Would you do this deal?

Question

I'm a new Realtor and want to dip my toes into the world of flips.  I've identified a property and have talked about it with two potential buyers.  One has said there's not enough profit. The other may present an offer - at least I'll earn a commission.

But I'd rather flip it myself - if I can figure out how to do it without any of my own money.

Here's the overview:

- The sellers are not in any hurry to sell, nor do they need the money.
- 30 miles South of Boston MA, 1250 SF 4 bed 2 bath cape, built in 1950 and never updated. 15.6K square foot lot.
- 0.2 miles to beach but not in a flood zone. No water views.
- Exterior is a disaster. Needs new roof, shingles, trim, deck and chimney.
- Purchase price $310K. ARV between $425K and $440K, depending on finishes and appliance selection. Based on the modest style of the home, I'm leaning more toward Home Depot appliances and finishes than luxury.
- Renovation includes making two 1st floor beds into a large master with an ensuite and expanding 2nd floor bath, plus paint, carpets, etc.

- Prospect #1's contractor's estimate is $60K.  I later ran it by a local hard money lender who after a quick look at the property says $73K.  Both include a $5K cushion.  I split the difference between the two estimates.

Here's how I see it using a 15% interest rate, carried for 4 months:

Acquisition $310K

Repairs $65K

Taxes $1400

Insurance $2000

Interest $18750

Commission $21,750

Closing $5000

TOTAL COSTS $423,900

ARV $435,000

Note that one of the Prospect #1 has a lender who will charge no interest and split profits 50/50.  That's $18750 that drops to the bottom line for a $29,850 net that they would split.

The other potential buyer - or potentially me if I can figure out how to finance it - would expect to pay hard money rates.

So I'm hoping for a little guidance here.  Would you do a deal with these numbers, or is there just not enough profit?

Thanks VERY much for any advice!

Joel Owens · Answer

Don't talk yourself into a crappy deal just to do one.

"The sellers are not in any hurry to sell, nor do they need the money."

Sometimes sellers are full of crap saying this and other times they really are flush with cash. If you ask them why are you selling then and they say " I am testing the market " then zero motivation there. That is code speak for " I am looking for a dummy to pay me over market value for this property ." I have seen sellers put on the market every year for 10 years doing this type of stuff.

It's not a deal today you just need to move on and not spend another second on it. If they call you back wanting to negotiate then they were telling you BS and you have called their bluff. Now you will have the leverage against them.

Steven Tierney · Answer

I'm new to this game but have read quite a few places that 10-15% of the ARV should be profit in our area, and if it's not at least that much, move because there's too much risk as there's no room for contingencies.  My challenge has been finding contractors inexpensive enough to allow a profit on projects.  I bet for newbies this is consistently a challenge. Just goes back to the saying "you make your profit when you buy the house".  In this case, you're not making profit buying it at $310k.

Charlie MacPherson · Answer

Thanks for the feedback Shaun.  It was looking better before I started adding back the carrying and financing costs and I was starting to talk myself out of the deal anyway.I just wasn't sure whether a nearly $30K profit over 4 months would be worth it for some  that would be the Prospect #1.

Prospect #2 has his own rehab crew, so he would't pay the full retail rate on materials and labor.  As I'm just starting out, I don't know what that would look like, but I'm guessing the rehab cost with an in-house crew would drop by perhaps $25K.

I forget which podcast I was listening to, but one of them cautioned against using "eraser math" - where you just start talking yourself out of certain expenses because you REALLY want the numbers to work.

Again, thanks - I sincerely appreciate the advice.

Shaun Reilly · Answer

I agree with the basic sentiment that it is still to thin, especially for a first deal.

The budget does seem on the low side, though you apparently have some contractors validating the range.

What I would do is go back to the guy that has free money as a possible $50K+ profit looks much more attractive, if your numbers are at least close.

Gabriel Mabry · Answer

*as a general rule of thumb - the remaining 150k would cover holding costs and fixed expenses

maybe a Pro can chime in and correct me!?

Gabriel Mabry · Answer

According to most people's 65% rule youd need to be out of this house at 282750 including acquisition and repairs.. That is if I read and understood that correctly :pThe extra cushion then allows for mishaps or overruns. Old houses tend to create more and more problems while fixing them!

Roy N. · Answer

Still pretty thin margins for a first flip.  A house that old that has never been updated will need:

1) rewired: in 1950, the wiring would not have a grounded conductor and there are likely only a handful of circuits for the whole house.  The panel may still be fuse blocks.

2) significant new plumbing:  you quite likely have a mixture of cast iron and galvanized waste lines (though copper is a possibility) and may have galvanized supply lines;

3) envelope: the house will likely have no more than R5 insulation mineral batt insulation ... or worse, someone blew in UFFI in the 1970s ... and will not be air sealed;

4) Roof: The roof will have been redone - likely 2-3 times ... multiple layers may still be up there ;-)  There is also a good chance the roof is not correctly ventilated as closed soffits were the norm;

5) Fenestration - If it has original windows and doors, they will be hugely inefficient (single glazed windows with storms)

6) Interior:  Our house was built in 1952 and they still used "Rock Board" with plaster over top on all the interior walls.

7) HVAC:   Please tell me its not the original furnace or boiler;

8) Landscaping : How have the grounds and outbuildings been maintained.

You could be looking at a full gut to do this properly.   On top of that 65K, I would add another 15K and a 10-15% contingency for any structural, or other, surprises.

Steven Tierney · Answer

@Charlie MacPherson  It depends on the confidence you have in the contractor to complete the project at the price you've been quoted.  A house that is 65 years old with a terrible exterior likely needs full kitchen and bath updates as well to sell at the ARV you're quoting, at least on the south shore, assuming that's where it is.    I find it hard to believe that in a competitive market like the area you're in, that you're getting a full exterior and interior rehab (or update even) at $65k.  Just saying.  If you are, let's talk!

Charlie MacPherson · Answer

UPDATE!!  The seller now appears willing to sell at $285K.  That's another $25K that drops right to the bottom line.

Acquisition $285K

Repairs $65K

Taxes $1400

Insurance $2000

Interest $18750

Commission $21,750

Closing $5000

TOTAL COSTS $398,900

ARV $435,000

Profit: $36,100

With that change, would you do the deal?

Shaun Reilly · Answer

*Tough love*

Why the f*%k would you want to do this?  You actually did a fairly good analysis showing there is pretty much NO profit.

If you were consistent with labeling your prospects, note the guy with no finance costs is the one saying that it is too thin.  Meaning this guy has enough experience to know that for a >$400K house that a sub $30K profit is way too thin.

If you have someone crazy enough to make an offer over $300K with those numbers take the commission, even if you have horrible split you are looking at like $3K to do nothing more or less.  In the end you will probably make more money on the commission than the rehabber will.

Would you get the selling re list?  If so no brainer!

FYI I would not touch this as a rehabber for more than about $60K less, and that is thin.

Would you do this deal?

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