Fix and Flip Mother in laws townhouse?

18 Replies

Hey BP'ers,

I am posting to try and get some advice about a situation that has just come up.I’ve been actively looking around for what would be my first real estate deal.

My mother-in-law recently had a fall, and has decided that her townhouse is too much to care for on her own, and she would like to downsize.

The townhouse she is currently living in, is your classic little old lady house. She bought the home in 1991, and if you walked inside now, you would instantly be teleported to 1991. Nothing in the home has been upgraded but it has been maintained. For example, it is the same carpet as 1991. You can imagine what 24 year old carpet looks like.

My wife, trying to be helpful, suggested that I buy the house from my mother in law, in order to fix and flip it.

My mother in law realizes that I want to make a profit, but at the same time I don’t want to screw her out of her hard earned equity.My contractor and I have gone through the house, checking all the mechanicals, roof, foundation, etc., and it is in great shape, it just needs a lot of cosmetic work.Further, the contractor I used is a bit on the expensive side, so I do have a little buffer there.

My problem is that I’m not sure what to offer her exactly, or even if I should take this on.Thanks for any thoughts or suggestions.

Rough Numbers (assuming 6 months of holding costs):

Purchase Price - $290,000

Closing costs - $10,150

Property Taxes - $1,700

Appraisal - $400

Total Acquisition: $302,050

Cost of rehab - $29,000

HOA - $456

Utilities - $2100

Total Funds Required: $333,606

ARV - $389,000

Cost of the sale - $38,900 (This seems a bit high to me, I got this from my realtor.I believe she is factoring in closing and 6% commission)

Interest on Loan - $3,700

Net Sale - $346,400

Estimated Profit: 13,794

Why use a realtor?  The seller and buyer already know each other.  A realtor earns his commission by his connections and marketing skills.  You need neither in this situation. You could save nearly 6% by just using a title company or lawyer.

@Daniel Mohnkern I wouldn't be using a realtor when I purchase the home from my mother in law.  I was using a realtor to try and find my first deal, before this opportunity presented itself, and that's where she came from.  

I agree with @Daniel Mohnkern . If it were a different situation (buying from unknown seller) I would likely use a Realtor but being that it is your mother in law it would be much more cost effective and easy if you were to go directly to a Title company or Lawyer.

Also I am from Maryland originally. Have you looked into comps in the area and factored in the need for cosmetic work in the purchase price? I can completely understand the desire to not want to insult her with a low offer for the property but it also has to make sense on paper. Then again that is just my opinion. Call around to a couple title companies to get a feel for the process. Most are very friendly and willing to help and answer questions. I've dealt with Olde Town title in Frederick, MD. Good group there

 Good Luck

@Ramzi Alldredge ...I posted my reply above prior to seeing yours. Definitely look into the title company!

@Krystal Grubbs Thanks for the info.  I did include the repair figures in my calculations. You've hit on my dilemma, I don't want to low ball her, but I still want to make some money. I'll definitely look into Olde Town Title, they are only about 25 minutes from me.

the use of your Realtor for finding another location. Word of advice, make sure that you communicate very well with this realtor about your situation and why you will not be using him or her this time. The same thing happened to me in the past and made my realtor think that I was wasting her time having her show me properties and then not giving them the deal. In actuality, I just ran into a friend who knew somebody who was selling FSBO and figured that I would save the commission by going straight through an attorney.

Ok, for some reason BP is cutting off the top part of my message if my message gets longer than the box given. my original first two sentence simply said I understand the use of your realtor...and it was @Ramzi Alldredge but that got cut off too.

Hello people!  The 6% commission he is quoting is for when he Sells the finished rehab, not when he buys it!

@Wayne Brooks   I guess i would  be the "Hello People!" to whom you are referring. Thank you for setting me straight. Sorry to aggravate you.

Here's what I would do, seeing as how this is your first project.

If your mother in law can get a bridge loan or can afford to get another house without selling this one, have her do so and move out.

Agree on a split of the equity now for managing the flip for her.  Maybe $10,000?  Maybe some fair percentage of the final selling price?  

Do the project management for her and she can then pay you out of her proceeds when she sells the house afterwards.

Note:  Make sure you are not acting as an unlicensed General Contractor if you manage this.  I don't think you are, particularly if you get a Power of Attorney from her for this project.  But check into this to be sure.

This accomplishes a few things:

1) Mother in law gets a new place

2) Nobody could look at the situation and think that you're taking advantage.  Your mother in law still gets all the equity in her house.

3) You are still compensated for your hard work.

4) You will learn a TON about managing a flip.

Good luck!

Medium cluebussol logo3inLinda Weygant CPA, Clue Business Services, Inc. | [email protected] | Podcast Guest on Show #244

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I would fix and rent it out. Give your mother in law the profit and she will be happy and you will own a cash cow for retirement. Forgot to add she will have move in with you. Lol

@Linda Weygant That is a great idea! I have an LLC and I was thinking that doing the sales through the LLC would give it some history when it comes to going to banks and such, but i like your idea much better. The LLC can still get the proceeds and show some business.

When you say:

Note: Make sure you are not acting as an unlicensed General Contractor if you manage this. I don't think you are, particularly if you get a Power of Attorney from her for this project. But check into this to be sure.

Can you elaborate a little? I will be doing most of the work myself.  My wife has full power of attorney for my mother in law.  Are you cautioning just because of the ability to pull permits as the owner?

@Joe Santoro heeeelllll no! :-P

I was thinking exactly what Linda said.  Why on earth would you get a loan, do pay all those costs, etc. when you are that close to the seller.  Leave it in her name, leave her loan in place, etc.  Get her the new place, do the work, sell the place, give her the money and let her give you what she wants to.  Do it as a favor to her and let her compensate you if she wants to.  The relationship is worth way more than $10k, as is the education you'll get from doing it.

Even split on the increased value is prob fair, but I'd definitely do it for free for the experience with no risk on the first one, assuming you can afford it.  Nothing will teach you like doing a project.  I screwed my first one up a million different ways.  Hell, I still screw them up and I'm well over 100...

Originally posted by @Ramzi Alldredge :

@Linda Weygant That is a great idea! I have an LLC and I was thinking that doing the sales through the LLC would give it some history when it comes to going to banks and such, but i like your idea much better. The LLC can still get the proceeds and show some business.

When you say:

Note: Make sure you are not acting as an unlicensed General Contractor if you manage this. I don't think you are, particularly if you get a Power of Attorney from her for this project. But check into this to be sure.

Can you elaborate a little? I will be doing most of the work myself.  My wife has full power of attorney for my mother in law.  Are you cautioning just because of the ability to pull permits as the owner?

@Joe Santoro heeeelllll no! :-P

Yeah, that's pretty much what I meant.  Every place has different permit laws, so doing the work as a family member of the owner might work in some places where in others, nobody but a licensed contractor can pull a permit.  There might also be some issues with hiring and managing subcontractors for any work you can't/don't do yourself as you're essentially committing to paying contractors for work on the house and they'd be able to put a lien on it for nonpayment.  There might be an issue with your ability to do that, but I'm really not sure.  All of that is tricky, so I'm just saying to be careful, research what the laws are in this case and proceed accordingly.

Medium cluebussol logo3inLinda Weygant CPA, Clue Business Services, Inc. | [email protected] | Podcast Guest on Show #244