
Turn to BP for answers on the furnace not lighting before replacing:
http://www.biggerpockets.com/forums/84/topics/46931-how-to-ignite-furnace-pilot-light
1 Reply
Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
15y
How does the furnace leak carbon monoxide into the house if it won't light? I could see that the exhaust has leaks, but you only get monoxide as a result of combustion, and it must first light before you get anything to burn ...

I posted something in this other thread that might give more info on this:
http://www.biggerpockets.com/forums/52/topics/58638-gas-appliances-in-rental-
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Marna N.
Investor · Greenville, SC · Member since 2011 · 22 posts · 5 votes
15y
Congrats on this deal! I have just read this WHOLE thread, and it was a nail biter. : )

Since this is your 1st one, am I alright to assume you have a "day job"? Just curious as to the time you've spent on this 1 project... I am just beginning and am starting out wholesaling. But after reading your post, I wonder if I should do a light rehab. I actually own my own small company (setting up small business retirement plans), so my time is extremely flexible but not limitless. I'd love to hear the "time" aspect for you.

You've inspired me Danny... you should be proud. Thanks for the post! PLEASE keep us tuned.
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Thanks for the responses BP

We got the furnace in, $1,800. The tile is being laid right now, and the floors look amazing. The granite is installed everywhere and I am a very happy camper.

We are behind schedule now due to the windows not being ordered on time. Not good news. We will be listing the house here soon, hopefully around the 18th.

On another note, I found my next deal from a listing appointment from a client. I ran a CMA on her property, and we are listing her house at $182,000. The comps support it, and the average DOM for the neighborhood is under 25....

She has 1 active listing competing against her, which is a foreclosure, listed at $115k. I figured it would be in both of our interests to go check it out, so I went and looked at it...

Basically the house needs MINOR cosmetic repairs. The tile is good, the kitchen is good. We will need sheet rock repair, paint, and carpet. I was thinking the rehab price would be around $15k conservative, with appliances.

I will be writing an offer tomorrow. This deal should (hopefully) yield about $32k before taxes.

Enjoy the rest of the weekend!

Danny
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Chad Kes
Jacksonville, FL · Member since 2011 · 10 posts · 2 votes
15y
Hey Danny,

Congrats on your first deal. I'm inspired by this. Any update?
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Danny Day
OP
Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
15y
Took my ARV to my broker with a CMA in the area today with actives, sold, and expired listings 6 months back today.

She thinks I'm crazy for listing it so low.

I based my original ARV at $125,000 .. At the time I thought it would be nice to be around $132,000.. According to my CMA, if I want this property to move I need to list around $139,000.

My broker feels that I am listing too low - almost $10k under value.

We'll see what happens.

Danny
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