$800k Flip For First Deal
Hi anyone who takes the time to read this,
My name is Tom and I wanted to talk about my first deal and what the huge take-aways that I learned.
A little bit about myself before I start. I am 23 years old in the Columbus, OH market. My full-time job is my father and I's business, home inspections and real estate inspection services (I would love to post about that another time). We work with many of the BP sponsors as subcontractors, the big one doing draws for Lima One Capital. So, I get to see the progress and the 100s of rehabs going on in Columbus and the SOW work. Once again, great for another post.
My first full deal was an REO ($427,500 purchase price) and the contractor I had met during work had given us a quote for roughly $100-$120k for reno, with an ARV of $750-800k. So obviously this was something that we jumped in on and were tired of waiting on the sidelines for. I will backtrack and say my uncle is my partner (money mostly) and I am to deal with the day-to-day operations.
We then purchase the property and find out that this contractors quote was for labor only, and not for materials (first quick lesson which we learned quickly). So this bumped our project of 5 bathroom and 7 bedrooms from a $100k renovation to essentially $200k in our heads. To anyone reading this and crunching the numbers... it still made massive sense to us and we were still very optimistic.
The next big lesson learned: MAKE YOUR SOW AS DETAILED AS POSSIBLE. I will stress this to anyone I meet from now on. I saw SOW's every day for my job, whether it was a new build or a flip and thought "how hard could this be to make?" Needless to say, out of the 28-30 week project, my contractor would always find something not in the SOW to charge for. I am even thinking of going as specific as down to the screw next time to show the contractor we mean business.
Third: We are in one of the most affluent neighborhoods in Columbus.. Bexley, OH. I have grown up in my Columbus and everyone knows the area for being very rich. The one other thing that comes with the area is snobbiness. We pulled our comps from one street over and did a detailed analysis (Price per SQ FT and detailed comp work). One street over there were 3200 SQ Ft homes going for $850-900k+ so we were salivating! We modestly priced in $800k ARV (but we both really were thinking $850k). We have the property listed currently at $800k, but we put all of our finishes at the 1 million dollar price point. What I mean is, we put all marble bathrooms in, Sub-Zero and Wolf paneled appliances, which costed an absolute fortune. When we then came to vet who we would use for a realtor and they all came in below (or at $800k). So the shrinking margin began! Expensive materials and labor and a price point at which we did not anticipate. What we learned: Talk to the areas most knowledgeable agent and pick his brain about the value of the finished product (ARV).
Where we are today - The property is listed at $800k, and we are all in about $680k. This sounds amazing and all until you really start to dig in. 6-7% realtor fees.... $50k out the window immediately. Then a (hopeful) profit of $60k..... until taxes! so the best possible outcome is $40k, then split between my partner and I.
Is it worth the 8-10 months? Absolutely. Am I upset that I spent some of my weekends and late nights on this huge first project for a margin that has shrunk? Sure.
But what this did was teach me what a podcast or a book can't do, and that is deal with contractors and set me up for massive success here in the future.
Last lesson and maybe the most important I learned: Pay only upon completion.
We set up the draws to be every Friday. I would go in, inspect what the progress had made and take a percentage of the baseline SOW number allocated to that activity. For example, they would demo the bathroom - Guest bathroom gets paid %10 or so that friday.
DO NOT DO THIS. For many reasons. For a period of time, the contractor got used to his steady check coming in every week. He got comfortable, and was getting some things done. But what he was doing is completing things about 80% and hopping to the next line item until that was 80% and so on. So the retain-age number on each item was low and finishing needed done. This is where thick skin (which I had to learn over the 8 months) and hold money even through the begging and the story telling. It is not my job to pay my contractors payroll, it is his job to complete and my job to pay for completion! Massive difference, and if it weren't for my partner, I would not have learned this.
There are many other lessons that I learned, but that may make the post too lengthy.
What I am doing from here, is while we have our capital tied up in the project until it sells, I am making my own direct mail database (mostly from driving for dollars) and writing hand written letters. I am trying Click2Mail campaigns, but have not had massive success with them. I am in what some consider the hottest market in the nation, so trying to find these deals are scarce. As I was doing that flip I did partner with my dad on an REO we found that we renovate and now rent for about 25-35% cash return. So I know there are deals, I am trying to hustle to get them!
If anyone wants to check out my project I will drop the link at the end here, please let me know what you think!
Thanks for taking the time to read this, I am looking forward to try to be more active on here.
