First Flip — Offer Just Accepted

[Greg Todrank]

I just got my offer accepted on my first flip — Yellow letter; video walkthrough with my realtor; and offer. Bing. Bang. Boom.

Oh crap, now what. I’ve got a handyman, but no GC. Time to get my team in place. I have 6 rental properties within 5 miles of the flip, so I know the area pretty well even though it is 7 hours from my home.

I was planning a BRRR, but I think the numbers make more sense as a flip. Plus I'd like to see this back as a single family to match others in the neighborhood.

Purchase price: $20,000

Closing cost: $2,550

Repairs - leave as duplex: $116,000

Repairs - single family: $140,000

ARV if kept as duplex: $140,000

ARV single family: $220,000

Diving back into the books where I skipped all the parts about flipping. As I read thru the forums for inspiration, any suggestions from you experienced guys would be greatly appreciated.

Greg

[Account Closed]

Originally posted by @Greg Todrank:

@Michael Plante

Thank you. Would a HELOC (on my rentals) be smarter than a construction loan?

I am not sure that the deal can be fruitful for any type of loan until after you post some serious numbers for your project from date of purchase to date of re-sale. I think your 7-hour distance is a serious drawback that will cause serious problems with dealing with contractors and the time to complete the project will take 1 to 2 years if you are not hands-on and not driving the contractors to do good work and complete the work within a reasonable amount of time. 

Personally, at first glance, I would not take on this project because the exterior, alone, looks like a nightmare of work and cash output and I can't see the condition of the eves, other wood trim, roof nor whether there is a basement that has moisture or water from the melting snow and maybe the basement alone needs serious work and cash to make the house is a condition where someone will purchase it from you. I own properties in Massachusetts where there is a lot of rain and snow and basement leaking and moisture is one of the worst nightmares and dinosaurs that eat up cash for almost every property. With all the mold crap in every person's minds these days basements have to be in pristine condition. Then, I am betting the property needs a ton of cash for the plumbing, electrical and heating system(s) and does the property have a separate heating system for each unit.

"Not all money is good money" Maybe, you can net $40,000 and maybe not, but then you have travel expenses, need to pay for a motel if you don't have a place to stay and you are probably looking at $5,000 to $10,000 you need to take off your $40k profit even if you can make $40k and without serious numbers you will be investing blindly and the 'cross your fingers' business model.

 I am definitely not being negative like every person I know tells me. I am against purchasing every property until after I have crunched the numbers no less than 10 times and that is not a joke. I purchase a 6-unit for my son and closed escrow this past march. Before we purchased the property, I crunched the numbers several times. My son is currently going to college for a PHD for math and he developed his own Excel spreadsheet and he did his own numbers many times. Then, I had my broker create a spreadsheet with the criteria I wanted him to show the math for and he sent a spreadsheet. When we put all 3 of our spreadsheets together the numbers were super close, or almost identical.

The 6-unit property is one of the worst I ever purchased because the price was $292,000 per unit and there was not much room for appreciation in the close future, but my son is going to college for 4 to 5 more years in Ohio. We sold 5 of his homes in Las Vegas and paid $1,750,000 cash for the property. So, he would net something like $100,000 to $120,000 per year from cashflow. In 4 months, the price if his units appreciated from $192,000 to $350,000. So, even if we go with a number of $340,000 per unit he profited about  $288,000 + $40,000 for rental income = $328,000.Then we figured on our spreadsheet that in 10 years he would earn a total of something like $1.2 to $1.5 million including appreciation and rental income.

The point to my story is to show that we (real estate investors) do the math over and over and over both before we purchase a property and we do it over and over after we close escrow. I have serious software I created back in 2001 that tracks my apartment buildings from the day they close escrow up to today to show my annual ROI.

Take the time to do the math and see if you can post all the numbers from close of escrow to the day you open escrow to re-sell the property and then this conversation gets more-interesting and clear in regards to the profit you can earn. Include your travel costs and all other expenses because those costs add up and are critical. You don't want to end up working for less than minimum wage by the time this project is completed.

I've been in business many years and every once in a while my employees sell a big fat job to a homeowner for $50,000 or $60,000 just for plumbing repairs, electrical work and sometimes a kitchen or bathroom remodel. Every time my employees put a $50k to $60k contract on my desk I clam up and shriver because large amounts of money don't impress me and the larger the job the smaller my profit.

The average job my company does for homeowners is $5,000 to $12,000 and we do several of those jobs every week. Just last week, we completed a $45,000 job for water pipes, drain and sewer pipes and we increased the electric service to 200 amp and removed all the cloth wiring from the entire house and re-wired every switch and fixture with city permits. The average job we do for $5,000 to $12,000 takes no more than 2 days and we do no less than $140,000 per week in business. This $45,000 job took a total of 3 months to complete and no less than 30 days of on-the-job time. So, if the one crew that worked on this job normally does $50,000 to $60,000 worth of business every month, then, I have to ask whether or not this $45,000 job was worth giving up $50,000 to $60,000 in business for very simple jobs that take 1 to 2 days and because the $45,000 job cost so much more for materials I figure that I lost a lot of potential business and would rather have walked away from the $45,000 job.

Everything is about the final numbers and you have to do the math, diligently, or you never know the truth and only guess and invest blindly.