For Flipping Consideration? Have I missed anything?

Question

This is a copy of an email I plan to send to my partner and want to vet it through you folks here.

Does it look like I have it covered?  Can you poke holes please? :)

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Here are my thoughts.

I still like (The dump).  I donâ€™t like it as a rental though because it ties up a lot of our capital and requires us taking on debt and makes the property negative cash flow.

I do however like it as a rehab straight flip using off the books financing (Outside silent partners).

So look at it like this.  Houses in that neighborhood that recently sold are selling for 80-134K TODAY.  As in the last sold I could find was 6/29/2009 for 134K.   That neighborhood alone has sold well.  21 homes in the last 6 months.  12 homes in that neighborhood are for sale today ranging from 21K (Our little Westchester jewel) to 127K.

Requirements and caveats:  FHA requires 90 seasoning of money so we wouldnâ€™t be able to flip to FHA buyers for 90 days (Largest percentage of buyers).

I suggest we look at 1 lower end for sale (Iâ€™m betting itâ€™s a rehab too.) and the 127 and the next closest 95K for sale to see what they offering (Granite, hardwood, et al.)

Doing the math â€“ Low ball

ARV (After Repair Value) = 80,000.   
Closing feeâ€™s = 3,000
Commission of realtor = %6 = 4,800
Rehab costs = 30,000
Purchase price = 4,000
Capital Gains = 5,730
6% (Negotiable) return on rehab loan to investor = 1800.00
Home Staging for sale costs = 600.00

Potential Profit = 30,070.00

Minus any carrying costs while the unit is up for sale.  However these costs should be very low and superficial since there will be no mortgage to carry.  Just heat to keep the pipes from bursting again and power to show.  Maybe even some staging furniture rental from rent-a-center.

Potential individual profit = 15K

Exit Strategies: 
1.	Major Rehab = Rent to own (Land Contract AKA Owner financing)
a.	This will require the silent partner putting up the funds to agree to only be paid the return upon sale regardless of time frame.
2.	Major Rehab = Flip out to FHA or Investor

This gives us two outs in the event things go tragically wrong.

Iâ€™d like to send this to Jeff and vet it through him and see what he thinks when he contacts us back?

My math all depends on getting an inspection of the property and ensuring thereâ€™s no game changers and then getting a GC out to the property to give an hard estimate on the rehab costs.

Jon Holdman · Answer

First, why are you sending your partner a letter and not talking?

I think you're saying you can buy this place for $4K and put $30K into it, and sell it for $80K.  You would need to borrow $40K or so to cover all the purchase, rehab, and closing costs.  That should be possible, especially if you have $4-8K of your own cash.

My simple minded formula looks like this:
ARV: $80K
70$: $56K
If purchase plus rehab = $56K, you'll net $8-12K profit.
Since your purchase plus rehab is $34K, your profit should be much larger, more like $30K.

You'll pay short term capital gains tax on that.

You don't seem confident about the ARV.  Huge range, and no specific comps.  Get tight on the ARV.

You're missing insurance and taxes for the hold period.  Insurance will have to be paid up front.  Be sure to price "empty house" insurance, since that's what you'll need.  It will be MUCH more expensive than you expect, and won't cover squat.  Taxes will be taken out when you sell, as a credit to the buyer for the partial year you've held the property.  Since we're getting toward the end of the year, you might have to hold past 12/31.  In that case, you will be responsible for all of 2009, plus whatever part of 2010 you hold the house.  You will get a credit from the seller (to you) for the part of 2009 when they owned the house.

Unlikely you will find an investor who will let you keep their money on the deal indefinitely.  You're really talking hard money here, and that's strictly short term.  Further, if you're paying 12-15%, you can't afford it.  If you end up holding the house long term, even with a lease option, you will need to refinance.  DO NOT PUT IT ON THE MLS, then try to refi.  Refi first, then list.

J Scott · Answer

Quick analysis says that if you can buy this house for $4K, put in $30K in rehab, and sell for $80K, this is a great deal.

Jon brought up a lot of good points, but even if the numbers are close, it should be a home-run for that price-point of deal.

I would be absolutely certain that your $30K rehab number is accurate.  If you're picking up a house for $4K, it's probably in pretty bad shape, so $30K could be low for the rehab.  Get a couple bids on the work, and make sure you're in the right ball-park.

Rael Mussell · Answer

Thanks Jon for the taxes 101!  That helps a lot and makes sense.

Yea, I'll definitely drive by the solds, but since they're all the same looking (Detroit is famous for it's track housing) I'm assuming it's the quality of the interior that made the sale.  So that's why I wanted to look at the 127K listing and then then 80K listing and see what the differences were.

Hi Mark!  I'm new at this, so we're just building a team now.  We currently are working with one realtor on this set of houses.  If anything changes though I will let you know!  Thanks!

Jon Holdman · Answer

2009 taxes are typically due in April of 2010.  Exact dates vary widely, but if you check the county web site (assessors office) or call them, you can find out specifics.

When you buy, you will get a credit for taxes from the seller.  That will cover 1/1/09 up to the date of the closing.  Say that's 10/1/09, and the taxes are $4K a year.  That would be a credit for $3K from the seller to you.  Woo hoo! you think.

Now, way you sell six months later, on 4/1/10.  Assume you've not yet paid the taxes.  You will have a debit on your side of the transaction for all of 2009 and three months of 2010.  So, $5K total.  Of that, $3K came to you when you bought, so you're really only paying $2K.  But if you've spent that $3K, you'll have to pay the entire $5K out of your proceeds.

Say you don't get a buyer unitl 7/1/10 and taxes are due by 4/30/10.  By that date, you'll need to come up with the $4K, in cash, to pay to the county.  Again, $3K of that came from the seller, but if you didn't set that aside, you'll have to come up with the entire amount.

Look at lots of houses in the area.  100 is a good number.  Seriously.  Find as many solds as you can.  Drive by the solds.  You mention "80-134K".  That's a huge range.  You need to figure out what sold for $80K and what sold for $134K.  Something's different, and you must know what.  You still may end up with a range, but you should be able to get much closer than the range you give.

Appraisals tend to run low, right now.  That's the effect of the new HVCC (home valuation code of conduct) rules.  Assume you'll get caught by this, too, and the appraisal will be less than you expect.

Mark Yuschak · Answer

Hi Rael,

I'm a Realtor that serves the entire SE MI area.  I'd be happy to help you determine true comps for the subject property.  Add me as a collegue and send me a PM with the details and I can pull comps for you out of RealComp.  Of course, hopefully you'd choose to use me as your listing agent when the time comes!  :)

Rael Mussell · Answer

We have 9-5's and during business hours communicate only through email.  So that's why he gets a letter and we're not talking over the phone.  I just give him something to mull over during the day and we'll talk about it later tonight over beers and a burger.

GOOD STUFF I MISSED!  Thanks!

So this is a REO unit.  2009 taxes are 4K.  I have to pay all of them?  Wouldn't the bank be paying the summer 2009 taxes?  I would likely get stuck with winter 2010 taxes?  Where can I read up on that?  That's all new to me.

How do I get more soldi on the ARV?  I looked at the homes in the neighborhood of the same size br/ba and went low?  So the usual for this unit it like 100.  I priced to sell, but I would suspect a higher appraisal?  How can I shore up this information?

For Flipping Consideration? Have I missed anything?

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