Taxes and flipping in CO: What to expect?

Question

I am planning on trying some flips in Colorado. Anywhere from Wellington down to Denver...I am new to real estate investing and planning on long distance investing in Charleston SC as well but with the Brrrr strategy. I live in Colorado and would love to do a flip or two here also to get my feet wet with rehabs. I plan on financing the properties and rehabs in cash. I spoke with North Western Acquisitions the other day. They are a licensed wholesaler in Denver and they said they did the most business in the country. They said the Market here was great for flips. I was wondering what others opinions were on that? And also, when calculating your potential profit on a flip, how much can you expect to lose in taxes? Assuming you flipped in less than 90 days...and your income is taxed at the 24% tax bracket. I want to be able to analyze flip and Brrrr deals well, so looking for as much advice as possible. I am currently in the middle of both David Greene and Brandon Turners books on both of those topics so I am sure they have helpful info as well, but thought I’d reach out to the BP community for more input! Thank you all! :)

Travis Foster · Answer

Hi Kyleigh,

I'm a broker with New Western Acquisitions in our North Denver (Arvada) office and I might be able to clear up a little of the confusion and hopefully help point you in the right direction. Firstly, as everyone will tell you, we urge all of our investors to do their own due diligence and to consult with their agent on value as well as have their GC walk the property, if needed, to asses the rehab. There is NO obligation to buy from us and there is no cost to see our full inventory, we only ask for a one time sit down to run you through our contract and our process to make sure we're on the same page. When we secure a contract on a property we send out a marketing packet to our investors, free of charge, and disclose the full address as well as send you comps in the area of recently sold flips. Any investor interested in the property will then start to 'run their numbers' to see if the ARV makes sense as well as get a estimate of what this would cost to remodel similar to comps in the area. We do work with a multitude of investors and some investors need more due diligence than others ex. sometimes we work with other licensed agents who are also investors so they can run comps faster, or sometimes we're working with an investor who will do the rehab themselves and be able to asses the rehab 'on the fly' while budgeting a 'variance' for uknowns (such as a faulty sewer).

At the end of the day, we'll be sending you below market properties with a 'buy now' button attached to them and we're currently set to close around 500 deals this year.  This is only accomplished by building, and maintaining relationships with our investors and we have a LARGE amount of repeat buyers who really enjoy the convenience of working with us and seeing a lot of deals.  Again, we're completely free to work with and there's no obligation to buy from us or to see our inventory.  If the numbers work, we can move forward with a deal, if they don't, there's no harm done with seeing the deal and you can always delete the email.  As far as the lending is concerned, you're also free to use any lender that can close on our transactions.  Because we do a double close transaction, and closing typically happens within a couple of weeks, we won't be able to use conventional financing but we work with a bunch of local HM lenders as well as a in house lender if needed but you're free to shop those rates out and work with whoever you feel most comfortable with.  We also have success with investors using a HELOC, 1031 from previous properties, standard LOC from a credit union, and self directed IRA/401ks.  I will say we find that around 50% of our deals are closed with a hard money lender.

I hope this can give you a better understanding of what we can offer our investors and I look forward to potentially connecting with you on a future deal! Please let me know if there's any other questions or anything else I can help you out with.

Happy Investing!

Bill S. · Answer

@Travis Foster so I agree with most of what you said and it generally covers the business. I will point out something that seems a bit overstated. You said "At the end of the day, we'll be sending you below market properties..." (I added the bold). I don't see how that is the case when you are putting properties under contract that are currently listed on the open market (MLS) or even expired listings. Even if you contract them for below the asking price, we all know, the asking price is not the "market price". The "market price" is the price the buyer and seller agree to when exposed to a large segment of willing buyers. The service your company offers IMO is to sift through the thousands of listings to find those that might work for your buyers, putting the properties under contract, and then presenting the properties to your buyers. IMO, to suggest that this process delivers properties "below market" is no different than saying buying with a coupon at the grocery store is buying wholesale.

In most cases, I would say that when buying a NWA deal, the buyer is paying full retail. That does not mean it won't make the buyer money and isn't a good deal for the buyer. It just means it's unlikely they would be able to turn around and resell the deal and make money without performing any rehab which would be my definition of a "below market" deal.

Bill S. · Answer

@Kyleigh Morgan So lots of stuff in what you requested. I'll add my 2 cents.

1) So to the tax question. I don't know for you but for me it's about 35% lost to taxes (ie "make" $10K and pay $3.5K in taxes so left with $6,5K in my pocket). Your mileage may vary depending on your personal tax situation but I havent' heard anyone pay less than 35% as was mentioned above, it taxed as ordinary income from flipping, plus some also have to pay self-employment tax on top.

2) NWA - so if you have to ask about them you shouldn't do business with them until you KNOW about them. In full disclosure, I have sold a number of deals to/through them. My experience is they don't wildly mark up the properties as @Steve K. suggested but I'm not sure they wouldn't if they didn't think they could get it. I think their business model is volume not so much margin but again I would not promise they don't take a huge margin on some deals. I really don't think it matters too much how much a wholesaler makes on a deal. What matters is that the buyer of the deal makes money as well.

As far as I know most of their deals come from the MLS. By that I mean they market to agents/sellers with properties that need complete rehab. By market I mean, they make offers to listings below the asking price. When someone takes there offer, they push it out to their extensive buyers list. They then do showings where their agents bring buyers in. These showings are high pressure events that are set in a 2 hour window with multiple prospects taking tours and often at the same time. Once someone says they want it, they pay the downpayment and sign the paperwork. First to sign gets it. If they get it sold then they double close with the original seller at their title company. If they can't get it sold, then they back out on the inspection clause. I would say, they are pretty good at their process because as far as I know they have a pretty good record of closing deals they put under contract.

I would also say that despite my skepticism the deals I sold to them sold for at least what they were projecting as the sale price. I thought they WAY over priced the ARV but in the situations where I went back and checked, the property sold for near their ARV (I do know a few buyers who were not able to get their ARV - not sure if it was a poor rehab, lack of patience with the market or what). My sample size is not too large so I'm sure there are misses there. In fact, I would be extremely surprised if there were not a lot of misses on that end because their numbers were the most optimistic that I could imagine without lying. I don't know how the construction budget went for the buyers. They all did a great job on the exit properties as near as I could let from the listing information.

Now if I was to consider buying one of their offerings, I wouldn't. The process is too stacked against the buyer. Their deals are so heavily advertised that in most cases they sell for what they could have been purchased for from the MLS. There is no inspection time aside from reviewing the observable cosmetic items. There is no sewer inspection in most cases ($10k + expense if it's bad). No time to prepare a detailed scope of work and costs estimate. While not required for seasoned investors, if you haven't done several flips and have a detailed process, you will miss items in this kind of a time frame.

As I previously stated, tThe showing event is really a high pressure sales event. The agents are schooled in closing these kinds of transactions. They have no skin the game after the deal is closed. I have never meet a buyer who has worked for them on more than 2-3 deals. Lots of agents around town know them and know what their approach is so if they get a deal it's because they are the best offer the seller has. Most of their buyers I encountered had never done even one deal before.

Think about the above paragraph real hard.

It would be my contention that a buyer with a reasonably responsive agent and a specific plan (area and rehab type) could secure a better deal using their same tactics straight off the MLS. By going directly to the MLS, you would have the opportunity for inspections and the normal due diligence.

One thing about them is they make it easy. They sift through the MLS and find something that looks like a deal and it lands in your inbox. All you have to do is show up and sign.

Steve K. · Answer

@Kyleigh Morgan Flipping generally falls into the “active” real estate investing category and is taxed as short term capital gains or as ordinary income, depending on your personal tax situation, how many deals you do in a year, whether or not you’re doing it through a business, etc. Tax rate on flipping can range from 10-37% but you would need to check with a CPA to see what it would be for you personally.                               The front range isn’t widely considered a great market for flipping at the moment. Because of the low inventory and the fact that we’ve been in a seller’s market for a long time, it can be hard to find any viable deals, but it can be done. For example it will be nearly impossible to find anything priced at 70% of ARV, and you may end up needing to do extensive renovation because many of the properties that required minimal work to flip have already been flipped. Also the barrier to entry is high because as you know properties here are expensive. I think many people consider flipping high-risk right now in this area as the market has recently started cooling down. If you pick the perfect property in the perfect area there is profit to be made for sure but I wouldn’t consider this an easy market to flip in for a beginner by any means.                                          I’d be curious to hear why NWA thinks it’s such a great market for flipping. As far as dealing with those folks, I’m familiar with them as I’ve been approached by their reps on BP and in person, and I have looked into their business practices. The first time they approached me, I sent the rep my buy criteria out of curiosity and they sent me some properties, which were wildly over-priced and badly comped, with inflated ARVs and unrealistic rehab estimates. Also they didn’t even come close to meeting the criteria I had sent (they were all single families even though I had specified 4 units and up, so it was as if they didn’t even look at my criteria and sent me whatever random property they were pushing). The properties they sent were not true off-market deals at all but rather just recently-expired MLS listings, marked up 15-20% above what they had failed to sell for. I don’t need to pay someone a 15-20% commission for an expired listing that was obviously overpriced to begin with. They seem to prey on new/uneducated investors. There are a lot of threads about NWA on here, I recommend doing a search and reading up, here’s one:

http://www.biggerpockets.com/forums/312/topics/70990-house-is-not-selling-advise-please        Also they charge a non-refundable down payment before they even ”release” full property info (I believe it’s $5k, and not Ernest money down mind you, just a straight non-refundable down payment). Who wants to let that much dough go hard before even seeing the full details of a property? I definitely wouldn’t trust them, or anyone for that matter, enough to let that much money go hard without a proper inspection personally so watch out for that. Also they don’t like to work with conventional financing but prefer cash or steer customers towards their own in-house lender, which charges high rates. That seems shady to me as does the down payment. Their reps were friendly in our interactions, but talking to them was ultimately a complete waste of time because they blatantly misrepresented the properties they sent me and weren’t able to provide anything even remotely close to what I’m looking for. Perhaps my experience was an anomaly and others have had a better experience with them but based on the many negative reviews on here I doubt it.           I haven’t had any success with any wholesalers in this area personally. I’m also more into the buy and hold strategy as opposed to flipping but I’m always looking for a good property to flip too, they’ve just become really hard to find.

Jeremy Oaster · Answer

I know you asked about taxes, but since wholesalers came up, I wanted to add my $0.02.  The biggest thing is DYOR.  That doesn't mean to not use a wholesaler, but to evaluate everything that comes in.  If you get a deal you're interested in, run it past an agent.  See if it is truly "off-market" or picked up after expiration.  Get your own comps on a property from a trusted source.  Evaluate the contracts.  If you have a GC, take them to a showing with you.  There are good deals out there, but like @Steve K. said, you've got to be patient and picky.  It's your money on the line, so protect it.

Kyleigh Morgan · Answer

@Travis Foster and Bill thank you for clearing that up for me. I’ll be sure to reach out if I have any questions. I look forward to doing my first deal and am grateful for all the different avenues available for investors to take to find and secure good deals. I am hyper focused right now on educating myself enough so that I can know a good deal when I see one and I am incredibly grateful for BiggerPockets and its community. I love being able to network and ask questions and receive valuable advice on here. When I finally do land my first deal, it will be all because of you guys! So I can’t say thank you enough! :)

Travis Foster · Answer

I would need to look at a specific deal that you're referring to but, yes, I say below market (relative to the updated comps) assuming you would need to fix it up to get value but we do have quite a few deals that go "wholetail" where the investor will buy it from us, off-market, and then relist it on the mls after it's vacant and a 'light clean up' is in order.  We work with a bunch of exit strategies and do everything from full on structure or meth remediation deals, to very clean light cosmetic properties that would fit a wholetail strategy.  While we do source deals off the MLS we have an extensive marketing arm that brings in over half of our inventory, every month, completely off-market and we will never send you an Active listing and anything sent your way will be under contract with us at a price we feel an investor can walk away with a solid profit.

Matt M. · Answer

The market is great for flips not found on the MLS, but they are difficult to find due to competition. The MLS deals are slim for the most part. The market as a whole is retreating back to normal, so now is the time to be extremely conservative in your figures and approach. The rapid appreciation we have seen over the past few years won't bail out new investors anymore. People are starting to lose money on deals.

I know a lot of wholesalers here in town, and I won't do business with either "NW" company. I don't even allow them to look at my deals. I get spammed from them a lot on this forum since they attract newer agents. There seems to be a decent amount of turnover with them, which speaks to how they operate.

If you are a serious investor, then spend the coin to speak with a CPA about taxes. Also, be careful about advertising "cash" on an open forum with your real name as I'm sure you'll get a few PMs about people being able to "help."

Kyleigh Morgan · Answer

@Bill S. Thanks again! I just signed up for a number of meetups I saw on Meetup! Hope to get to meet you at one of them! :)

Bill S. · Answer

@Kyleigh Morgan there are a number of local meet ups. The Events section of the Network tab here on BP has meetups posted. You can set up some keyword alerts to get notices when someone posts one. Meetup.com is another source to locate real estate events. I think there is a meetup in Erie this week which would be close to you.

Taxes and flipping in CO: What to expect?

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