​Flipping Childhood Home to Raise Cash for Future RE Investments

[Stefan Abel]

Brief Intro:

I have been on the Biggerpockets forums for some time now as I have begun my real estate investment journey. Currently, I own with my wife (1) SFH rental in NYC that was an inherited property and own/occupy another SFH in the same neighborhood. I'm currently in search of other markets as additional properties in NYC are cost prohibitive for us to move forward. Currently looking in the Huntsville, AL area and based on my extensive forum reading have moved on to Birmingham, AL as well since there seem to be more opportunities for MFH investments.

Current Opportunity:

My parents have moved out of my childhood semi-attached SFH to downsize and are currently holding (2) mortgages. In short, they need to sell and the numbers do not work as a rental. However, given my home reno skills and work in the architecture/construction industry (albeit not residential) I see this as a great opportunity for all of us to make some extra cash in the sale of this property as a ‘light' flip. The idea is to build capital for rental properties in the very near future.

The house is part of a fairly extensive residential development from the 1930's and has a prime location on the block with private driveway and full attic. All other houses share a driveway and no attic. Looking at similar properties (but not prime location) these houses are being sold from $610k to $780k based on level of repair. I would estimate current value near $630k and conservative ARV near $750k.

We have agreed to a 50/50 split in the additional value added to the property based on appraisal before repairs and actual sale price. They will foot the monthly mortgage payments and I will invest the repair costs ($27k budget) and do the actual work.

I want to approach this in the most transparent way possible to avoid any conflicts when this is all done. I plan to enlist an appraiser (not just my evaluation or RE Agent) to have a written document as the basis for the current value.

Any thoughts or issues I may have overlooked would be appreciated. 

[Stefan Abel]

@Matthew Whitaker

1. Are you putting any value on the time you are spending working on the project?

2. If you need to make a trip here, are you going to include those expenses as part of the project?

3. What happens if you don't make any money? Perhaps lose money? Are your parents ok with that? If you are putting the money in and you lose some, how do you split what you do get?

4. Who makes the decisions on what the house will sell for? i.e. you get an offer, who has negotiating rites?

5. I know it is your parents, but how do you know if you'll get the money? Say something crazy happens to your parents (sorry to be morbid) and your sister/brother isn't aware or doesn't care about your agreement.

6. Who is going to be checking up on the contractor doing the work?

Thanks for your thorough points of consideration. I will need to think on these a bit more and make sure they are folded into a written agreement with my parents. Current responses:

1. I have not. I am banking on this being profitable. If not my time is a loss. Not sure if there IS another way to look at it?

2. The project is in my hometown and unrelated to my future investments in Huntsville and Birmingham. I do plan to keep record of all travel costs to potentially write off come tax season. Admittedly, I need to look into this further.

3. Great question. I have not counted on that and perhaps I should. My reasoning for obtaining an appraisal is to confirm the low value I believe it is worth. If the appraisal comes back within $50k of what it can/should sell for I am not moving forward and will sell As Is. My reasoning for pursuing this in the first place is the large amount of cash I believe we will be leaving on the table if we do nothing. However, I’ll have to think hard on the scenario if I do wind up losing money in the end. Again, great point.

4. Another great point. This was not yet discussed and should be. As the owners my parents will ultimately have final say but this is another point to seriously consider.

5. Again, we’ll make sure to write everything down. Perhaps it would be good to get a lawyer involved to make sure the verbiage will hold up should something happen.

6. I will be doing all or most of the work with some help from my wife for some larger tasks needing two sets of hands. If a contractor is needed for some work in the end, I will be checking in on them. This is part of my day job on a much larger scale so I am comfortable in this aspect of the work if it comes to needing a contractor.