First Flip Journal - Oh Crap! I Don't Know What I'm Doing!

My Name is Jeff Neal, and I am a real estate investor with a 9-5 problem. In this blog I will be documenting my first true leap into investing, as I take on my first flip. At this point I have done one live in flip that I did all the work on, and my wife and I are currently are house hacking a duplex (which I am also renovating myself).  My goal is to be predominately a buy and hold investor that flips to buy more properties to hold. 

Enough about me, back to the flip....

Finding a Property

Let me get you up to speed on what has taken place up to this point. I decided that the right move was for me to try to flip a house to raise the necessary capital to buy our next rental. So I took the advice of all the books and podcast I read and began driving for dollars. I took 3 of my lunches drove the neighborhoods between my office and home. I identified 2 houses that matched all the criteria I had learned about which lead me to believe they were vacant. I did my research, they were both absentee owners. One house had backed taxes and the other had a house fire two months prior. So I wrote them each a personalized letter that included a picture I took of the home and a photo of my wife and I at the bottom of the letter. One week later.... I had a voicemail from someone (the owner of the house with fire damage) that was interested in talking. Oh Crap! That wasn't suppose to be that easy! It was suppose to take longer than that to find a house! I have no clue how to talk to a seller! Now what... 

So I researched on BP what questions to ask a seller, called the seller back, and asked none of the questions a wrote down.... But what I did do is spend 15 min just talking to Mr. Turk (the seller, not his real name, long story) about everything but the the property and agreed to meet at the property to discuss "the deal". 

After the call lets just say I was pretty pumped! This overwhelming desire to start the adventure of becoming a "real" real estate investing had started. Whether this deal actual worked out or not it still answered my question of could I really send a letter and get a response. The answer was yes. I could actually do this. That wasn't so bad... 3 hours of driving, 2 letters, 1 call, and 1 appointment (3+2+1=1 simple math). Hope they are all that easy! lol

The Deal

I met Mr. Turk at the house a couple of days later. The house was in pretty rough shape but the fire had only caused cosmetic damage. The fire department had pulled down part of the ceiling in the kitchen where the fire had started and there was not charring on any of the rafters or ceiling joists. With that said it was a complete interior gut job. i would have to get this house for a really good price if it was going to work out. 

So as we are walking around and continuing the small talk a switch the conversation to some of the questions that I had written down. One of the questions was well what do you need to get for the place. Mr. Turk began to explain the situation. He informed me that he had already collected 3/4th of the insurance money and that the city was on the check for the remaining 1/4th. He stated that I could get this house for pretty cheap and said if he could get 20k for it he would probably take it. 

The Number

Ok, so this might actually be feasible. I took a bunch of photos and started creating my estimate that night. I wasn't going to be able to sleep if i didn't know if this might work. Not that it helped, I still couldn't sleep. The estimate came out to be 70k-80k on the conservative side. Contacted a realtor friend who pulled comps and I derived a conservative ARV of 150K. So I offered Mr. Turk 15k and he said yes... Oh Crap! I don't have 15k! I have been spending all of our money on renovating our duplex! How am I going to find 15k or even 80k for the renovations! 

150k x .70 = 105k

105k - 80k = 25k

Offer Price of 25k or Less

The Money

I knew that he was wanting to close quick, and that a traditional mortgage was going to require more out of pocket money than I had available. So that left me with the two other options I was aware of, hard money, and private investors. So I started investigating both. I took the advice of always telling everyone I knew that I was a real estate investor and for some reason always found myself talking about it at every event I was at. There were a couple of people who had expressed more interest than other and so I decide to reach out to them. One guy said no the other said he was interested in talking more.... What?! No way! A week later we worked out the deal that he would hold the note for the cost of the property and the renovation for 8% and 2 points. In the mean time I had talked to a hard money lender who wanted 14% and 4 points because I didn't have a proven track record. Which i would have probably done had I not found a private money investor and chalked it up as the cost of gaining experience. 

Due Diligence 

Man is it hard to find good contractors. Lucky I had been meeting for lunch with a small group of investors that were about 3 years ahead of me in the game. The most notable had been investing for 3 years and had acquired 150+ units! Wow! He was kind enough to walk the property with me and deny to partner with me... Yes he said he didn't want to partner.  His reasoning was that he knew I could handle it myself (how did he know that because I sure don't know that) and he didn't want to take part of the profit that could springboard me into investing more seriously. What a great guy. He also opened up his rolodex of contractors (minus his finish carpenter, can't blame him). 

So I have been shuffling contractors through the property before and after work for the past 2 weeks. During this time some of the contracts pointed out a header that wasn't constructed very well that was sagging, and that the chimney was beginning to rotate way from the house. All unforeseen costs that totaled near $5500.00. So I was honest with Mr. Turk about what I had found and that I wanted to make sure that there wasn't any other cost that could make it hard for me to complete the project and make a profit. He responded with "you know what I think those issues are things that we should cover. send me an email with all the items and costs." not possible... Not Possible... I am buy this house as-is and the owner just offered to reduce the sell price by 1/3? I know what you are thinking I was thinking the same thing... Why? What am I missing. The important thing to remember is ya he will make $9500.00 off of me but he will get another check for 30k from the city! He is what I would call a MOTIVATED SELLER. Lol

Long story not so short we agreed on $11,500.00 for the purchase price. You are now officially up to speed. As of now we are finalizing the contract with new price and about to get our closing date set. 

I will try to keep the next posts much shorter. Until next time....

I am Jeff Neal... Signing off. (that was for Josh Dorkin!)