How to not lose $40k doing a fix and flip

[Brad Cogswell]

Thought I'd share a lesson that was reinforced for me today that ended up saving me from doing a bad deal and losing a bunch of money.

tl/dr: make sure that you're getting your own estimate from YOUR general contractor instead of trusting one that a seller/wholesaler has and then verifying after you put under contract

I'm working with a wholesaler that I haven't worked with in the past and found a deal in Essex (outside Baltimore) that I liked.

Here are some of the pictures of the house:

Based on the pictures, we considered this a complete cosmetic rehab - the house was shown to be in pretty good shape but there was some work that needed to be done to modernize the house in order to bring current market prices in Essex.

Here was the info we had from the wholesaler:

Single family, 3/2 bath
1320 SF
Price: $90,000
Rehab: $35,000
ARV: $200,000

And the kicker: the seller had a one month old SOWk that had already been prepared by a local general contractor and laid out the $35k in rehab costs.

There was enough info at this point to deep dive into the analysis. I pulled comps and did my typical analysis for a fix and flip. At this point, it looked good and I was starting to get excited.

My analysis:

Two roads diverged in a yellow wood...

With the above analysis and the comps pulled that were close to the wholesaler estimate ($196k), these were numbers we would immediately put an offer on, and I have a tendency to want to move quickly. But I wasn't sure how reliable the SOW was given that I hadn't commissioned the SOW myself.

So I had two choices:

Choice 1 (the smart one): WAIT for a day to call MY general contractor and get him in to do his own estimate. Seems to be a duh, right!?

Choice 2 (the devil on my shoulder): "Brad, you've got an SOW already, you would estimate a cosmetic rehab to be between $30k and $40k, the wholesaler's estimates have been relatively accurate thus far, the pictures looks pretty damn good, you should get the property under contract now so that someone else doesn't scoop it up."

Now, I hate to be one to miss out on a deal, but I just couldn't trust pictures and my own estimates without my GC to back to reinforce it. So I called my GC, held my breath, crossed my fingers and prayed that someone else didn't find "my deal" in the day it would take to get my own SOW.

So glad I did.

My general contractor came back immediately with a $75k estimate, which blew up the deal. The seller's SOW didn't contemplate a new roof, an out-of-use pool in the backyard that neighbors had been using for burning trash and needed to be filled, exposed and out of code electrical, and a basement that had been dug up by the previous owner. I would've lost money on the overall deal had I put in the offer prematurely.

Bottom line, it was a great reminder to me that I need to make sure I complete all my steps when looking at deals and not contemplate the shortcut in order to secure a deal faster. Hopefully this helps any of you looking at deals as well and maybe prevents one of you from going down a road full of headaches (and sunk money) that I almost went down.

Happy to answer any other questions on the deal if there are any.

Brad

[Lisa S.]

I guess I'm curious if you had seen the property at this point, or if your contractor was able to visit the property to give you that estimate? I assume he must have seen it in person to see the old pool and the roof that needed work. 

[Rob Poole]

@Brad Cogswell -- smart move. 

I would be skeptical of most claims of rehab estimates under $50k in the area (for flip / retail properties) -- not that there aren't any, but in my experience they're rare. A lot of the housing stock, in and around Baltimore, is fairly old (1940's and 50's) and typically requires a minimum amount of rehab that often include: rewiring, replumb, roof, windows, kitchens, baths, cosmetics, and oftentimes a full gut to the studs. When you go down to the studs you're pretty much going to have to bring everything up to today's code. This also adds additional planning and time to your rehab timeline which incurs additional expense.

You definitely saved yourself a lot of time, frustration, and money by not moving forward on this property.

[Brad Cogswell]

@Lisa S. I had not seen the property at that point, he was able to get out there to walk the property and prepare the SOW.

@Rob Poole good point, you're exactly right.

[Benson Juarez]

If at all possible try and look at rehabs done by other investors in the area. Seeing the project before and after can give you clues to what they're spending. You won't be able to see the actual rehab costs but researching what other investors are having success with will help mitigate the potential risk. Here's a flip in Essex where the they grossed $114K. What would you estimate they spent on construction? Maybe $40K? Where they made a mistake was on the hold time. It was on the market for over 5 months. Hopefully they weren't using hard money!

When in the report click the "Before and After" link to see spreads, timelines, and before and after pics.

914 OREMS RD, ESSEX, MD 21221

https://mris.accessprivy.com/email/u14955535310076...

[Ozzy Sirimsi]

good post by @Rob Poole

 Often times, rewiring, re-plumbing, roof, windows aren't taken into consideration, and they cost a lot without really adding much value to the house.

@Brad Cogswell you're right though, house looks great on the pictures, potential rehab :D))) 

I can definitely see somebody jumping on it. There are a lot of investors who put offers on houses without seeing the inside of it, I guess they assume the worst.

Good call on your part!!!

[Brad Cogswell]

Hah yeah @Ozzy Sirimsi, and I don't think my wholesaler was being disingenuous, I get the impression he was surprised as well. 

[Ricky Davidson]

did you make that spreadsheet? or is it available somewhere in pdf?

[Jay Hinrichs]

Anyone who relies on a wholesaler for rehab estimates and ARV is well taking a huge risk.

we have learned that the hard way ourselves... its why I rarely buy from a wholesaler..

[Account Closed]

Maybe you're supposed to negotiate with the wholesaler now??? Maybe your contractor is overpriced??? 1350 is a small place. Its also clearly in good shape. 35k goes a long way when you're doing minimal stuff....filling a pool consists of jackhammering the concrete, filling it with dirt and smashing it down. New roof? Maybe/maybe not...any evidence of leaking?? Electrical work?? Couple thousand. Hvac? Plumbing? Got ductwork already? No structural modifications?....so you know...basic rule in contracting, take the labor/materials...then double it to the customer. Are u 30/40?? Sure. 75? No way.

[Drew Markert]

Brad Cogswell happy to see it worked out in the end. The saying "trust but verify" sometimes sounds easier than it is in reality. Thanks for taking the time to share!

[Brad Cogswell]

@Ricky Davidson PM sent.

@Jay Hinrichs totally agree. The only part that had me on the fence for a bit was the construction estimate was commissioned by an external third party contractor. Obviously not knowing them I have no idea how that contractor works, which in the end was the reinforcement to get my own guy out there. 

@Account Closed no problem!

[Ned Carey]

@Rob Poole is right, the housing stock here is old.  A property that looks in good condition isn't worth much more than a property that is in rough condition. They both need full rehabs due to age of the systems.