Numbers (rounded to nearest $100)
1350 sf
3 bed, 2 bath
1 Story
No Garage
Listed Price $45,000
Offer/Purchase Price $50500
Original Estimated Renovation Cost $17000
Renovations $20,000
ARV $106,000
Sold $109,500
Closing Costs at Purchase $2800
Closing Costs at Sale $5500 (around here, sellers pay for buyers closing costs)
Holding Costs (Loan Payment) $200 a month for 5 months
Holding Costs (Utilities) $300 a month for 5 months
Holding Costs (Yard Maintenance) $100 a month for 3 months
Real Estate Commission Paid at Sale $6600
Target Profit Margin $20,000
Actual Profit Margin $22,000
Details
The reason why I laid out all those prices is because I read a lot of success stories before I started and often times there was very little information about how much money was spent where and why. I am hoping that even though prices will vary greatly from area to area, this might help put give some perspective on what goes into flipping a house.
When we (my real estate agent and myself) found this property it was listed by the VA as a foreclosure for $45,000. This property had been on the market for a couple months before I bought it, which is not usual for a property that has these numbers. I believe it was largely ignored because most houses in that area are 3 bed, 1.5 baths (which are not desirable in this area), but this house had been upgraded to 3 bed, 2 baths. Also, if I remember correctly, this house was incorrectly listed as 3 bed, 1.5 baths too. Finally, the pictures of the house did not help either. The pictures provided by the listing agent made the condition of the house look worse than it was. The only reason why we went to look at it was because if you looked at the pictures, it looked like a 2 bath and because it was pretty much the last thing on my list of possible rehabs before looking in another city or town. When we got over there, we discovered that almost everything had been upgraded by the owner (which is usually bad) and they actually did a decent job. New cabinets, new counters, new tile on the walls in the bathrooms and around the showers. The garage was converted and added to the living room/dining room area with a separate laundry room and all done to code. Shoot, it even had crown molding, which you don't typically see for this size of a house and in this area. The only thing we had to do was paint, replace some drywall, lay down some laminate flooring and add new appliances. We also added a privacy fence which really sold this house, especially in this area with the size yard it had.
Anyways, ironically enough, other investors started to look at this house during the same week we did (I am guessing this was their last pick too) and within a couple days, the VA was asking for best and final offer. Maybe if we had looked at this house a month earlier we would have got this house for $45,000 or close to it, but since there was multiple offers and since the numbers worked at $50,500, that is what I offered.
Originally, we had estimated that the renovations would cost $17,000 and the house comped out at $106,000, but we figured we could sell the house for between $109,500 to $14,500. Either way, we went conservative and based our numbers on $106,000. The renovations ended up costing more because we ran into some issues. Floor had to be leveled out and then fixed again later after a hot water line burst under the house. This is also the reason why we didn't sell the house within the first 2 weeks of having it on the market. More on that later. The additional renovations brought the total renovation cost to $20,000.
For those wondering how I came up with estimations, I started with the 70% rule to quickly rule out (no pun intended) bad investments, but I quickly learned that I had to adjust that number closer to 64% because of the additional closing costs that you have to pay for the seller (normal around here) as well as loan fees and other misc expenses. I eventually just made my own calculator on a spreadsheet and between that and the comps, I can generally tell if a house is worth looking at. Obviously, I had a contractor look at the house to estimate the renovations. I am not quite in a place where I can do that myself yet. And to estimate closing costs, I spoke with several real estate agents and well as looked over a few HUD statements to get a good idea of how much closing costs are. Luckily, this could be simplified by estimating 3% of the purchasing price and 4% of the sales price for closing costs and then of course the real estate commission, which is 6% of the sales price.
Moving on, we almost had the house under contract within the first couple weeks of having it on the market. However, during that time, a hot water line busted and ruined the sub-flooring and the new laminate flooring that we just installed and as you can imagine, the floor had waves running through the living room. Of course, the buyers real estate agent thought it was an issue with the foundation and would not listen to reason, she ignored our calls once we fixed the issue and by then she convinced the buyers to look elsewhere. Fast forward 4 months later (winter) and now we finally sold the house. In total, it took 153 days from the first closing to the last closing to renovate and sell the house.
Financing:
Originally, I was going to do hard money because I could not find a bank within 2 hours of my location that would fund me. Then I found a small bank that only has a small office in my area. When I say small office, I mean that there was no receptionist, no teller, no vault. Just a guy and a desk. That's it. Rates were 4.5% with 1 point and the loan was interest only for 12 months.
$17,500 credit line to cover down payment and holding costs.
Horror Story:
Other than the pipe busting and potentially costing us another 4 months of holding costs and thus preventing me from moving on to another house sooner, there is a story that is much worse . . .
Other than the crazy idea of having the seller pay for the buyer's closing costs, there is another common practice called early possession, which basically means that the buyer moves into the house while under contract and before closing. Yes, I know this already sounds like a stupid idea . . . However, they were willing to pay $500 to stay there till close, which was in 3 weeks and then $30 a day for each day the closing gets pushed back. In the end, they ended up paying about $800 for ealy possession. They had also offered a $100 pet deposit, which I increased to $300 just in case we did not go to close and I had to replace one of the carpets. What I didn't know was that they had 10 dogs. Yes. 10 dogs . . . And no, they did not utilize the huge back yard with the beautiful fence to house the dogs. Being a relatively logical human, I figured that these people probably only had 1 or 2 pets and that they would actually use the back yard. I was wrong. Anyways, we did not find this out until the contractor had gone back to do some work that the buyers had requested as a part of the offer to purchase, and by then the damage had already been done. There was pee all over the laminate flooring and carpets, what looked like black silt in the bottom of the tubs and the house looked like it was owned by a couple of budding hoarders. Apparently the smell was so bad that the contractor had to leave the house several times just to breathe. To make things worse, this couple was unable to adult and fill out the necessary paper work on time on multiple occasions, pushing back the closing to 8 days. Needless to say, we were a little concerned about whether or not we would actually be able to close on the house and if we did not go to close, I would have probably lost at least $3000-$5000 in additional repairs to make the house look and smell new again.
You might be asking why we did not kick them out. Like I said, by the time we found out, the damage was already done and we were close to closing. Rather than alienating the buyers and kicking them out, the best we could do was hope to God that they were able to close and then take legal action if necessary if we did not go to close.
Lessons Learned:
The above tale is not a typical early possession, nor were these normal people in general. So, I will still do early possession in the future, but I will not allow pets and I may even require that underwriting be complete before early possession so that I know for a fact the buyers can close.
Obviously, I learned a lot about pricing out renovations, closing costs, etc. But the main lesson I learned is not to assume that you cannot do something just because that is what you were told or because you don't make enough money or because you don't have the best credit or (add your reason). Now, don't get me wrong, I am not the type of person who lets someone tell me I can't do something and then not rise up to the challenge. But when I first looked into flipping houses 2 years ago, I asked a friend of mine who was a real estate agent (not the same one I am using today) what I needed to do to start flipping houses. I can't remember exactly what he told me, but it basically boiled down to needing a lot of money and he knew nothing about hard money (neither did I), construction loans or private lenders. Basically, I got my information from the wrong source and instead of digging in and doing some more research, I waited another 2 years just to find out I could have been doing it all along. Oh and I was not in any better position financially when I bought this house compared to 2 years ago. I had the same income, the same credit score and I looked just as good as I did 2 years ago (JK). The only difference is that I decided to dig in and do some of my own research and eventually stumbled on BP. I started reading everything I could get my eyes on to include all the books I could buy from BP and other sources. Eventually, I was able to find a small bank that was willing to fund me and another bank that was willing to give me a 17k credit line to cover a down payment and closing costs. Now, I have over 40k to put towards my next two houses between my credit line (which was increased to 20k) and my profits from this house.
Pictures:
There are a lot of pictures, so I have uploaded them to my google drive.
https://drive.google.com/drive/folders/0B4gWighCv2...
PS: How do I edit the title to fix a typo?
