First Flip and Need Advice

[Chris Ferren]

Hey Everyone,

So I finally got a house under contract after about 10 previous offers on houses. This is a 3bed/2bath that is 1588 sq/ft and is an REO that needs mostly cosmetic work. I have it under contract for $107,000 and have an estimated After rehab of about $175,000. From all the bids I got, it looks like it will need about $30,000 of work to really make it turn key. I've estimated about $7500 holding costs (costs to borrow the money, closing costs, holding costs). Based on my Excel spread sheet, I'm looking at profit of about $15,000.

So my problem is this: My after rehab estimate of $175k was based on the assumption that we would be able to salvage the pool. Unfortunately, it looks like the pool will not be able to be salvaged and the GC recommends filling it with sand and placing sod and re-landscaping the yard. He seems to think that the after rehab value will not change with the loss of the loss of the pool, and that it will remain at $175k. I was planning on the pool as an added bonus to help the house sell quickly. Does anyone have an opinion on the added value of the pool? Should I drop the ARV since there will be no pool now? Anyone care to share any experience if this pool is really vital for my ARV or not?

Just some quick additional info. For this particular area, the other comps of the neighborhood are mostly in the $140k - $150k range, however they are 3bed/1 bath and closer to a 1,000- 1,150 sq/ft. Most flip comps are selling around $125 sq/ft. Our house is 400-500 ft larger and with an additional bath, so I was thinking should be closer to $175k, which is around $110 sq/ft. It's one of the larger houses in the area, so it is cheaper by the sq/ft but more expensive overall.

Anyone have any advise before I move forward with sinking $50k of my own money into this. I'm currently in escrow, and will be closing within the next 25 days. If anyone sees anything wrong with my numbers/estimates or has any additional questions in order to provide any advise, please let me know. Thanks.

Chris

[Jeff S.]

I live in Northern CA, so it seems like sticking to that 70% rule would be very difficult. I don't think the same rate of return is as likely as maybe some other state.

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I feel like I would not be able to find any properties using the 70% rule, as everything I've seen go for and sell on the MLS and when looking at other investors in the area are doing, are not purchased at that point. That seems REALLY low to me. Do any other investors successfully follow the 70% rule?

You have no requirement to listen to anyone Chris, but you did come here for advice. I can’t tell you how many first time flippers I know who thought their deal “was different†and who are now losing money. With all due respect, you show all the earmarks of someone who doesn’t think it can happen to him. Just because others are overpaying and driving prices up, doesn’t mean you can and still make money. Many experienced flippers I know recognize this and are slowing down. 70% of ARV minus Repairs is just a rule-of-thumb that you’re welcome to ignore at your peril. Personally, I find it unconservative.

GC recommends filling it with sand and placing sod and re-landscaping the yard. He seems to think that the after rehab value will not change with the loss of the loss of the pool

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I was planning on keeping the pool, but now looks like the only option is to demo it. I don't know how much this will be, but I'm estimating it should not be more than $5k

You’re really not relying on your GC for valuations are you? You cited many comps above. Have you talked to any local realtors for their opinion about the pool and general valuation of the property or are you doing this alone?

Pools tend to be like corner lots. Some people love them and others hate them. You really need to talk to several local agents to get the lay of the local land.

If your GC thinks you can simply throw some dirt in one and cover it with sod, then think again. Tax records will show the pool exists. This is the first thing your buyer’s home inspector will identify. There’s a substantial amount of engineering and remediation involved in removing a pool. Depending upon the size, removing one can cost well into the ten’s of thousands of dollars. Where exactly did you get your $5k estimate? Simple repairs to a pool that looks good enough to hold water can easily exceed $10k. Much more if it’s a mess.

By the way, 10 previous offers to find one house is nothing. I know you’re chomping at the bit Chris, but I strongly suggest you keep looking. Sorry.

Jeff