FLIP Series - SW Columbus, OH: Part 1

The intent of this series is to divulge the details of our projects so others may learn from our journey. Our aim is to be as detailed as possible, but please post your questions and we will promptly reply. Thanks for the read!

We're currently in contract on this home in SW Columbus. "Plan A" is to improve it and sell it at an affordable price. "Plan B" is to improve it and rent it. The initial details of the project are below:

The Home: 4 BR/2 Bath. 1,710 SqFt rebuilt in 2010. Newer windows, roof and gutters. Brookshire neighborhood in SW Columbus with choice of Southwestern Schools or Columbus Schools. The home is on well water and septic tank (more on that later). It has no garage or driveway. The neighborhood feels rural because there is plenty of space between houses, but the property sits next to an elementary school and park. 

Acquisition Cost: $37,000 ($33,000 is seller's price plus $4,000 contract assignment fee to wholesaler)

Wholesaler Contract: A wholesaler is an expert at finding properties that people desperately need to sell. These properties often need at least mild rehab, but can usually be purchased at a discount. This contract is technically between us and the seller even though the wholesaler is in the middle of the transaction. The purchase contract allows us 15 days from the contract date to do any inspections we want and make a decision to continue with or kill the project. This home was never listed on the MLS (as it usually goes with wholesale deals). 

Estimated Rehab Cost: $45,000 *details below

We tried to over estimate all of the rehab costs to create some room in the budget for inevitable surprises. 

The Septic: The county mandated that all septic systems must be converted to city sewer by the end of 2019. We will know exactly what this conversion will cost this week, but plan to fund the work since the septic is overflowing into the back yard. 

Holding Costs: *Estimated 4 months from closing (purchase) to closing (sale).*

Interest expense came from the lender we plan to use. Utilities are a winter estimate. Taxes came from the county auditor and our insurance agent gave us an actual quote. 

Financing: We shopped a few hard money lenders as traditional lenders backed by Fannie and Freddie usually will not fund FLIPS. We found a 12 month term at 13.99% that covers 90% of the acquisition cost and 95% of the rehab cost. This loan requires 1.5% of the total loan paid up front (1.5 points in other words). 

Finance and Closing Costs: We need to pay 10% down on the acquisition, 5% down on the rehab cost and 1.5% of the loan (as noted above). We also need to pay other title and closing costs (i.e. legal fees, title insurance and appraisal), minor fees to my broker and a percentage of the sale to a buyer's agent at the end. A break down of these costs is below:

When we add the finance and closing costs to the holding costs and add the $145 fee to make construction draws (lender requires us to do the work first and then submit for 3 reimbursements based on completion percentage), our total cash out of pocket is approximately $18,254. 

After Repair Value (ARV): We estimate that this home could sell for $139,900 in March when it goes on the market. We based this assumption on several comparable properties in the area that sold in the last 6 months. This home is zoned for Southwestern Schools (a HUGE help to property value) by the slightest of margins. The red flag in the picture below is our property! 

Though we think we could sell it for $139,900, we are using 85% of that number ($119,000) as our basis for estimating our profit to be safe. After all expenses are paid, the loan is paid off and we redeem our out of pocket costs, we are estimating a net profit of a little less than $20,000. This equates to a 107% cash-on-cash return (net profit divided by our total out-of-pocket expenses). 

Plan B: Like any fundamentally sound investor, we have more than one exit strategy. If this property will not sell for enough to cover our expenses, we plan to refinance into a conventional 30-year mortgage at 75% of the ARV. If we use $119,000 as the ARV, we could secure a loan for $89,000 and rent the home for approximately $1000/month. In this scenario, we would leave almost $9,000 in the deal. Though this scenario is not ideal, acquiring a cash flowing rental property for $9,000 is still a decent outcome. 

State of the Property: It needs rehabbed for sure :)