Crazy Idea to Acquire, Flip, and Sell

[Zack Busch]

Hey everyone! I posted recently about a house that needed a full gut to flip in the Philly area. The house is listed for $235k (was at $250k on my original post) but my agent talked to the seller’s agent and they indicated that they wouldn’t take less than $200k despite the amount of work that was needed. They had multiple offers in the $100,000’s but did not accept any.

I estimated that I would need $100/sq ft to rehab it (around $145k in rehab costs) and the ARV would be around $375k (likely $400 but I want to be a little conservative). I stopped considering this as an option until today when an idea came into my head. I will put the summary of the analysis below along with the chart. I wanted to get everyone's opinion on if this is as crazy as I think it is but also if it would even be possible.

Listed Price: $235,000

Est. Repair Costs: $145,200

ARV: $375,000

MPP: $125,000

I don’t have enough cash to purchase and fund the rehab for the house. Giving them the amount they want is out of the question due to the extent of work that needs to be done, so I had an idea. What if I drew up a contract where I was able to become part owner of the house (put on the title or some other way, not sure if this is legal or possible) in order to do the repairs. I would avoid paying the buying expense of the house and getting a loan for the purchase price of the house, limiting some holding expenses.

Then I would fund and coordinate the rehab costs (construction loan, hard/private money) and use draws for the construction costs as the work was completed. Once the house was rehabbed, we could list and sell (don’t think it would be difficult in this market).

Once sold, I would pay back the loan for the construction costs, plus interest (depending on finance method). Then I would pay the owner the MPP, closing costs, and half the profit that would be made. The other half of the profit would go to me (at the low end, approximately $39,000). See table below for more information (I'll post two version that are the same, just not sure how it will format when I paste it in). I used four scenarios. 1 and 2 are the higher rehab costs but the two different ARVs that seem achievable. 3 and 4 are lower rehab costs with the two ARVs. The assumptions I made are below:

• Closing costs are calculated to be 7% of final ARV purchase price
• Rehab costs are $100/sq ft and $75/sq ft
• Loan interest is the loan + 10% back to the private money investor (assuming I go that route)
• Total cost is the MPP + Closing Costs + Rehab Costs
• Total Profit is ARV – Total Cost
• Owner receives the MPP (what I would have paid for the house) + Closing Costs (I would have had to pay for these anyway, I could sweeten the deal for myself and offer to split them with the current owner) + Half the profit
• Private Money lender receives their initial loan plus 10% interest
• I receive the split profit – interest on the rehab loan

My goal was to get the owner as close to their $200k wish in order to convince them to do this less than traditional (and maybe not even possible) way. I am probably looking over some things and making some assumptions but my attempt was to be conservative. Let me know if this sounds as crazy as I think it does. It may not be worth the work or even possible but wanted to bounce the idea around.

Scenario	ARV	Owner Costs	My Costs	Summary	Payouts
House Value	Closing Costs	Total	Rehab	Loan Interest	Total	Total Cost	Total Profit	Split Profit	Owner	Mine	Private Money	Total
1	$375,000.00	$125,000.00	$26,250.00	$151,250.00	$145,200.00	$14,520.00	$159,720.00	$296,450.00	$78,550.00	$39,275.00	$190,525.00	$24,755.00	$159,720.00	$375,000.00
2	$400,000.00	$125,000.00	$28,000.00	$153,000.00	$145,200.00	$14,520.00	$159,720.00	$298,200.00	$101,800.00	$50,900.00	$203,900.00	$36,380.00	$159,720.00	$400,000.00
3	$375,000.00	$125,000.00	$26,250.00	$151,250.00	$108,900.00	$10,890.00	$119,790.00	$260,150.00	$114,850.00	$57,425.00	$208,675.00	$46,535.00	$119,790.00	$375,000.00
4	$400,000.00	$125,000.00	$28,000.00	$153,000.00	$108,900.00	$10,890.00	$119,790.00	$261,900.00	$138,100.00	$69,050.00	$222,050.00	$58,160.00	$119,790.00	$400,000.00