Runnemede, NJ - Buy & Flip SFH (Auction.com) - Diary

[Jeff Watts]

Hi, My name is Jeff and this is my first BP discussion thread and my first investment property! Let me know if you want to know any other details on this deal!

How we found the deal

My business partner and I were looking for a SFH property in our farm area (the town we both grew up in and know very well) when a friend mentioned a foreclosure that was across the street from his primary. I checked it out on Auction.com, and the auction happened to start the following day. (I had been registering for Auction.com deals and watching them closely to get some experience with the site and get an idea of the bidding strategies.) (Note: I was also looking for deals on MLS, it was just coincidence that the first deal happened to be a foreclosure.)

Deal Analysis

I had taken a basic course on Udemy on Real Estate deal analysis. I used this knowledge (and spreadsheet templates) to put together an analysis to determine our max purchase price.  My partner and I had a goal of making $10k Gross Profit each, so $20k total on the flip.

Original Analysis (summary)

3 Bed / 1 Ba / 980 sf

Purchase Price: $80,000 /Construction: $10,000 / Holding: $2,500 / Financing: $0 (Cash Purchase)

Total Cost: $92,500

Exit Sale Price: $127,000 / Exit Costs: 7% ($8,890)

Est. Gross Profit: $25,610 

Auction.com (Online) Bid Process

I had some competition on the property. The bidding gets very aggressive in the last 5 minutes (just like old Ebay auctions). My strategy was to counter-bid the next allowed amount immediately after another bidder. We ended up getting the property for our allowed purchase price ($10k below the reserve, so we were unsure if the bank would accept. They eventually accepted). We won the bid on March 12, 2019 and we didn't fully close and gain access until May 21st, 2019. The delay was mostly dealing with title issues on the banks end. But, they eventually cleared everything and once we gained access, it's been a normal property sale. I wouldn't recommend the online auction for investors that need a quick closing. However, I think it's a good way to build your deal funnel if you are looking out 12 months in advance.

First Look

Since we were unable to see the interior of the property prior to June 1st (due to foreclosure), we were unsure of what to expect. The living areas had ugly carpet, the kitchen had a closed off layout, and there was some cosmetic damage. We didn't find any water damage, mold, pests, etc. Overall, we were happy with the condition of the property.

Rehab List

We walked through the property and visualized what our end goal would be.  In our eyes it would look something like this:

1. Rip up carpet and pergo laminate and sand/finish the existing hardwood. 
2. Sheetrock as needed, prime/paint the entire interior. 
3. Take down wall in between living and kitchen to open the floor plan. This is a load bearing wall and will require a beam.
4. Relocate the Gas/Plumbing in the kitchen to the other side of the room to more space.
5. Build a new wall to create a small laundry room in the kitchen
6. Install wood decking over top of existing concrete deck
7. Paint the exterior
8. Landscape

Deal Analysis Review

Our first mistake. We underestimated the amount of work that would be needed.  This entire house will be focused around the kitchen, but due to the location of the plumbing and layout, we need to make some major changes to make it work.  We increased our construction budget, but we also increased our estimated sale price due to some more research on recent comps in our area.  We are still looking at $20k + profit at this time.

Contractors

Throughout the project we will be working on this ourselves (My partner has experience) with some day labor help. We will call in a contractor for any specialty projects (floor refinishing, electrical permits)

Kitchen Design

This house is small, so the focal point (and budget) is going to be spent in the kitchen.  We are going to use an IKEA kitchen and IKEA has a great kitchen design tool. I used this tool to build our layout and design a kitchen.  I spent a lot of time on this (Maybe 20 hours) over a couple of weeks. We ended up with the design below:

(Note: The final cabinet layout may not be reflected accurately here, but the general layout is the same)

Construction Phase

We started the construction phase early June. We needed permits for Electric, Plumbing and Construction. My partner used CAD to draft up a floor plan, and we submitted all permit drawings ourselves. The permits took about a month to get approved, so the first month we had to be careful what we did.  It didn't feel like we made any progress until our demolition day. In one day, 3 of us filled an 8 yard dumpster with sheetrock, kitchen cabinets, and misc. debris. (Note: A week after the dumpster was taken away, I cleaned out our crawl space. I could have filled another 2-3 yards with what I found under the house.  Lesson Learned: Look everywhere for trash before pulling the dumpster!)

I'll post a bunch of pictures now for construction stage:

May

June

July

August

September

Where we are today

I am posting this about 4 months after we closed and about 3.5 months of rehab. Most of our work through August was done over the weekend. We started doing more work throughout the week in September, and we are really starting to see the project come together. Over the next 2 weeks we will have our tile floors installed in Kitchen/Bath, Support Beam installed, new walls completed, and kitchen cabinets installed.  Within 1 month we should have our hardwood refinished and our interior painting completed, ready for our finishing touches and hopefully get listed with our agent.

I keep a very detailed spreadsheet (I created a Google Sheet Template for tracking expenses, P&L, time of labor, etc) so we always have a real-time assessment of our actual expenses versus our budgeted expenses. Pending no major delays or unforeseen issues, we will be at $110,000 total cost for Purchase, Holding, and Construction.  This is is almost $20,000 more than we originally estimated.  Most of our additional cost was labor. We initially thought we would do more work than we have done, and I'm fine with that. I have enjoyed getting my own construction experience on this project, but I do realize that I am not training to be a contractor. I need to know enough to work with contractors and manage projects, but I don't need to be an expert. I'm optimistic that our increased costs will be offset by our sale price. I used a conservative sale price estimate from the first deal analysis, so we are now shooting for a $140k sale instead of a $127k. This is still within the recent sale comps. Move-In ready houses have been selling very quickly in our market.

Lessons learned so far:

• If permits are required, start that process immediately
• Check EVERYWHERE for possible debris when renting dumpster
• Make a construction list up-front with a tentative schedule/priority list. You need to keep your labor working. 
• Visit the job site regularly to check on progress and keep a good rapport with crew

Would I change anything?
I would like to say that I wouldn't have been involved in the day to day work, but I think it's important to get this experience. I won't be ripping up carpet and painting on the next project, but I think it was worth it for this one. I would rate my deal analysis a C+.  In the end, I think we will still make roughly the same profit, but the rehab numbers could have been better estimated a second time around.

Next Steps?

Ironically, I ended up purchasing another foreclosure (at a live auction) to start my BRRRR portfolio. We visited this property when it was on MLS. It ended up being a short sale, but by the time we walked through the foreclosure had already been scheduled and they couldn't take an offer. I went to the foreclosure the next week (crazy timing...) and bought the property for about the same as our short sale offer. The on-site auction took 15 minutes and within 2 weeks we had access and clear title...So I have 2 active projects now!