22 Year Old - Third Deal: $51K Profit Flip

[Alex Kamunyo]

This was my third deal after the house hack last year, and the flip I sold earlier this year. This one was another great learning experience. I'm a firm believer that your first few deals probably won't make you rich financially, per se, but definitely rich in knowledge and experience. Which is away more valuable than money, because that's the one thing that can't be taken from you. My mindset going into this one was to learn as much as possible and make a decent profit, while considering any failures as just tuition to the School of Hard Knocks..

I completed this flip with two other partners who are also the same age. (Side note: We started the deal with each of us being 22 years old and when we closed a few months later we were all 23). The property was a 3 bedroom / 2 bath SFH, on the NW side of San Antonio, TX. We got the lead in February by a wholesaler who had the property under contract from the owner that was in living in San Diego. He was set to be foreclosed on within a week so we had to move fast. Purchase price was $73,000, rehab estimate was about $35,000, and ARV was $165,000.

The property had tenants occupying it that were receiving housing assistance of $700 per month while they payed $300 per month. So the previous owner was receiving $1,000 per month in rent from them. (How he was getting foreclosed on? I have no clue...) We were set to close on the property February 4th, 2019 and wanted to begin the rehab immediately, but the contractor said he needed the tenants out before he could start. However the tenants didn't know that the property was even being foreclosed on until we told them, so they were very adverse to moving on such short notice, especially since they were already on housing assistance and in other financial trouble. In real estate, they say you have to be a problem solver, so here was our first test. 

I took on the role of communicating with the tenants, which I was glad to because I could put the principles from Chris Voss' book "Never Split the Difference: Negotiating As If Your Life Depended on It" into use (i.e. mirroring, labeling, tactical empathy). The objective was to get the tenants out quickly, ideally in three weeks or less, while also making sure they had a place to go afterwards. My approach was to explain to them the situation and place the blame on the previous owner for not making them aware of the situation (anther Chris Voss tactic). In order to make this a win-win for both parties we told them that if they were out within 3 weeks, they wouldn't have to pay  their normal $300 rent that month and that we'd give them the $700 from housing assistance for them to use towards a new place. We even made them a spreadsheet of all nearby properties and called landlords to see if they'd accept them (they had bad credit). But even after all this they were not willing to compromise... So after the three weeks was up and they still weren't out, we rescinded our offer to help them financially and told them we would have to begin the eviction process. A few days later, they were gone...We really didn't want to evict them and had no intention to actually do so, but the threat alone must've been enough to get them moving. Money talks, right?

Finally, about a month after closing we were finally set to get started on the rehab. Of course the house was trashed by the tenants. (wouldn't be right if they didn't right?) The majority of our SOW included: cleanup, new roof, exterior siding and paint, flooring, interior paint, ceiling re-texturing, cabinet refinishing, counter tops, light fixtures, windows, doors, bathroom gut, and landscaping. Thankfully there were no mechanical capital expenditures such as HVAC or water heater. The rehab took about 3.5 months, which was a month longer than we anticipated. This was primarily due to the fact that the contractor was extremely slow... On many occasions he would say things would be done by a certain date and then they wouldn't be. Not to mention how many times he ignored our calls and texts. After it was finally finished, and we did the walk through we were not entirely pleased with the craftsmanship. There was some sloppy work done on the details. Luckily none of it was too noticeable unless you're a home inspector. (We had to get some things fixed by a different contractor after the end buyer's inspection report came back).  But all things considered, it was good enough to list it. Check out the before and after pictures below.

So after four months since we closed the purchase, in May 2019 we listed the property for $165,000. After one week on the market we had 10+ offers, 3 of them being $10K above asking price. A fantastic turnout. In San Antonio, the inventory for updated move in ready homes under $200K is few and far between, so when one does come up, it won't last long. We accepted an offer for $175,000 and closed on June 13th. About a four month turnaround from close to close.

After all was said and done we made about a $51K gross profit, and after all closing costs, holding costs, miscellaneous costs, and paying back each partner, we walked away with about $22K in net profit. This was larger than our anticipated profit so that was great. But like I said earlier, even more valuable than the money are the lessons learned. But thankfully we didn't pay any tuition on this one... Check out what I learned from this deal.

Lessons learned:

1. When negotiating, always try to be in control of the conversation. This is one of Chris Voss' principles in his book that I mentioned. I got to witness the practicality of how important that is when I was negotiating with the tenants to get them to leave. Naturally people will allow their emotions to control how they negotiate, because we as humans are wired to think emotionally before we think logically. I caught myself getting upset with them when speaking to them which probably made them upset too. Looking back, I'm sure this was a part of the reason they had no sense of urgency or desire to leave within the 3 week timeline we gave them. Also I've found that asking open ended questions when negotiating rather than making statements, allows you to control the conversation. Statements allow the other party to avoid your interests.

2. Create a very detailed Scope of Work and a contract with deadlines with contractors. I mentioned earlier that some of the work that was done was sloppy. This could've been avoided if we had a more meticulous SOW. If we made a SOW that covered everything down to the outlet covers, then the contractor would have no room to decide if they want to leave or change anything. If it's in the contract it has to be done. But if not, then 9 times out of 10 the contractor won't go out of their way to just do it anyways. Additionally, I think it would be a good idea to implement project deadlines within the contract that enforce fees when they aren't met. I'm sure that would've gave the contractor incentive to work faster. Once again, if these things aren't specifically stated, don't assume it's implied.

3. Manage your contractors. This should seem like more common sense, but this was my first time dealing with a contractor with frequency. It was hard to go out to the property more than once or twice a week due to work, but if we had done that we would've known that things weren't getting done when they said they were. Manage your managers...

The goal for the rest of the year is to house hack another property and flip 2-3 more properties...the market is on fire right now so I'm taking what it gives me!

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