Flip Summary - Phoenixville, PA
Snapshot
Deal Summary
This property was sourced directly from the MLS. With often competitive MLS deals, my mindset is with enough persistence, there is plenty of opportunity for all. It takes numerous MLS bids to get 1 viable opportunity. I stick to my criteria for ROI, often roll the buyer's agent commission (I am a licensed agent) into the deal to boost the seller's net proceeds, in an effort to gain a slight edge vs. the competition. I was pleasantly surprised my bid won out, and given it was 5 minutes from my house, was excited to transform it (and have an easy commute to do so!).
This was by far the largest rehab project I had undertaken to date. It was riskier than a quick cosmetic flip as it had septic issues, was on a busy road, only had 3BR (most in this area have 4) and needed some reconfiguration of space to optimize value. I was projecting an 18% ROI available to both my investors in the deal, and myself. This was before I was sure whether to bring in equity partners or debt partners. Either way this was above my minimum 15% ROI threshold. I would only get a chunk of it, and gain vital knowledge around the process.
I typically make non-contingent cash offers (no inspections, no mortgage contingency etc), however, the concern over the septic system issues could not be overlooked. To help my offer stand out, I negotiated with the seller to include the following terms in the contract, which I’ll share to help you see exactly how it was structured:
1.Buyer purchasing in "As-Is" condition. Any U&O is the responsibility of the Buyer to order and satisfy. Buyer will perform a septic inspection for informational purposes only.
2. Seller may leave behind personal items for Buyer to dispose of after settlement at Buyer's expense, EXCEPT: hazardous materials (ie paint,oil, gas, cleaning supplies, grease, lawn/garden sprays or fertilizers etc), vehicles, auto parts, lawn equipment, lawn tools & tires MUST be removed prior to settlement.
3. Buyer has the right to access the Property, with 24-hrs notice to Listing Agent, to obtain estimates, septic design proposals etc prior to settlement.
4. IF SEPTIC INSPECTION PASSES, PURCHASE PRICE IS INCREASED $20,000 AT SETTLEMENT.
5. BUYER AGENT CO-OP 3% COMMISSION IS WAIVED WITH 2% GOING BACK TO SELLER (to increase their net proceeds) AND 1% ADDITIONAL COMMISSION GOING TO LISTING BROKER
My numbers reflected ample ROI in any scenario with the septic, even if it had passed and price went up, I was still hitting my minimum criteria. The septic inspections revealed minor concerns, which would cost $7k or so. The seller argued it had passed and they wanted more money, I explained there was still risk inherent with the work, and if the cost went up if additional issues were found, it's not like they were going to give me more money back post-settlement. The price remained the same, and I had further buffer in my numbers to work with. In hindsight, the contract language above around the septic system was inadequate to cover all possible scenarios, however, it sent the message to the seller I was fair and was what helped my offer stand out.
As the title indicates, I ultimately partnered on this deal with a contractor friend of mine. I had helped him and his wife (my stager for the past 5+ years) buy and sell several flips he had done successfully on his own over the past several years. We had developed trust with each other and he does quality work. But how to divvy up the proceeds? How to compensate for his time? I had asked numerous flipper friends, and no one had a go-to solution.
Our original vision was for him to serve as more of a construction manager for multiple projects at once, managing the subs and scheduled work, and earn a minority % of profit on each one. Challenge was, despite repeated attempts, we were unable to secure any other new flip projects for several months after we had closed on this one. Instead of bouncing around to multiple projects, this became his sole focus. Therein lies a challenge.
He had just wrapped up the last flip of his own, with his own money, and profited $50k+. For our business relationship to work, he had an expectation to clear enough profit in the same timeframe, otherwise, what would be the point. Given this became our only project, the pressure was on to maximize profit to justify his investment of time.
Outside of our go-to trade subs, he had a difficult time securing reliable crew members, and ended up having his hands in nearly every segment of rehab he was responsible for. If you’ve read the book E-Myth, this was a classic example of that. Nothing against him whatsoever, it’s just one of the big learning lessons we took away from this experience. Put good people in place, set clear expectations, hold them accountable to those expectations, and free up more time for yourself. At times easier said than done.
As he dove into the rehab, he’d have some crew members not show up, including one who got arrested mid-project, and on occasion they’d do poor work that he’d then have to fix. He has high standards of workmanship, which is a good thing, but that also prompted an urge for him to get his hands dirty to make sure everything was as good as possible, which drained both time and energy. Not to diminish the fact he did an amazing job on the project, per the photos below.
We started with a rehab budget of $104,880 and in reality spent $146,410! Detailed breakdown of this is below. A portion of this overage was his compensation. Originally, we were simply splitting profit 50/50 as this would be a relatively hands off construction management role, however, per above, he got mired in the day-to-day and this became his sole focus. Given he had no time to pursue other projects, I agreed to pay him $1,000/week as a “GC Fee.” The other overage sources were: plumbing (most of the lines had to be replaced), roof/siding (we used a high quality company and paid for it), drywall (we decided mid-project to raise the ceilings in 2 rooms) and “misc carpentry/trim” ( all the extra time we paid his crew members given we expanded the scope).
One of the more unnecessary (ok, dumb) things I did was pay his crew hourly. I created a shared spreadsheet he would fill in weekly with his crew’s time worked and what component of rehab they completed during that time so I could itemize charges on the bookkeeping end.
I would show up every Friday to check the progress, and cut checks on the spot for his guys. This became burdensom. Burdensome for him to have to track every hour of work, for me to have to write dozens upon dozens of checks, a waste of his valuable time and mine, and way too reactive. I liked showing up weekly to check progress, but there’s a better way to do it.
Next time, he will bid on his scope of work like any other contractor, get paid on periodic draws as the work progressed, and assume full responsibility for payment to his crew. When partnering with a contractor, treat them like you would any other contractor. This seemed like a great way to hold he and his crew accountable, but turned into a nightmare of tracking each and every minute and penny, simply not realistic.
As we progressed through the rehab, a sale of a fully rehabbed similar style home settled nearby at a much higher price than our original ARV. This opened our minds to getting more creative with design, and we decided to raise the ceilings in the living room and master bedroom. We had already blown open the entire main floor layout, with a header, large center island, and now we vaulted the adjacent living room ceiling to 20' high at its peak. This created a dramatic appearance and helped the house feel larger. Challenge was to obtain proper permitting as we needed a structural engineer to map it out, and multiple permit inspections from the municipality. This added 3 weeks to our timetable, and caused a chain reaction of delays. Ultimately, it helped us fetch a much higher ARV than originally projected. When evaluating the cost-benefit of this component of the rehab, the opportunity cost of those 3 weeks very well may have outweighed the higher price we obtained. It cost us $20k extra and it's hard to pinpoint exactly what our ROI was in value. But hey, it looked amazing.
With the additional work and time, we exhausted our capital and obtained supplemental funding from one of the private investors. We did not get cheap money on this project. Our private investors received 10% flat on their money, meaning, 10% ROI regardless of the amount of time the project took. For example, a $100,000 investment returned $110,000 no matter if it took 4 months or 8 months from closing to closing. There were penalties if the project went past 8 months. This makes the math simple, but it's quite expensive for a 6-month project of this scope. I'm happy for my investors, and wanted to build trust and track record with them, however, going forward I would look to secure less expensive financing unless the deal permitted.
Structure
Raised capital from multiple private money partners to fund entire project. Used an existing LLC. Created mortgage and note for the private lenders recorded by the title company at the courthouse, with lenders having pro-rata fractional interest in a 1st lien position against the property, with further collateral in the form a personal guarantee by yours truly.
Details (Nitty Gritty!)
For those of you that love full transparent details here are all the numbers, original projections and actuals on the back end. The first chart shows what each partner invested and their actual returns. Net profit after investors were paid interest was split between the contractor and I, less a finder's fee I paid the person that tipped me off to this opportunity. The second chart is a detailed budget analysis showing projected expenses vs actual. All said and done, I was short $1,632 off my original projections. Crazy considering I was $50k above my original ARV and spent well over the original budget. In this case, spending more money and time to go crazy with design may very well not have been worthwhile. I'll take the knowledge gained, few dollars in my pocket, and off to the next!
Lessons Learned
Lesson 1: Agree to a scope of work and design plan and stick to your guns. Minor changes certainly are expected, but major changes such as raising ceilings as noted above, cost valuable time and are difficult to pinpoint ROI.
Lesson 2: Partnering with a contractor friend for a one-off flip is challenging. If you don’t have a steady stream of rehab projects, the pie is rarely big enough to chop up and make everyone happy. You could jeopardize a friendship too. Fortunately, we are still good friends and under the right circumstances, would definitely work together again.
Lesson 3: If you partner with a contractor, do not ask them to track their crew’s time to the hour for pay. Agree to a budgeted scope of work and let the contractor deal with his crew’s compensation directly. Accountability is one thing, micro-management and wasted time is another. Maybe I’m the only moron that would do this.
Lesson 4: Get very clear on your schedule of work. Who’s coming in when? What rough-in work has to be in place before finish work can start? I was not clear on this and as a result, the process was inefficient at times. As much as I tried to mimic J Scott, there is plenty of room for improvement!
Lesson 5: Work continuously to have multiple sources of funding available. Hard money, private money, bank financing, seller financing when available etc. While I prefer private money given it’s simple and I want to provide unearned income to my investors, interest is typically the most expensive line item, so have options.
Lesson 6: Pad your numbers on the back end for a potential seller's assist. In our case, we had an unexpected chimney and structural issue that resulted in a several thousand dollar credit at closing to buyer.
BEFORE / AFTER (too bad I lost my before photos!)
My Main Focus
I’m committed to paying $1,000,000 of passive income to my investors from 2017-2021, between flips and apartments. For years, paralysis by analysis held me back. Shifting my focus to helping my investors build wealth was the mindset trigger I needed to stop worrying so much about ME and take more action. I now focus the majority of my time on securing new investment opportunities with a focus on building long term passive income. I jump on flip opportunities as they arise. I’ll continue to share transparent stories on both flips and apartment investing to hopefully inspire others to start down their path as well.
Paid to Investors to Date: $80,550 of $1,000,000 (by 12/31/21)
ON TO THE NEXT!
