A successful (barely) first flip!

[Donald S.]

So I just finished doing all the calculations for this flip. Man it was a beast. Almost 10 months from close to close and a huge project for a first time flipper.

So here's what I got:

I had a call from a direct mail campaign and the seller offered me his duplex in an up and coming neighborhood of St. Louis known as Benton Park West. He was only asking $9,000 so I thought there's no way I can't make this work.

I went and looked at the place, it had been vacant for nearly 25 years and was in rough shape to say the least. But the foundation was solid, brick work was in good shape, and the floors and floor joists (that I could see in the basement), looked to be in good/salvageable shape.

My business partner decided it was worth it and we bought the place for $9852.00 including closing costs. About a month later after talking with about 6 general contractors, numerous subs, 4 architects, and a host of potential wholesale buyers I lined up contractors and decided to hire a GC to do/oversee most of the work and I would project manage/manage the GC. We put a budget of $132,000 for the contractors to do their part, and I would contribute another $8,000 worth of work mostly in tile and painting.

With that in hand I found a private money lender through a friend of mine, and showed him the comps my Realtor (I wasn't licensed at the time), had pulled and he was already funding a similar project 4 blocks over from mine. He agreed and gave us a loan of $150,000, Interest only, Rate was ~10.5% 3 month variable.

My GC thought he could start August 20th and finish by December 1st, so in our contract I gave him until January 1st to finish before penalties would kick in. Work started with demolition on August 20th as predicted and within 2 weeks the place was a shell. Literally everything except the studs were gone (and those would be gone soon also). Unfortunately work did not progress as fast as my contractor had hoped and it would be February 20th before he managed to finish enough for us to put the place on the Market. Fortunately my GC and I had a good relationship and he kept his word, paid the penalty (200/week), and through in a 1 year warranty transferrable to the new owner as of the close of a sale.

After getting staging set and pictures taken, landscaping completed, we listed the property around March 5th, right at the beginning of the spring selling season. We had 2 really positive open houses on back to back Sunday’s and a good amount of showings throughout the weeks. After the 1st open house we put out advertising saying something to the effect of “If something isn’t quite right, let us know, we’ll do what it takes to make it right for you!” This was a good and bad thing it turned out, but mostly good.

After almost exactly 30 days on market and a price drop we got an offer at $200k and a request we provide $5k in closing cost and a $550 home warranty, we had listed it at $230k-223k. We countered back with $213,000 and kept the other concessions. Closing was set May 7th. We had a deal!

After some trials with the occupancy inspector and home inspector on some relatively minor things, we finally made it to close. I cannot express how nerve racking the waiting period between listing a house and getting an offer is, this was the first house I had sold, and then the escrow period was almost worse. The buyer’s didn’t know, but had they cancelled the contract, we were probably screwed as our loan was due on May 17th.

So how were the final numbers? (all rounded)

Purchase: $9800

Renovation: $162,000 ($22,000 over budget)

Total Interest Paid: $8700

Closing Cost: $18,400 (including commissions and concessions)

Holding Cost (other than Interest): 1100

Sale Price: $213,000

Gross Profit: 13000

Takeaways:

I learned a ton on this rehab.

1) Don’t try to do work yourself, have a pro do it.

2) make sure you keep a good lock on what’s going on and when with your contractors, one of our costs overruns was time.

3) On a gut, just because you think you can salvage something (like the floor), put a contingency budget in for it.

4) My 10% contingency was not enough.

Photos to follow:

[Carlos Varum Jr]

Just playing devil's advocate here: for only 13K profit... wouldn't it be worth to just rent it, then do a cashout refi? 

Let's say you got  $1800/month in rent for a fixed up 3 bed in that area, you get $21,600/year in rents. Most commercial lenders will give you 80% of the value of the property if it is stabilized (locked in a yearly lease)... my guess is it will assess for $216000+/- or 10 times yearly rents... so you cashout $172800 @ 4.5% commercial lender rates, that is $875/month for a mortgage.... minus expense, you are probably bringing home $700/month in profit virtually tax free (because of depreciation and other benefits of renting properties) versus $13K of profit flipping that you have to give between 10% and 37% to the IRS for short term capital gain... let' say you are in the middle tax bracket (24% capital gain tax) so $3120 of your profit goes towards taxes, so you really only made $9880!

 If you made a $700/month profit, it only takes a little over a year to make that same flipping profit in rents, but the best part is that after that point, you are now making additional monthly profit, and the house is brand new... nothing should break! You should be making that monthly profit easily for 5 years with only minimal repairs/maintenance. So $700 x 12 months x 5 years equals $42000 in profit virtually tax free, versus the short $9880 in 10 months...

Don't get me wrong, $9880 is a profit! You should be happy, just the same way that everyone on here is happy for you, but every deal is different...  if its not worth flipping, pivot and look at what other options you have to make a better profit...