All Forum Posts by: Rob Adams

It's hard to flip your first house. If there was an easy way to get >20% on your cash in 3-6 months, everyone would do it. So it's going to be hard. Especially the first one. How do I know? Because I'm on the wrong side of first. 

It's not that I mind hard. It's the kind of hard, the specific breed of hard, that makes it so hard. 

I'm going to switch to difficult instead of hard, because typing hard so much feels weird. 

What's difficult is that it's chaos and lies, chaos and lies, chaos and misinformation, chaos and truth, order and lies, and misinformation, and more chaos. And luck. It's basically salmon swimming up stream. And I guess it gets easier, but at the beginning I can tell you it sucks. Digging ditches 18 hours a day would be more pleasant. Because at least there are simple rules, laws of physics. The shovel doesn't shape-shift to another size mid scoop. The dirt doesn't change its weight. It's all predictable effort, predictable results. 

Your first house flip, not so much.

After grinding for a few weeks I think this is the thing: at the beginning, all you get are sucker prices. You waste time modeling sucker deals, and walking sucker properties with sucker GCs. You get comps from sucker agents and take advice from sucker advice givers. 

Finally, you realize that numbers don't lie. There are such things as accurate comps, accurate rehab costs, accurate carrying costs, accurate closing costs. You soon realize that you can't do a flip with a full commission broker taking 6%. Maybe a flat fee deal at most. You can't use a GC that works with insured union contractors. Maybe some uninsured guys, usually ones that don't speak English. You can't pay what the seller of a distressed investment property is asking. Maybe 80% of ask is doable if you know your stuff w/r/t rehab and reselling, and if the comps are spot-on accurate. 

You can't get 80% ask unless you win at musical chairs. It means you have to happen along and run the numbers ACCURATELY AND QUICKLY at the exact moment that a seller is done messing around and has finally, at long last become REALISTIC about things and wants out. 

To happen along at that right moment it SEEMS like you need to kiss a lot of frogs and get to know a lot of brokers, and make those brokers think that you have a lot of money and are quick and dead serious as an investor. But convincing them (or yourself) of that when you've never done a deal before, well, that's hard. 

But whining about it ain't gonna do a darn bit of good. 

I meant stable meaning occupancy is stable at high 88%+ on a seriously ****** building, and I would rehab it and try to raise rents; if I thought there was a market for higher rents. I wouldn't do this same thing for a building with low occupancy in a deep inland neighborhood I knew nothing about. It's all moot because I won't find anything like that anyway – that was my main point. I'm not about to speculate on demand in a volatile neighborhood I know nothing about. Maybe was using stabilized incorrectly. 

The more inland I go the more stabilized I'd want the investment to be before I buy. it would need be a stabilized value-add with room to push rents after rehab and refi within a year. I don't think I'll find anything like that in California but you never know. My goal is to look at as many deals as possible, and right now I'm looking at a small flip in a hot area in LA Country. I love what you said: "you need to be honest with yourself and have the discipline to NOT buy anything until/unless you can..."

So true, and I'd add that there's no such thing as a good deal on its own. A good deal is when the right deal combines with the right kind of investor at the right time. It's kind of like sound. There's no such thing as sound unless it hits an eardrum. People have to be honest about their team, their vision, and their numbers, and be able to divide and conquer a million little layers of the onion until the deal is self-evident. It pisses me off that no complete algorithm exists for the "investor journey." It's always boiled down to basics that never come close to addressing the chaos of real life. At some point a newbie has to roll up their sleeves and find out for themselves, simply by being driven and resourceful and engaged. It's annoying at first but becomes addictive, like a game. 

75% ARV less repairs

I don't know the cost of the project until I get numbers from the GC (chicken and egg problem), but it's at 100K on the pro forma. My guess the repairs could wholesale up to $150k, don't know until I get accurate numbers from someone used to doing small uninsured jobs with wholesale contractors. 

The thing is, the GC, who I'm friends with and trust, quoted $200K wholesale for the job, (no markup, I offered to pay him on profit split on the sale.) $200k strikes me as high and he agreed it could be high, but he's not used to running a wholesale crew (he does higher-end deals with insured union contractors) and would have to assemble wholesale contractors and oversee them a lot. That is something he's been meaning to do, but for the first time he does it wants a big cushion so that neither of us get hurt with the learning curve. 

That's why he's only comfortable with a huge cushion for estimate, and this knowledge gap is hurting my ability to close on the deal with confidence and precision w/r/t my COC threshold.

i.e.:

Asking price - repairs of an extra 100K on top of pro forma repair estimate puts me at an offer that's $100k below ask, which is what the contract holder (seller) paid for the contract. Whereas if I can do it 85K below ask (and get a credible GC to say I can do the repairs for $150-$185K) I can lock up this deal. 

What I need is a GC (or PM) repair estimate from someone who is used to doing this kind of work in this area, but I don't know anyone, so the trust level would be low. The PM/GC would be paid from profit on sale, and would be motivated to be quality/quick/frugal. At 85k below ask it's 75% ARV in a hot neighborhood, (if I can get the repairs done at $130k, which my gut says we can with the right team) it's a good gig for the right PM or GC.

How do you find an honest and reliable project manager in a major market on a gutted flip that needs an addition, i.e. a fairly big job on a small home and small lot. 

Thanks. And by the way, the selling aspect is just one small part of a really tricky deal. My GC walked the property today and he felt he couldn't do it for the pro forma amount. Too much needed to be done. And this is wholesale, meaning he was going to take his pay from % of profits. In the end I decided that this might be a good deal for a GC with cash and a crew with experience doing this particular kind of rehab. It's just not a good deal for me. I'm a little distraught. 

Jon, thank you for laying it bare. I appreciate it. Seems like if I'm selling a flip in a hot neighborhood in LA where there's high demand for quality product at market prices, the smart play is to go with a flat-fee commission while doing what i can to market heavily to the buyers directly, before putting it on the MLS. Sounds like if I have trouble reaching buyers after a few weeks I could pull the trigger on the MLS listing, hoping that I still have time and won't get into a second or third quarter of carrying costs. The fear factor is that those costs can easily equal or exceed what you'd pay a 6% broker. No approach comes without pros and cons, but if this was easy everyone would be doing it.

other argument I heard against the flat fee is

• buyer brokers may choose to avoid you or boycott you (seems like bs)

• buyer brokers can put things in the deal that take advantage of you that a seller broker could protect you from. (scary and non-specific)

Mike, is what you're describing even more true in hot areas? Meaning is it easier to get away without a seller broker in a hot area, as opposed to an area that isn't very hot or has a lot of sitting inventory? I feel like the area I'm looking at is a hot area and things get snatched up quickly.