First Flip Analysis, multiple offers, long road to closing

[Maxime Benoit]

Hi everyone,

I made my first post back in February. I was waiting to finalize my first flip to write my second post which is a recap how it went down, so here it goes.

I bought my first flip off of a wholesaler who had bought it from a county auction. The house was a duplex, in Lehigh Acres, FL. On my first post, I asked questions about the need for title insurance and fire insurance, because, from what I understood, some flippers didn’t get some. However, based on the feedback I got other BP members, better safe than sorry, so I went ahead at did a full closing (with title insurance) and got fire and liability insurance.

At first, back in February as I analyzed the property, I was feeling fairly insecure for a couple of reasons. Lehigh Acres is not the nicest of neighbourhoods and it kind of has a bad wrap. On top of that, the house prices had been skyrocketing for over a year and I was worried that I was buying at a market peak and might get squeezed if the tide turned. The margin was pretty tight and if the tide did turn, I would probably lose a bit of money. That being said, I was buying all cash with no hard money lending so that gave me a bit of room to breathe. The duplex had one side rented and one side vacant. My agent and I figured it was best to keep it this way to attract potential home hackers (owner occupants) or investors in order to have a broader pool of potential buyers.

The duplex itself was in mint condition by foreclosure standards. I was able to get background information on the previous owners (this sounds like a sophisticated research but I was just lucky enough to run into the previous owner while I was visiting the duplex so I went ahead and asked him a few questions). The story was that he built the duplex for his mother (who still lives in half of the duplex and pays a decent rent, 700$/month) in 2002 but ran into some financial troubles and had to foreclose. Although he foreclosed, he had maintained the property like a champ throughout the years. It was the nicest duplex on the street from the outside, and on the inside everything was in order. All I had to do before I put it back on the market was to do some landscaping to improve the curb appeal, slap on a new coat of paint inside and it was good to go!

I closed on the deal February 1st and it was back on the market February 16th. I got a full price offer the NEXT DAY and signed the Sale Agreement on February 19th. You could imagine what I was thinking at that moment, “this is too easy, why didn’t I do this earlier?!”. Keep reading…

So the offer was from an FHA buyer. I am Canadian, so I wasn't too familiar with all of the aspects of accepting an offer from an FHA buyer. A few days later my agent got a call from the buyer's agent saying that they had been denied by the bank because the duplex was a "double flip" (wholesale + retail flip) within a short period. For this reason, my house couldn't get accepted for an FHA loan for at least 60 days. My agent wasn't aware of this technicality but hey, we both learned a bit on that day. This was a bit of a downer for me since the FHA buyer market was the main target, especially in Lehigh.

We went ahead and put it back on the market hoping that a conventional buyer or investor would come knocking at the door. What do you know, a week later I received a good offer, not quite full price but close enough and the buyer paid for title and owner’s policy. This was a conventional buyer with, supposedly, a pre-approved loan. I accepted that offer on February 28th. On march 15th I received a call from my agent telling me that the bank didn’t approve the loan.

So once again, we put it back on the market the next day and received an almost full price offer from an investor! I figured, third time’s the charm, and I felt much more confidant that this would work out because the investor was putting a larger down payment. Everything was running smoothly, it was a 45 day closing. On the 40th day I spoke with my agent and she informed me that the buyer had requested an extension on the loan because the bank required the buyer to keep his down payment in a frozen account for at least 60 days (to make sure he is financially solid). My agent and I where frustrated because the buyer didn’t disclose that information and he new all along he couldn’t close in 45 days, we didn’t grant him the extension and decided to put it back on the market.

With all this time that flew by, we found ourselves one week away from the duplex being eligible to the FHA buyer market, we reached the 60 days on May 2nd. The market had kept going up during all that time so we decided to put it back on the market 4,000$ higher than the previous listing.

On May 2nd we received 4 FHA offers. We told them to come back with their highest and best offer. I accepted a full price offer, with the buyer paying his portion of the closing costs. Fast-forward to a few weeks later, the inspection went just fine, however, the appraisal came in at 190,000$. This wasn't unexpected as I felt our price point was slightly high for the market, but it was still somewhat of a bummer. My agent asked if the buyers could put in some extra cash to cover the 6,900$ spread between the list price and the appraisal, they accepted to putting an extra 1,000$ but that was the max they would go. I wanted to close after all these events so I accepted the 191,000$ offer. We closed today, June 1st, 120 days after the purchase, on the dot!

As you can imagine, this deal wasn’t the smoothest, but it wasn’t all that bad either. I learned a whole lot and it helped me grow as a real estate investor. The hardest part was just getting the fear out of the way, after that it was simply a question of staying on top of every situation. A fellow BP member told me the numbers were pretty tight, and they were indeed, but since I was buying all cash, I figured it was a calculated risk because I had income coming in from one side of the duplex and so my holding costs would be minimal.

I understand that not everyone has the chance of buying all cash on their first buy, however, I believe that if you break even, or just make a little bit of profit on your first few deals, you're coming out a winner no matter what, think of it as free tuition!

I hope you enjoyed the read, below you’ll find the details of the deal.

Best of luck!

Details:

Selling Price: 191,000$

Selling Fees (agent + closing costs): (14392$)

Buying Expenses:

- Buy price: 161,000$

- Closing costs: 2,510$

- Rehab: 2,252$

Total: (165,763$)

Holding Costs:

- Property Manager: 530$

- Electricity: 221$

- Insurance 491$

Total: (1242$)

Holding Income:

Rent: 2,800$

Profit: 12,403$

ROI: 7.48%

Annualized ROI (120 days): 22.76%