LA, Ca flip scenario, please analyze and critique...thx!

[Clarence Johnson]

Hello to All,

My business partner and I (both Realtors in southern Ca)have decided to take the plunge and purchase our first flip. After running the comps and walking through with my dad and Uncle (both in the business of property maintenance) I have decided to pay for an inspection today to make sure there are no unforeseen issues. I'm in communication with the listing agent and he is very receptive to working with us. Please analyze the deal and the proposed terms of our hard money loan, all input, recommendations and suggestions are welcome. Thanks in advance!

Home Specs: 3/1.75 1500 sq ft, 5400 sq feet lot

List price: $375,000

Purchase price: $340,000

ARV:$440,000 (comps verified with homes sold in 1/4 mile radius in last 30 days, not to mention a few pending listing at $460ish)

Rehab: $20,000

-Scope of work:

-Paint int and ext

-finish original hardwood floors 1200 sq ft

-new windows

- install 1 ext double door

-landscape back and front yards

-bath1: new shower pan/tile, vanity, bathroom flooring, light fixture

-bath2: epoxy coat tub and add tile border, new vanity, new flooring, light fixture

-3 new mirrored closet doors

-1 water heater

-kitchen tile

-retouch white cabinets and add modern hardware

-5 int doors

-door hardware, hinges, electric plate covers

Hard Money Loan Terms: $300,000 with 3.5 points and 12% interest

$40,000 cash for purchase

$11,000 possible payout for selling agent commission

$9,000 closing cost (will attempt to have seller pay closing)

$10,500 cash for hard $ points

$9,000 holding for 3 months (1.5 month rehab, 1.5 month market and sale)

The largest concern is the shower pan in the bathroom caused flooding and destroyed a portion of the bathroom subfloor, I made sure to mention to my inspector that I need him to verify that there are no signs of mold under the home. The other concern of mine is

that there was a fire in the home (which explains why the kitchen is practically new) and I am having the inspector look into the attic space to ensure there is no hidden fire damage. My last concern is making a purchase in early Sept means that my listing will hit the market Mid Oct-Early Nov. I would like to know if the experienced flippers break around this time in consideration of the winter market slow down.

Once again, any and all questions, suggestions, criticisms etc are welcome, the inspection is being conducted as I type. Also, if anyone has a hardmoney lender with more favorable terms please give me their contact information.

[Jeff S.]

Watch out, @Clarence Johnson. If your numbers hold up, you will net about $27k or a meager 6.3% of ARV. This shouldn't be a surprise since your project cost (Purchase price + Rehab) is 82% of ARV. Here's our income and expense estimate using your input:

I don't agree with your numbers, however.

Your scope of work is probably closer to $40k to $43k and there is no way you will complete this job in 1.5 months and sell in another 1.5. Six months is more realistic. You should also be getting repair estimates from a trusted contractor. Here, your project cost is 87% of ARV and you'll likely lose about $6k, as shown below:

To make matter worse for you, we funded an Inglewood flip several months ago that's just coming to the market. It's a 4/2.75 and asking price is $440k. This was a full blown, down to the studs gut job, so the house is virtually new. It also has a guesthouse in back. I don't know where you are getting your comps but you might revisit them.

The only good news here is that, though the best time to sell a house is always in the spring, southern California's fair weather climate doesn't really restrict sales any time during the year. More important is to select a qualified buyer and quickly get them cross-qualified with a lender you can rely upon. It's not the weather that will kill you, but a deal that falls through a few times.

Be careful Clarence, and good luck.