Potential First Flip

Rehabbing, Fix and Flip, Rental Properties
1

My wife and I are looking to flip our first home. We’ve identified a town that we think will be ideal. It’s a little over an hour away from us, but it’s a beach town that is undergoing a revitalization. There is a lot of private development going on, but you still see a mix of nice and not-so-nice houses, so we think this is a great town to try our first flip.

We’ve identified a few block radius that we would like to focus on and met with a realtor for the first time today. She showed us a house listed for $350k that needs the kitchen, bathrooms and a lot of cosmetic work (carpets, painting, landscaping, etc.)

The agent we met with is also the listing agent (should we be concerned at all) and she thinks the seller will go to $330k if a buyer can prepare an easy transaction. The price of this house is higher than we were originally looking for, so I’m not 100% sure what the ARV will be yet - my hunch is that it will be in the $500k range, but I will have to confirm this with some more research.

Now my questions:

  1. What is the best way to determine your repair budget - this would be our first deal, so I want to make sure we are as realistic as possible. I estimated $30k including holding costs, but I don’t know if I’m WAY off. If this is accurate, I think this would be a good deal if I can get the house for $320k.

  2. What is the ideal entity for a flip. I read in an article on the site that an S-Corp is best for a flip. Do you agree?

  3. FINANCING - I’m probably most concerned about this. I have very good credit (780), but not really any cash to put down. Is a hard money loan my only option. I’ve been estimating 5 points and 14% for 100% + rehab costs. I would like to take it out for 6 months in case the rehab and sales time takes longer than expected. I know I’ve got to talk to specific lenders, but is this reasonable? Would I be wasting my time talking to anyone but hard money lenders?

Is there anything else I should be considering at this time. Any help would be appreciated.

2

with a 780 you should be able to get many different conventional loans with good rates at 10%. FHA loan definetly will do 100%. I would also talke to a bank about a line of credit for the rehab money.

3

First off let me say this… Everything I’m going to tell you I’ve learned FIRST HAND.

Your realtor will show you comps today that in 6 months he/she will act as if they’re for houses on Malibu Beach. (Those days are over, the market is transitioning)

It will take longer than 6 months to purchased, fix, market, and close any deal for a new flipper. IMO (especially NOW)

What type of income do you generate? You mentioned you have little cash, If you’re betting the farm on this deal and you can’t hold the paper easily, this will not be a pleasant experience for you.

I’m not familiar with the area you mentioned. If I were you, just starting out, I would try something for substantially less money on my first flip. Remember this is uncharted territory for you. Be patient and make your first deal a home run. This is just my opinion, but this is when you will make all your mistakes. If you find a great deal that you can by for let’s say $125,000 and net $30,000 there’s a lot of fat there that can cushion you if you screw up something, and we all do.

People love watching these real estate shows on TV. It’s fantasy land! I’ve never flipped a house I my life and completely furnished it from top to bottom, what the hell does that cost? The numbers they furnish on these shows leave A LOT to be desired.

This is just my opinion. But I’ll leave you with this thought.

If you were starting a restaurant would you buy the most expensive one you could afford, or work your way up to it by letting your new business buy it for you? It’s the same with real estate. Start small, make small mistakes, have small delays, small sets backs, and yes smaller profit. But, bite off more the first time and it can very easily be your last. People get hurt in this business EVERYDAY.

4

Bingo!

TV land never subtracts the 18,000 to 60,000 dollars in realtor fees or the 12,000 to 24,000 in carrying costs AND the 2,000 to 4,000 in Property tax and Insurance.

All of those shows were also taped 8-9 months ago when the market was much different.

Don’t be discouraged. Profits can be made, what they show is just not realistic. 25k is a nice yearly income for a lot of folks.

5

First of all, thanks for all the info – I’m familiar with a lot of your posts and I appreciate you taking the time to help me out.

I’ve decided to pass on this house (and town in general) simply because it’s too far. We live over an hour away and I’d feel more comfortable finding something closer to home.

We are trying to identify local towns that make sense and are reasonably priced – I’m doing some Internet research this week and will be driving through a few towns this weekend. I will be focusing on some of the denser areas, but my concern is that there tends to be a lot of renters and I’m afraid when it comes time to sell, it might take a while. I will have to discuss this with some realtors this weekend and see if it’s a real issue to be concerned about.

I don’t think my wife would feel very safe working in some of the towns where we can pick up a house for $125,000, but I’ll look into them.

I just started a new job – right now my wife and I make about $110k in salary, and I should get a $20k to $30k bonus next January.

We just climbed out of debt, so that’s why we don’t have a lot of cash available. I would be thrilled if we could net $30,000 on our first flip.

I’m in the process of putting a business plan together – hopefully I can start a good enough relationship with some local banks that will allow me to get 100% financing – I’d love to avoid hard money lenders if at all possible.

6

The best thing I ever learned and have found to be the most true is from Dolf DeRoos who said the deal of a lifetime will come along about once every week!

7

I think you’re making a wise decision passing on that house in your post. The one hour commute would have been brutal. You will not believe how many trips you will make to your first flip. The problem is you forget things at home that you end up needing. You’re trying to save money so you don’t want to buy something you have in your garage. Good move passing on that one.

Know my next gem for you is this… I know lots of people buy houses for flips from realtors, it a good source. BUT, the best DEALS are the ones you sniff out yourself. the best scores I have made all came from private owners who didn’t have their homes for sale. Drive around, look for houses that need work. Get business cards and pass them out to everyone with a “$1000 finders fee” for whoever brings you a deal. Someone living next to a potential project can make a grand by putting you in touch with an owner, that’s a lot of money for no work.
Be creative. it sounds morbid but I have sent letters to peoples homes from the obits. Make the letter very general. “I buy houses and contents, take care of clean outs and buy all property AS IS for cash with NO WARRANTY.” call 555-555-5555 People can be pack rats, If someone gets left a home filled with junk and can unload it with a phone call and not fix anything? You will get calls.

Stay away from bad neighborhoods they’re like selling junk cars. Spend your time digging for deals and remember you NEVER get a great deal on a car from a car dealer, same thing with realtors.

8

Also don’t forget the federal income tax on short term capital gains, state income tax, and self employment tax. In my state, that would be like 25-28% federal, then 5% state then another 15% self employment tax. So that’s 45-48% of profits. A guess a no income tax state would be a little bit lower.

As for the best deals not coming from realtors, it all depends on the seller. The seller decides the purchase price. Motivated sellers will sell at a nice loss and they might not even think so if they’ve had the property for a long while.

Also forget about getting good advice from the listing broker, they always represent the seller unless you’ve signed some sort of disclosed dual agency agreement. Either get your own buyer’s agent or don’t ask them for advice on what to offer, they’re not there for that. People seem to think that going directly to the listing broker will get you some sort of a discount, but major firms won’t do it, after all they’ll have to do twice as much work, why shouldn’t get they paid for it?

I see lots of people who come into our mortgage office with a deal they bought from the listing broker and none of them got good deals, we just want to do the loan so we never say anything.

9

I hope you skip on something that far away…by the time you’re done driving over 2 hours roundtrip to and from you won’t want to do much work. I drive that far for my day job, it sucks. If I didn’t have bills to pay I’d defintely be skipping that commute. Try to find something closer…

10

Thanks for all the advice - we’ve identified a town about 30 minutes away that I think might be great (good schools, high % of ownership, close to shopping, parks & transportation). My wife will be driving around the town Thursday and Friday to let me know if there are any potential targets. I think we might be able to find a few homes in the $150,000 to $200,000 range.

Does anyone have any comments on my other questions?

Is an S-Corp ideal for flipping? My accountant is so busy this time of year, it’s tough to get him on the phone. I will talk to him before I actually set something up, but I’d love to hear your thoughts.

Also, with regard to the 15% self-employment tax that henryinma mentioned - I’m assuming he’s referring to social security. I should come pretty close to the annual SS limit with my full-time job. My wife won’t come anywhere close to her limit - and she will most likely own 50% of the Corp. Again, I know this is a question for my accountant, but does anyone have a similar situation?

As far as estimating the repair costs, I’ve found some pretty detailed home inspection lists online. I figure if I’m diligent enough with my notes, I should be able to figure out some rough estimates by talking to the right people and doing some research at Home Depot - I will of course add on a generous contingency to allow for any errors in my estimation.

I haven’t spoken to any lenders yet (it’s tough to head over to local banks when I have a full time job - all the branches near my office are the big guys). Although I don’t have my business plan ready yet, I’m hoping to introduce myself to a few branches on Saturday morning. If I can keep my cost of debt down, that will REALLY help us get started on the right foot.

Sorry for the long post - I’m trying to get all my ducks lined up, but sometimes I get the feeling I might be overplanning

11

What I do is take a contractor to the house with the repair list you want to have done. Get him to give you a quote on doing the work…that is the best repair estimate you can have. If at all possible go in with facts not guesses.

12

Just to clarify - you bring the contractor to the house before you even put an offer down, right?

Do you pay them for their time, or is this just their cost of doing business?

13

I make an offer on the house that after the offer is accepted I get 7 to 10 days for an inspection period. During that 7 day period, I take the contractor over and have him give me a bid on repairs. I don’t pay him for that because he is giving me a bid.

I do have an inspector (I pay him $250) and an appraiser (I pay him $450) go over also to make sure I have not bought a pig in a poke.

If any of these shows me that I have overbid, I make a counter offer based on what I have found out or withdraw my offer.

14

OK, thanks. That’s what I originally thought. I’ll be using the inspection checklist I found only to assist me in determining my maximum purchase price. If the offer is accepted, I’ll bring in the professionals.

15

Why do you use an appraiser in the inspection period? Also $450 sounds a little high if it’s a single family, about right for a multifamily though.

I’d get comps so that I knew I was paying a good price so there’s usually no need for an appraiser. Lately every deal I’ve done, the appraisal has always come in over the sale price. Of course I think that’s just a reflection of the down market now.

Deals can fall apart so it’s easier to walk after dropping $250 than $700.

Anyway the other option is to check out a few mortgage brokers, they can shop the loan around and maybe get you better rates. I know our mortgage office next door can beat most banks in this area by 1/8 to 3/8 of a point. We can still beat or match most rates by credit unions. Some it is the luck of the draw though, some have high fees and some don’t.

16

I’ll also give some first hand knowledge:

Ask your realtor to pull a list of houses for sale in your neighborhood. Here in San Diego, you can pretty much go onto Realtor.com and search by zip code to accomplish this. You want an area that doesn’t have a large number of homes available. ie: 92114 here in San Diego has a LARGE number of preforeclosure, foreclosure and REOs. While this glut means that you can go and work a good buy, it also means that you’ll have a hard time selling your home when you’re done with the rehab.

When you have a contractor come in have him quote a complete job, but also have him quote labor and materials seperately. Create a spreadsheet that lists every material that s/he has listed and then go price it for it yourself. After a little while you’ll be able to look at a room and know exactly what it will take dollar wise for materials.

Do not contract of things you can easily do yourself. Demo may not be the most pleasant job, but for the most part it’s exceptionally easy. Why spend money for that? Things like painting, door knobs, cabinet hardware don’t need to go to someone that is making $50/hr.

And finally: Always, always, always get an inspection before you close on the house. Consider it $300 of insurance.

17

You can get an appraisal for about $200, but that appraisal will be based on comps and the condition of the house as it sits. My appraisals contain 3 values of the house. The first is like any other appraisal using comps and present condition. The second uses rental comps and gives an income based appraisal, and the third is the after repair value (which my loan company uses). The normal as it sits appraisal for the types of “trash houses” that I buy will come in at $60k versus the $100k that the after fix up value the house actually has.

This is the kind of appraisal I need to get the 90% loan to value loan which includes repair costs and no money of mine out of pocket.