1724 sf
4 bed, 2 bath
1 Story
No Garage
Listed Price $66k
Offer/Purchase Price $70k
Original Estimated Renovation Cost $31k
Final Renovation Cost $36k
ARV $140,000
Sold $143,000
Closing Costs at Purchase $4,600 (including $1500 that I pay my agent to handle Auction transactions)
Closing Costs at Sale $10,200 (including 6% commission)
Holding Costs (Loan Payment) $280 a month for 4 months
Holding Costs (Utilities) $200 a month for 4 months
Holding Costs (Yard Maintenance) $0
Real Estate Commission Paid at Sale $6,600
Note: I pay my agent an extra $500 on top of his commission to make it more worth his time. I also pay him $1500 for handling auctions. For what I pay him, he will show me lots of houses, meet with contractors to get bids and even check on the progress of repairs in a pinch. The way I see it, if I was a normal home buyer, I might look at 5 or 6 houses before settling on one. As a flipper, I may look at 20 or 30 before I can get 1 under contract. And considering everything else he does for me, it is worth it for me to pay him the extra bonus. I should also note that I do have my real estate license, but I honestly don't have the time to use it, but man, I would save a lot of money if I did :D
Target Profit Margin $18,000
Actual Profit Margin $17,500
Financing used: 80% of home and renovations covered by bank with an interest only construction loan. The rest was funded with credit lines and cash from first flip
Condition of Home:
Crack house
Lots of trash to be removed
Piss and crap all over the floors.
Non-permitted sun room done incorrectly. Built on top of existing back porch.
Exposed wiring in the attic that lead to non GFI outlets in the soffit.
Outside had not been painted in over 15 years
What was done:
Trash-out and Demo
Tear down Sun room and repaired porch
Properly repaired electrical in attic
Painted inside and outside of house.
Painted roof (yes, you can do that)
Replaced floors with new laminate and carpet throughout the house
Replaced old almond color switches, outlets and covers with new white ones
New lights and fans throughout the house
Completely redone bathrooms with new tile, vanities, mirrors, lights. Managed to safe the shower and tub in each bathroom.
Knocked down walls between kitchen and living room/dining room area. Closed of existing entrance from the foyer to give the kitchen more cabinet and counter space.
Replaced old cabinets with new unfinished oak cabinets and then painted them. Used formica for the counters.
Fence added to roughly 80% of the back yard.
General landscaping
Before and After Pictures: Some of the before pictures are actually during the renovation phase.
https://drive.google.com/open?id=1Zof64ecPRvOJy79HGXwWyVO7WDFjNGBz
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.
After I sold my first house, It took almost a year before I was able to get another house to flip. During that year, I was bidding on houses every week and every week, all my offers were rejected. When bidding on these houses, I was shooting for a 20k profit, which just wasn't happening. It wasn't that 20k was unheard of, in fact, it was not uncommon. However, in 2017 there was a huge influx of new house flippers (mostly inexperienced), so getting a house at a price that would allow a really good profit was very difficult. Granted, if I had more time, I could have explored other options for acquiring houses, but it was a rough year for my other business and my time was tied up. The best I could do was bid on every MLS foreclosure and auction that seemed like a decent flip. Half way through the year, I went over all the numbers for the houses we bid on. For those that closed, I looked up what they eventually sold for. I did the math for each of those deals with the estimated renovation costs and found that had I purchased those houses for the same price they sold for, I would have only made 15k on average. So I started to shoot for 15k to 18k profit (depending on the scope of work and potential risk) on the next several and finally got one. This house was an auction house that was in the upset period. I put in my 5% upset bid and for some reason, no one upset my bid after that.
Well, at this point, you would think that we closed on the house, renovated it, sold it for a nice profit and lived happily ever after right? Nope . . . During the due diligence period, we found out that the house appraised for 15k less than what our comps showed us. On top of that, the tip of the house (part of the back yard) was in a flood zone. Now, I was not so much worried about the flood zone, but it certainly didn't help my confidence in purchasing the house. My real estate agent assured me that the comps looked good and that there was even a couple other houses that was pending and would support the ARV even more, by the time we closed. So I called the appraiser and personally spoke with him. I made sure he was accounting the renovations and he assured me that was and that his appraisal was accurate. He explained that the reason why the appraisal wasn't coming out the same as the CMA, is because the one of the comps was a private sale. Assuming that the appraiser knows best, I backed out of the deal and lost my 5% deposit. I later learned that (at least in my area) it doesn't matter if the house was a private sale. I was told by another appraiser that a lot of appraisers simply do not want to do the extra leg work that is required to find out the circumstances behind the sale and determine if it works as a good comp. I should note that the attorney's office told me that there was a possibility that I could get my money back IF the house sold again at auction for the same price that I bid it at or better. I was also pretty much told that they were under no obligation to do so and that it was up to the attorney.
From there, I went back to the grind and kept bidding on houses and got nothing, again. After a few months, this house that I let go of went back to auction. I had my real estate agent run the comps again, and sure enough the numbers came out the same again and those houses that were pending had sold and supported the comps even more. I purchased the house from auction again for roughly the same price and eventually got my deposit back from the original auction. Now, we have our happily ever after right? . . . well, sorta.
There was a lot that went wrong with this house, but honestly, nothing that I would really consider major. I certainly didn't lose any money. But the renovations took way too long and the renovations cost more than estimated due to unforeseen circumstances. The two main things that blew our budget out of the water was the AC unit and the fence. Let me explain.
AC Unit: We already knew the unit had to be repaired, but by the time we acquired the house, the unit had actually be stolen. Luckily, we found a used unit in good condition and we could have it purchased and installed for $800. This was actually cheaper than what we estimated it would cost to repair the existing unit. So, with the extra room in the budget, we completely opened up the walls from the kitchen to the dining room/living room area, closed off the existing entrance from the foyer, spent more money on cabinets and counters (because now we had the room to do so) and made a beautiful U shaped kitchen. Shortly after that, I realized that the AC unit still had not been installed . . . come to find out, the used unit was sold before we could get to it and the contractor had been looking for a replacement since. For the next two months we kept looking and eventually found one and could have it installed for $1600, which wasn't bad, but we already spent more money than anticipated on the kitchen. Which, honestly, I am glad we did either way. Just so you know, I didn't hold up the renovations to save a few bucks on the AC unit, it just happen that the renovations was taking that long anyways.
The Fence: This was the big one. The back yard was huge and unkept. The grass was long and the shrubs and trees had grown into many parts of the chain link fence. Originally, we had planned on cleaning up the fence and repairing it where needed. After we cleaned up the back yard and started cleaning up the fence, it became clear that fixing this fence was not an option. So, I decided that we would just get rid of it. Well, once it was removed, we could now see the flood zone . . . On the left, behind the neighbors yard, there was a swamp that was waist deep. Which, would explain why their backyard was only half the size as ours. In the very back portion of the yard, there was more water that drained from part of the neighborhood into our back yard. Basically, about 60 feet (depth) of the back yard was worthless. So, we did the only thing we could do and put up a privacy fence around the good portion of the back yard. We did this for two reasons. 1. Obviously, this was an eye sore. We weren't trying to hide anything though. It was public knowledge that this house was in a flood zone and we even had a gate on the back of the fence for easy access, so the potential home owners could inspect the area and maintain it. We also included a quote for flood insurance with the disclosing documents. 2. My main concern was that since this was a 4 bedroom house, more than likely a family was going to be purchasing it. I know I personally wouldn't want my kids to have easy access to the swamp area and I am sure that most parents would agree. Anyways, we lost a huge chunk of the back yard and we spent $3800 that we never planned on spending, but at least the backyard was still a good size and now safe for a family with kids.
Finally, we got it on the market. We had listed the house for $149,900. We knew for a fact that it wouldn't appraise for that amount and that we probably wouldn't be able to sell it for that much either, but we wanted to see if we could break the comps anyways. Within 1 week, we had multiple offers on the house.
Offer 1: 146k
Offer 2: Full Price
Offer 3: Full Price
Offer 4: Full Price
When we received offer 1, we waited a few days for more offers to come in. It became clear to the buyers that we weren't that interested and they decided to move on. Offers 2, 3 and 4 came in within a day of each other. At this point, it was a matter of figuring out how we could take advantage of the situation. It's not like we could ask for more money. We knew it wouldn't appraise for the amount we were asking for to begin with and in this market, people don't save up money for houses since 99% of buyers here get 0% down mortgages through the VA. But, there was one thing I could do and that was to negotiate the closing costs. In my area, sellers pay for all closing costs, to include the buyers closing costs (unless of course you are the bank selling a foreclosure). In fact, this is such a common practice, that a lot of agents in my area will swear you can't negotiate this and that no matter what, the seller will end up paying for the buyers closing costs. So, I did what any good business person would do and did it anyways. We told each of the buyers that we had multiple full price offers and that the only way they cold sweeten the pie was to lower the closing cost that we would have to pay. Two of the buyers came back with 2k less in closing costs, while the other offered 152k with no reduction in closing costs. It became apparent to me that the buyer who offered 152k was either an idiot or thought I was idiot. Either they couldn't follow the instructions or they knew that the house wouldn't appraise for that much and was counting on the appraisal to prove that point so that they could renegotiate the contract. Either way, we rejected that offer and concentrated on the other two. So, now we had to narrow it down again. We looked at the lenders and realized that one of the lenders the buyers were using has a tendency to push back closing 2 to 3 times on average, while the other lender does the underwriting up front and only commits to a closing date they feel they can actually reach. So, we contacted the buyer with the more favorable lender and asked them to again lower the closing costs and they knocked off another $500 and we were under contract. By the way, the more favorable lender was able to close almost a week earlier than anticipated.
Everything went pretty smoothly from there. The appraisal came back at 143k, which was kinda disappointing since I thought we would at least get 145k. A lot of appraisers will try and make the numbers work, if they are not too far of a stretch and we were hoping that would work in our favor. And it did, just not quite as much as we had hoped. But, the appraiser did try. They even went a bit further out to find comparable houses, which is the only reason why we got what we did. Anyways, I wanted to make up for that 2k that I was hoping to make on top of my profits, so, I asked the buyer to pay for the rest of their closing costs (which amounted to 2k) since they were paying way less for the house anyways. Well, some how, the lender made it work and included the closing costs into the purchase of the home and we made up the difference.
What I learned:
First, I learned that not all appraisers are equal. I have since dealt with this appraiser a couple other times and his numbers are always way lower than ours. Maybe he has a hard time envisioning what the house will look like after renovations, who knows. Either way, I take his appraisals with a grain of salt. My only concern of course, is that he will one day be the appraiser used by the lender when I go to sell a house. Hopefully, he will have a better outlook on those properties when they are fully renovated, but we can only hope.
Secondly, maybe breaking the comps by 10k in my area for the price range of houses I am working with a is a bit too much. Perhaps if I had listed the house at 145k, the appraiser would have had an easier time justifying that number and may have even found room to support it. Instead, we got 143k. Then again, maybe it wouldn't have changed anything, but it is something to consider in the future.
Third, don't under estimate due diligence repairs cost and container costs.
Something else I recently learned is that banks and lenders are more willing work with me on loans and additional credit lines now that the business has been open almost 2 years now. The funny thing is, in that time, I have only flipped 2 houses and the second flip sold in 2018, so it's not even considered during the underwriting process. And after all expenses, I only profited about 20k for 2017, which does not seem like much to go off (especially being that it was just 1 flip) for underwriting. Of course, my other income and credit does help.
Where I am now: Right now, I just finished up a rehab on 1 house, half way through the rehab on another house, closing on a house today and under contract for another house that will close in about a month. Profits will vary from 12k to 20k. I now have 3 lenders willing to fund my flips and decent sized credit lines to cover other expenses. I project that if things go smoothly, we should profit over 100k this year from these flips.
