What happened to my $30,000 profit?

[Matt Morgan]

I thought I would post a recap of my first flip, a deal I thought was a slam dunk but didn't turn out to be in the end. The house directly next door, which was identical to mine, sold for $105k earlier that year and there were several other supporting comps in that price range or higher. The projected numbers were: 

Purchase price: $27k 

Acquisition costs: $4k

Rehab: $33k

Holding costs: $3k

Closing costs/commissions: $8k

Sale price: $105k

Profit: $30k

What killed this deal was a combination of going over budget by about $10k, but more importantly, the area in which this home was located. An extreme lack of qualified buyers (and those that were qualified expected EVERYTHING to be perfect) combined with a large inventory of flip-level homes lead to a severe imbalance in supply and demand. Had I paid closer attention to the market, I would've noticed the glut of inventory and probably lowered the price and/or accepted a much lower offer than I was initially hoping for.

When all was said and done, the home fell out of escrow twice and with the end of selling season approaching, I decided to put a tenant in the home. I was able to rent it out for $1,200 a month on a 1.5 year lease, which puts me in a position to try and resell in the spring of '17. As it sits, the home cash flows nicely, and if I can refinance out my initial investment, it will make a great addition to my portfolio.

Things learned:

Know your buyer: Who's buying? How many are buying? What do they expect as far as fit and finish? 

Dig deeper into the comps: What was the home originally listed for? How long did it take to sell? 

Pay attention to current competition: What kind of product are you competing with? How many homes like yours are there? What are they selling for? How long have they been on the market?

Have multiple exit strategies: Run a worse case scenario. What if the home doesn't sell? Can you rent it? 

Budget for overages: 10% is standard. If the home is older and lower priced, 20% is probably more realistic. Always err on the side of caution. Run your numbers to reflect worst-case.

All in all, although I didn't make what I thought I would, it was a great learning experience and I may just end up with a great rental. 

BEFORE:

AFTER:

[J Scott]

Originally posted by :

@J Scott Do you mind sharing what your biggest hurdles were when flipping in the Milwaukee area? 

- Older homes in need of major repairs

- High cost of materials

- High cost of labor

- Lack of available labor

- Uncooperative weather

- Strict building codes

- Very picky buyers

- General distrust of flippers in the area 

- Large seasonal price fluctuations

Of course, none of those things is a big deal if you can pick up deals at a price that accounts for those factors.  Unfortunately, the deals I was finding weren't good enough to overcome those factors.  While we made decent money over the 20 or so flips we did there, it wasn't enough to be worth the time and stress of dealing with long-distance rehabs. 

BTW, the picky buyers were the worst.  There are very few fully rehabbed houses in that area, yet buyers expected rehabs to be like new  construction.  I've rehabbed 150+ houses in various areas and it was the only place I ever had buyers complain that our scope of work was too incomplete -- things like not replacing ten year old roofs and sidewalks having small cracks.  It was ridiculous, and likely fueled by the general distrust of investors in the area (in my opinion).  Not to mention some of the worst real estate agents I've ever dealt with. 

I'm not blaming the buyers, the contractors, the agents or anyone else... I just wasn't able to make enough of a profit there for it to be worth the effort for me.