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Updated about 8 years ago, 10/06/2016
Help Analyzing Flip Deal in Buena Park, CA
My partner (who is a RE Broker) and I are in negotiation to purchase a 2 bed, 1 bath, 750 sq ft home in Buena Park, CA to flip. This would be my first flip and first purchase in general, and I was hoping to get some feedback on my numbers. We are offering to purchase the home through seller financing (the owner is the original owner and has a good, long-standing relationship with my partner), go on title as tenants in common (my partner's corporation would be on title with me), and I would contribute the cash for the down payment and rehab cost. My partner has agreed to pay me a set interest rate on the cash I contribute, then share the remaining profit with me 50/50 at resale. I have known my partner and worked closely with him in various business ventures for 5 years, so I have a good amount of trust in him. Since this is my first flip, I'm not as concerned with making a huge profit on it because of the experience I'll gain, so I'm quite happy with my projected total return (see spreadsheet below). Here are the terms:
Offer terms with seller financing:
Purchase: $250,000
Down: $30,000
Seller Carries: $220,000
Interest due to seller (annual): 5%
Term: 18 months
Payments: Interest only = $917
Closing Costs (1.3% for escrow and recording fees and prepaid insurance/taxes/interest): $3,250
Rehab and Holding Costs:
Rehab: $60,000
Property Taxes (monthly): $257
Insurance: $200
Utilities: $150
Plus 10% buffer = ~$670
Resale:
ARV: $375,000
Closing Costs (3%): $11,250
Commission (5%, my partner and I would co-list): $18,750
My Contribution:
Cash Invested: $90,000 (down payment + rehab cost)
APR: 5%
Term: 5 months (could vary depending on number of months actually held)
ROI:
ARV: $375,000
(Selling Closing Costs): (11,250)
(Commission): (18,750)
= Gross Margin: $345,000
(principal on seller carry): (220,000)
(total interest on seller carry - $917 x 18): (16,500)
(purchase closing costs): (3,250)
(holding costs - $670 x 5): (3,350)
= Gross Profit: $101,900
(repay my cash investment plus interest): (91,891)
= Net Profit: $10,009
Here is the spreadsheet I used for all the calculations:
Have I calculated everything correctly? Is there anything I'm missing? What risks might I be taking? Is there anything special I should include in the contract either between me and my partner (I'm planning to include terms of my cash contribution, how we will hold title, who is responsible for what during the rehab and listing, and how disputes will be settled) or us and the seller? Any input you have is very much appreciated!
@Kelly O'Quinn If you use the standard formula of ARV x 70% less rehab = max offer.
$375k * 70% less 60k rehab = $202,500 max offer. You're offering $250k, so personally I think that's why too high. Also to invest $90k to make $10k profit plus 5% interest is way too tight (for me at least).
- Tom
Tom S. is absolutely right,this is a crummy deal.Kelly O'Quinn,there isn't enough meat on those bones and one small extra expense in the rehab costs and your profit is long gone.Believe me,I have suffered this same scenario twice now with zero profits for either of us.Only the contractors laughed all the way to the bank.Unless you have the ability and finances to turn that too little 2/1 shack into a 3 or 4 bed/2 bath modern home,you won't get your time and money's worth.If you can't expand it,you need to pay no more than 210k because the property needs too much work over too much time to make it worth the effort if you don't.If the sellers are motivated badly enough they will take it.Otherwise,move on to a better project.The inland empire has much better 3/2 and 4/2 project properties you can get for 250k that are much more profitable potentially.
Hi I actually rehabbed in Buena Park last year which I use as a rental now. The area is great. But I too feel that 10k profit is to low of a profit for a 90k investment. Unless your rehab cost can be brought down. Feel free to message me for any help.
-varinder dholideepak at yahoo.com
Basically, what you're saying is you're willing to invest $90,000 on an education. There is no guarantee you'll see your $90K again. There's no guarantee your partner, whose only skin in the game is reputation, won't rip you off, head to Vegas and go on one heck of a bender. FYI, I've seen "partners" rip off their friends of way more than 5 years for way less than $90K.
You walk into a room. You're dressed to the nines. Everyone else is too. The music is playing. People are socializing. This is definitely the place to 'be seen' tonight. You make your way over to the refreshments. You pick up a very nice, and expensive crystal glass. You turn towards the punch bowl...
and there is a big post-Chipotle turd floating in it. That's your deal; it's a turd a punch bowl.
I am more interested in this partnership agreement. Your putting up 100% of the capital but sharing profit 50/50 and the commission on the sale is 50/50. Look at your ROI and look at your partners ROI. Am I missing something? That math doesn't add up to me.
While I was analyzing your deal, it reminded me of my first "real estate" meeting. I was offered a deal, where I had to put up 200k, 50k for the land to build a "custom home" for 150k, and sell it for around 300k, in Oak point, which is near frisco and denton in far north dallas. He would do all the work and expect to get 50% of the profits...Not to mention he said it would take 9 months-year. (building from scratch). Glad to have stayed away from that.
p.s. This meeting took place last week, I'm literally new at this. But I've listened to a few of the bigger pocket podcasts.
I don't know Buena Park that well. Maybe just lipstick this one and sell in two weeks for $325+ish. Let the next guy full rehab. That is unless you can add some square footage...if you can bang this upto 1200 square...looks like $425k+ is the next stop. To spend 90k in the hopes of 10k profit makes little sense.
Good luck!
Agree with others and want to add a suggested update for your mindset. You say you are ok with only making $10k since you will be learning something ... thinking of your profit margin in absolute terms rather than thinking of it as not only a profit margin, but also a margin of safety ... it is the cushion that stands between you and a loss. It is what compensates you for and insulates you from the risk you are taking on by putting your capital at risk as well as the work (time and effort) you are putting in. By investing in this deal, unless you plan on losing money, you are essentially saying that you are confident that on your first flip you can predict all of the costs, timeframes (and effect that has on costs), scope of work (and effect it has on cost), performance of your teammates (and the effect that has on costs), and exit price within $10k on a $365k investment, or within 3%, on your first time out of the gate as an investor! This is the way I'd advise thinking about it.
Holy cow! Thank you all for your overwhelmingly helpful responses. Looks like the resounding answer is, "HELL NO!" The numbers on expanding to a 3 bed/2 bath with 1100-1200 sq ft are worse than this scenario. It'd be approx. $125,000 for the rehab for a resale price of $450,000, so that's out of the question unless the seller agrees to a much lower price (fairly certain he won't, he has another $250k offer on the table that's just as strong as ours would be). Thanks @Aaron Mazzrillo and @David Faulkner for the mindset shift - I'd been looking at it from the perspective of getting a 12% return on my cash invested, which is much higher than I could achieve in other investment vehicles in that period of time. But you're right, the risk of unforeseen issues eating up that profit is way too high to stomach. @Christina McManaway I'm very new to flipping and partnering on deals (so far I only have experience in property management and real estate sales), so thank you for addressing my concerns on the partnership agreement! I'm not sure what's realistic to expect so far as each partner's skin in the game and their return, and would be interested in talking to you (or anyone else on here who is willing) more about that aspect, if you're open to it, of course =] @Hugo Perez welcome to BP! It's great to hear from another newbie who is encountering similar issues and learning along the way.
I've been through all the podcasts twice already, but putting theory into practice is an entirely different monster. Thank you all for bringing me back to earth! I will keep hunting.
I wasn't sure what your partner was providing vs what they were receiving. I would would expect them to have some vested interest either time or money. But you seem to be doing both.
Hey I applaud you for looking at the deal and working through the numbers. That's half the battle. It is always, always all about the numbers. I've seen lots of wannabe investors buy something that made no sense, but emotionally, they just had to have it. Be a Don't Wanter. If you're not truly excited about the numbers, just forget about the house. I never buy a house because I like the house. I could care less about the house, many of which I buy I never even bother to go see. There's not a rental in my pile that you would look at and say, "I see why you bought that!" It wouldn't be until you saw the numbers on the deal that it would make sense.
