I wish I could say that every deal you will look at in real estate will become your deal, take little time, cost very little and make you a ton of profit. Isn’t that how it works on TV? Well, as many of us have experienced, that is not the reality.
Last week we analyzed a short sale opportunity for fix and flip and decided to walk away from the deal. After the experience, I figured this would be a great opportunity to use as a learning opportunity for others! So here goes: the story from beginning to end with all the real numbers of the deal.
How to Estimate Rehab Costs!
Estimating rehab costs accurately can make or break your real estate business, and it takes years of experience for even the best rehabbers to master the art. However, you can expose yourself to less risk and get more accurate with your projections by learning how the pros think when estimating construction costs.
3 Invaluable Lessons I Learned by Saying NO to a Fix & Flip Deal
Lesson #1: Always be networking.
I don’t need to get into all the various ways that you can find deals in this business. However, I can tell you one of the best ways is for deals to come to you (versus you having to find deals). The best deals are the off the market deals that you get first glance at. The only way to get first glance is to build your network and relationships. This means staying in front of key people in your network all the time!
My husband and I live in a small town in NJ that is full of opportunity to fix and flip houses. Recently, I called one of my business contacts in town who happens to be an accountant. I am not sure why, but accountants always seem to know everyone in town. These are great professionals to network with. Anyway, back to my story: I called my business contact/accountant in town to discuss another property whose owner I thought he knew. We got into a discussion about the property and then we spent some time catching up with one another. I was sharing what I was up to and that we are always looking for deals to fix and flip.
The next day the accountant called me while he had his real estate agent friend/client in his office. He handed the phone to his real estate agent client and he told me about a short sale opportunity that he just received in his office. He told me if we wanted to go see it, we would be the first ones before they listed it on the MLS. I said, “Yes, of course!” and got into the property two days later.
Remember to stay in front of your network. That way, people keep you top of mind when opportunities come along.
Lesson #2: Get as much information as you can before you walk the property.
I love to do research and fact finding on deals. I am not sure where that comes from in my personality. I am not an overly analytical person, but I really love to do investigation work on properties! We have access to the MLS, so my first order of business as soon as we have interest in a deal is to go into the MLS and review the public record.
The public record on a property is incredibly helpful for many reasons. It obviously provides the current owner, when it last sold for and the amount it sold for, annual taxes, etc. I find the public record most helpful to confirm square footage of a house. Many times I have come across MLS listings that post inaccurate square footage, so I always appreciate the public record to confirm this. I also really appreciate the “MLS history information” on the public record.
The key is to be as prepared as you can before you go see the property. That way, if you like the property and deal, you can make an offer quickly.
We set up an appointment to walk the property and quickly conducted some fact finding. When I say “we,” it was my husband, myself and my two-year-old son who walked the property. My childcare fell through that day, and my only option was to take my two-year-old with us. Not ideal, but you have to make things work. Don’t get discouraged if you have kids and you have to bring them along with you to your appointments. Real estate agents tend to be super helpful and not judgmental. Just bring a lot of hand sanitizer in case your kids touch something they should not have!
So here is some detail on the deal:
The property has 3 bedrooms and 1.5 baths, with 1,612 square feet. It is a single family home (detached) in a middle class town in a good school system. As soon as we drove up to the house, we realized there was no driveway. This is a deal breaker for some families, but something that is fairly common in older small towns like the one that this house is located in.
We walked the house, and it was clear that it was going to need a lot of work. It was helpful to have two of us to walk the property so we had two sets of eyeballs on the deal. We made notes and estimated repairs throughout.
During the walkthrough, we asked the real estate agent as much information as we could about what was owned on the property, what she thought the bank would take, etc. The current owners owed somewhere around $270k for the property. She said that she thought the bank would want somewhere around $90k-100k.
On our ride home, we thought we might just have a great deal on our hands! But before we got too excited, we wanted to estimate costs; that way, we knew exactly how much we were comfortable offering considering a profit goal of at least $30,000.
We use a software called HouseFlippingSpreadsheet.com and find it very helpful since it does not miss anything! Here is a breakdown of our repair estimate:
The repair estimate above totaled $54,627. We added a 10% contingency factor. And we figured $19,621 for fixed costs (buying costs, holding costs, and selling costs).
Therefore, we would be into the property between repairs, contingency, and fixed costs for $79,711.
Lesson #3: Always confirm comps.
One of our last discussions with the agent was to get her sense of the market and comps. We know this town very well since we live here, but we wanted to know her thoughts on comps as well. She told us that this property fixed up would sell for around $225k. Based on this number, the deal could be a home run. Here is what I mean:
From these numbers, an offer of $90k to the bank would work great. However, I wanted to conduct my own comp analysis. You can’t take anyone’s word for it! So, after some analysis, it turned out that the best comp in the last 6 months sold for $180,000 NOT $225,000.
So, after looking at this analysis, there was no way we were comfortable offering $90,000 to the homeowner/bank. Therefore, we decided to offer $65,000.
The real estate agent presented the $65,000 offer to the homeowner since this was a short sale, and the homeowner thought that this was too low and the bank would not accept it. At that point, we had a choice: to either increase our offer or walk away. We decided to walk away. Over the years, we have learned to become more conservative. I would rather wait for a great deal than get into something that will not work.
Although we did not get this deal, there was a ton of learning along the way. There is always learning in every deal if you choose to look at it that way!
I would love to hear from those fix and flippers out there. What have been your greatest lessons on deals you have not gotten?
Thanks as always for reading and happy investing!