Hey there, BP! I try and keep at least one fix and flip moving at any given time, and our current one is finishing up. So I’m on the hunt! I have my feelers out to my realtors and wholesalers and have been doing some “driving for dollars” on my own as well. Last week we came across a deal that at first looked fantastic, but after further investigation, we ended up passing on it. I thought I would share some things that ended up killing that deal in hopes that you look out for the same on your fix and flip hunts!
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
The property came across our plate from a realtor we’ve done a few flips with. She’s been a great asset to us and has forwarded us several deals over the last few years. We keep our realtors loyal because we commit that they will get first crack at the resale if they bring us a deal. This property was bank owned and in an A+ neighborhood. The school system is among the best in the area, and the house is walking distance to the downtown shops and restaurants.
It was a sizable home so there was no need for an addition to get to the typical square footage in that area, and it had 3 bedrooms and 3 baths. No show stoppers on paper. The listing price was $160,000 and After Repair Values in that area are north of $400,000. The house even had some build it “wow” factors, like a sun room with a double high ceiling. All great signs. This one didn’t seem like it was going to last long so we set up a tour for the next day.
When we pulled up there were two other cars in the driveway; another showing was just finishing up. No worries. We waited in our car to be respectful for a few minutes. While we were waiting, another car pulled up — and then another. I realized there was no reason to wait any longer so we went in. While we did our walkthrough, there must have been no less than 10 other parties going through the house. Most of them were end buyers that couldn’t believe a house in this area was priced so cheap. This could have been because it was a Sunday afternoon, typical “go see houses” time for end buyers.
So let’s use a baseball analogy for analyzing this house. Three strikes and you’re out!
3 Reasons I Passed on a Tempting Fix & Flip Deal
Strike 1: Competition
The first strike is the amount of competition on the deal. I hate competing for deals, especially bank owned ones where there is no homeowner to make an emotional connection with or do something creative like send them a YouTube video with our offer. Competition from other flippers on a fix and flip like this is saying “Ok, so who wants to make the least amount of money and take the most risk?”
All it takes is one fool to drive up the price and take a deal to a bidding war. They probably didn’t factor some things into their rehab cost or left out a contingency for “just in case” expenses. Either way, going up against someone like this on deal is going to cause you to bid higher to win the deal. Another competitor that can drive up price is end buyers. If they have the resources and the knowhow, they can pay more than you can because they are not looking to make a profit. Either way, when there is a bunch of competition on a deal, either find a way to make your bid stand out or really sharpen your pencil and put your best foot forward when you make an offer.
Strike 2: Unknowns
When we started the walkthrough, it became immediately obvious that the house had been infested with mold. It reeked. Further examination uncovered the source: the basement was covered in black mold. The cause was not immediately obvious, but it was clear that the basement had flooded in the past, and the effect of that flood was mold all over the place. It was so bad it was all the way up the 8 foot walls and onto the ceiling tiles above. There was no telling how far it went from there. It could have been behind the walls in the rest of the house.
The bottom line is that we wouldn’t know the extent of the damage or the repair needed until after ownership.
While in the basement, I saw that the foundation walls had major horizontal cracks. I don’t want to get into structural engineering here, but horizontal cracks in a foundation are very bad. They really compromise the structural integrity of the walls and can cause them to buckle over time. Horizontal cracks don’t show up out of nowhere, they are a symptom of something else. It wasn’t clear what that was, and the repair was far beyond just patching the walls.
The mold, the structural issues, and a few other things in this house are all “unknowns.” These are things where you just won’t know the real story until you get deep into the house. We once found out that an entire exterior wall of a house had been eaten by termites. The bad news is that we found that out after we owned it and had to deal with it ourselves. It’s impossible to budget for these things because you don’t know the full story, so how can you budget to remediate? You really can’t completely avoid unknowns on a flip, but you can do your best to limit them. I always put a line item in my budget for “contingencies,” which accounts for cost overruns or an unknown item coming up. For most flips I go with 10% of my budget for the contingency factor. For a house like this one, there were too many unknowns to make a budget that I could stand behind comfortably.
Strike 3: Time
The rest of the house was in deplorable condition. There wasn’t anything that we couldn’t deal with, but the problem was that EVERYTHING needed something. The furnace was shot. The kitchen was dated, and so were the bathrooms. The hardwood floors needed sanding, some of the windows were broken, and the roof needed to be replaced. I could go on. There was money in the deal to do all these things, but the problem was that it would take time and coordination to do all these things. I try and find deals that have a few things I don’t have to touch. This saves me time and energy.
Time can kill your fix and flip. If you are using financing (we typically use private lenders or banks), time costs you another interest payment every month. If not, there are plenty of time-related items like real estate tax, insurance, and utilities that will eat into your profit each month that you own a flip. Taking too much time on a deal also has another, indirect factor — opportunity cost. If you can sell that flip fast, you can be on to the next project and making another profit. If you are locked up for a long period of time, you may have to put all your resources into that deal to ensure its success. There is only so much time, so make sure that the deals you get into don’t take so much of yours that you miss out on other deals that will take you to your goals!
So for this house… it’s strike 3, you’re out! We walked back out the driveway and agreed to pass on the deal, all the while more potential buyers were pouring into the house. I have no doubt that the house is already under contract because of the amount of traffic it was getting, and I’m sure it went for well above the asking price. I wish the buyer the best. I hope they can remediate all those issues inside their budget and create a great home for someone. I’m glad I’m not that buyer, though!
So what are your thoughts? Tell me about your show stoppers that will cause you to walk out of a potential deal.
I’m looking forward to having a good convo with all of you on this in the comments section below!