Fix and Flip opportunity?

[Dave Howland]

Hello all, 

I'd love to get some advice on a potential flip I'm thinking about. It will be my first. 

I have a friend who has a neighbor that passed away, and her house is being sold in the next few weeks. They've offered it to us steeply discounted(260,000) before it hits the market. ARV for houses on that street go for 300,000 to 340,000 - they're mostly single level small houses. This is in NJ. The house is being sold as is and I'm assuming a complete kitchen and single bathroom gut.

Last year a house just like this one - three doors down - was renovated and a second floor was added  - yielding a purchase price of 500,000. It was very nicely done and there was a lot of interest I happen to know. 

My question is about potentially flipping this house either 

a- rehabbing it straight as is. 260,000 + 40000 =  300,000.
Sell for 350,000 = 50,000, then subtract out closing costs, etc = 40,000. 

b- adding a second floor to it. 
This is the direction I'd rather go. 260,000 + 130,000(second floor addition)  + 40,000 (kitchen + bathroom) = 430,000 all in. A 525,000 asking price doesn't sound unreasonable - leaving 95,000 minus closing costs = 80,000. 

I'm lining up to get the same builders that did the house down the street to do my house. In a way I have a perfect template of what it's going to look like and how the deal could be done with the other house. 

One additional note is that I would need to blend some money from a Self Directed IRA with money from PML or the like - as the renovations plus the cost of the house would be tough.

I sense some opportunity here and would really appreciate some of the wisdom BP doles out every day. 

Thanks, Dave

[Kevin Siedlecki]

@Dave Howland - I don't think you're wrong to see some potential here, but I think you need to adjust your numbers to more conservative estimates, and more importantly, get an experienced partner involved. This looks like a very risky deal for a first-time flip.

In both of your scenarios, you are actually expecting to sell higher than the high-end comp. That is a recipe for losing your money. You should always assume the low end when you are analyzing any kind of deal, and then if you get the high end, that's a great bonus. 

You are looking to do your first flip, and assuming a higher than high-end sale price, in a market that a lot of experts expect to crash soon. You also haven't included any carrying costs in the numbers. The renovation and sale are going to take time, especially if you are looking to get a high price. You might be paying taxes, insurance, and your loan, for 6 months to a year. That adds another significant expense.