$103k Profit / 249% ROI / 15 Month Sub 2 Hold n Sold

[Tim G.]

Wanted to share my most successful real estate deal I've ever completed. In just over a year I earned $103k by getting creative with what would typically be a standard flip or wholesale deal. First, the financials... 

Background on the deal: This lead came to me via my website in February 2017, I didn't take it very seriously. Some personal things were going on at the time and real estate wasn't a priority. I made a soft pass and forgot about the lead. Early May the seller emailed me asking if my offer was still good and I setup an appointment to meet at the home. 

Property Details: 10202 3 Oaks Way, Santee, CA is a 2 /1 - 875 sq ft with a poorly converted garage into a master suite in a really nice part of Santee (East San Diego). Most homes in the area were 3/2's 1100-1500 sq ft. Renovated 3/2's were selling in the high 4's low 5's but there were no comps for 2/1's. 

I felt like I'd be able to wholesale the home for $10-20k or flip it with unknown comps for maybe $30-40k. I'd need to do a master suite addition to be certain of exit values around $500k but the home previously had a swimming pool and it was where the addition would be. This created concerns on construction costs due to grading and soil testing. Possibly making it cost prohibitive. 

Why I chose to Sub 2: I wanted to see if it was possible and I felt I could leverage the mortgage and have time to decide my best use for the home. The seller had $30k in equity in the property, I pitched taking over payments and he agreed. It was a VA mortgage, the payment was $1670 I felt I could push the rents over a standard 2/1 ($1800 range) by leveraging the garage conversion and get closer to 3/2 rents ($2400). I wanted a tenant who needed a short term lease, I found some students to take the place for $2275 a month on a one year lease. With minimal expenses, I netted $3500 in cash flow for the year.

Investment Strategy: This was an appreciation play, I could cover if it went wrong. Santee is a nice part of East San Diego. The 3/2 1200-1500 sqft market in San Diego County felt predictable and I saw an opportunity in an outlier community. There were areas in the City (Mira Mesa & Claremont) starting to push into the 600's and 700's for a similar home. I felt certain that Santee, being 15 miles away would see a push in value as home buyers wanted to find affordable alternatives. In 2018 Santee saw an increase into the $520-575k range for 3/2's, giving numbers that better supported doing a master suite addition. 

I felt we had hit peak values this summer and was anxious to get out of this house before values dropped, and if they had plateaued. I wanted out to use the funds elsewhere. I began running numbers on what would be my best move. I felt very conflicted selling a house, my goal is to add doors. My ego enjoyed that I could say I owned this home sub 2, checking that and focusing on the financials and where I could move these funds for better use was important to allow a well thought out decision and plan.

Selling the deal: By late summer I felt the market was slowing down and I was getting nervous. I offered to let the tenants out of their lease to give me the chance to sell during summer but they weren't interested. I reached out to Redfin Now to see how their program worked, could I get a good cash offer from a company I believed was overpaying for homes in my market? They refused, they don't do additions and the comps were still weak for 2/1's. 

I was running the numbers on a light fix up and selling as a 2/1 and it looked like I'd get around $430k but I'd spend $10-15k in repairs, hold for 2-5 months and pay agents. Netting me close to $400k at best.

Then I ran the numbers on doing a master suite addition. I couldn't see it costing me less than $90k and I had friends whose similar sized flips had been sitting on the market in Santee with no offers for several months. If this house sold for $530k or below I would net the same amount as selling as a 2/1 with a light fix up. 

There were no comps for a renovated 2/1 in the entire city of Santee. There was a comp for a 2/1 an investor had purchased for $400k to do a master suite addition. So I reached out to him offering my home to him at the same price. My math told me a quick sale at $400k would net me within $5-15k of what I'd net doing a master suite addition if values continued to trend flat/down. 

As much as it hurt my ego to sell as-is and not renovate the home. The financials based on my bearish outlook on the market told me it wasn't a good use of my time or resources. Too high a risk for too low a return. 

We came to an agreement at $400k no fees, no repairs and the house was sold in 14 days. It felt like I wholesaled my own home. One thing that helped bring some ease to me was that before agreeing with this buyer. I emailed this deal out to a 700 person buyers list at $400k and not a single person was interested in the deal. 

Lessons Learned: I experienced a good amount of anxiety over the year, fears of the note being called due. Concerns that I'd run into title or lender issues when I wanted to sell the home. The home was reassessed when I purchased it and the property tax increase wasn't covered by the mortgage. This hurt my cash flow and was surprised by a tax lien this summer, it was under $400 but I feared it would tip off the lender of the new owner. I realize now I worried entirely too much about the what if's on this deal and being more prepared would have helped to prevent this.

Structurally if I were to do this again, I'd of created a trust instead of holding in my company name and changed the email and mailing address for notifications. I would have had the seller sign a 3rd party authorization and limited power of attorney when we closed on the sale. I had to reconnect with the seller while in escrow to sell the home as we needed the payoff info and fortunately he was easy to reach. 

This was the first time I've cashed out on a deal I could have held. That was a weird feeling but when examining what I was holding this was the only property I felt I would have regretted not selling if the market flattened out or dropped. I have a good plan for the funds that will allow me to earn a greater amount of cash flow (building an ADU at my primary) and I am excited to start work on that project.

I hope I managed to cover the important details, if there are any questions I am happy to answer them honestly. Thank you for taking the time to read my success story. 

[Tim G.]

Originally posted by @Bruce May:

@Tim G. glad that I was part of the success for this deal by doing a quick loan for your buyer. (Sorry, had to get a plug in, right?) It was good talking to you recently and I think you still owe me a beer at Bagby's.

Thanks Bruce, glad you could help too. Let me know next time you're in the area.