Flip Summary - Royersford, PA
Deal Summary
I came across this opportunity as a straight referral to list the seller’s home traditionally as a licensed agent. Upon our initial conversation, her extreme level of motivation became readily apparent. The seller had already abandoned the property due to concern over mold (that was not actually there). I laid out multiple options, from a traditional listing to a cash purchase to subject-to. We ultimately agreed that me purchasing the property subject-to the existing mortgage was the preferred route.
I had never done a sub-2 before and was determined to figure it out. I connected with various investor friends across the country, received excellent advice along with the form templates and contract addenda I needed to confidently take this deal down, and serve the seller properly.
Everything was going smoothly until a week before settlement, when my money partner, who I was going to split the profit with 50/50 upon outsale, decided against the subject-to approach. He was not comfortable with the concept and his attorney reinforced that. I pulled the money partner in to fund the rehab. Had I done it myself I could have pursued the sub-2 route, however, my goal was to have multiple projects ongoing at once and leveraging OPM was still at the heart of my strategy.
Needless to say, we shifted course and ended up paying cash for the property. Seller still received the net proceeds that were expected, no problem there.
The rehab itself was cosmetic overall, except for the basement that needed a gut. The previous owner had already rehabbed the kitchen, bathroom and flooring to give me a great head start. My scope of work was to add new HVAC, remove the existing electric baseboard, open and refinish the basement, add new carpeting upstairs, patch/paint the exterior and interior and add new windows. Timeframe was 4 months front to back, with a quick 30-45 day rehab. Or so I thought.
In reality, I would show up to an empty house more often than not. I had used this contractor before with the same issues. The crew did a decent job, however, the reliability was subpar. After some poking and prodding, the crew wrapped things up after about 75 days.
Projections
Purchase Price: $120,000
Closing Costs In: $5,984
Rehab/Holding: $37,110 (includes 10% contingency)
ARV: $200,000
Closing Costs Out: $9,048
Profit: $28,268
Time: 120 days
Investor Cash-on-Cash ROI: 8.7% (28.9% annualized)
Actuals
Purchase Price: $208,000
Closing Costs In: $5,945
Rehab/Holding: $43,961
Sold Price: $208,000
Closing Costs Out: $8,648
Profit: $28,555
Time: 180 days
Investor Cash-on-Cash ROI: 9.4% (20.0% annualized)
Structure
Pulled in a private money partner to fund $160k purchae + rehab, I would come out of pocket for any overage. Created LLC and operating agreement to split net profit 50/50 (I voluntarily gave partner a bit more to get them to an even $15k distribution as a thank you).
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. The second chart is a detailed budget analysis showing projected expenses vs actual. All said and done, I was short $1,171 off my original projections. I’ll take it!
Lessons Learned
Lesson 1: Be specific with the rehab objectives each and every week. Don’t assume your contractor is showing up when you expect them to. Speak to them on Monday, lay out the weekly plan, hold them accountable end of week to that plan. Keep the pressure on.
Lesson 2: Use a plumber for even the most basic plumbing hookups. A leaking toilet not only sent my water bill through the roof, but the contractor had not tightened the toilet properly, causing it to leak through the floor into the covered porch below. Thankfully it was an exterior space, had it been the kitchen on the other side of the wall the cleanup would have been more extensive. Still, that was nearly $1,000 down the drain in avoidable water and restoration charges. The water company gave me a slight leak adjustment, enough to enjoy a meal at Wendy’s.
Lesson 3: Instruct your contractor to request permission for changes and the associated cost before the work is completed. By not having appropriate oversight weekly with the contractor, his crew took it upon themselves to perform work not part of the original scope. While I certainly want a proactive contractor on my team, their approach to keep inventory of all extra work performed and ding me on the back end creates conflict and eats into profit. Having to negotiate down from a surprise $8k bill on the back end can easily be avoided with proper expectations and oversight.
Lesson 4: Ask the neighbors to keep an eye on the house. Be respectful. Get them on your side. I did not do a great job with this on this project. Once rehab was complete and house was under contractor, it snowed and I forgot all about snow removal. The kind neighbors decided to thank me by piling all snow into about a 12’ pile on my front sidewalk. Needless to say, the township wanted that removed. I guess next time I should remember to shovel the sidewalk.
BEFORE & AFTER
ON TO THE NEXT!
