FlipBlog 2 – So fast, who knew?
Alright folks, it is time to tell the tale of flip number 2. Before I get into it though, I feel like I forgot an important detail as to how I find properties.
Let me start by telling you, it ain’t easy. It’s a byproduct of what I call the “HGTV Fan Epidemic” where everyone watches Chip and Joanna Gains go out and grab some cheap piece of junk and turn it into a gem. Whatever show is your preference (I think I may have a thing for Joanna Gaines myself) the bottom line is the same. They make it look easy, they make it seem profitable, and they increased the competition by a TON. So thanks for nothing HGTV!!!
To say that you have to kiss a lot of frogs until you get your prince/princess is an understatement. I am talking – bring your latex gloves, your sanitizer, your flashlight, your tape measure maybe a hard hat and even in some cases a weapon to defend yourself.
When you think “worse house on the block” you are probably thinking of something nicer than what I walk into on a daily basis. On average I look at 10-15 properties and write offers on 3 before I can get one accepted.
Nearly every viable property has a lot of interest, draws multiple offers, and you end up feeling lucky to have overpaid for the opportunity to take a big financial risk and hopefully return a profit. As I said in my last blog, this business isn’t for the faint of heart. You’ve got to be ready to offer all cash of $100,000 – $250,000 just to buy it and that’s only the beginning. You better be ready to apply for permits, make material choices, and trust in your team!
I bring you now to the second flip project we have going…AND here we go!
THE SUBJECT PROPERTY
This one started somewhat serendipitous in that the subject property is only about 6 minutes from where I live in the middle of nowhere in the SW Metro area. When I saw the listing pictures on the MLS I could tell right away that it was a potential deal.
More importantly, than the location was the fact that it was presented so poorly on the MLS that it had me salivating. The pictures were slanted, low-quality pics that look like they were taken on an iPhone 4S (I am an Android guy and your iphone sucks) Yes, I left that kool-aid party.
The notes on the MLS said that there was a plumbing issue but no details…? When I went to go look at the property initially there were 2 feet of snow in the driveway, nothing had been cleared. I had brought my 5-year-old son along with me to view and so I ended up having to carry him through the thick tundras uncleared front walk to the front door…hazards of the job.
At first glance, every aspect of the home looked like it had been either beaten up or deferred. The front door looked as though it had withstood a siege. Everything was original, dated, damaged or stained. Pair that with no heat or running water…yeah this was the place for me!
With my 5-year-old staying close behind me and my trusty $10 flashlight in tow, I fumbled through the dark to take some quick measurements before the cold caught up to us and we had to depart.
The property had been vacant for three years and was bank owned. The agent on the other side representing the bank couldn’t give me any information on the plumbing issue. They were asking $219,000 and the comps in the area for this size supported an after repair value (ARV) of about 280-290k and growing by the day. The house 4 down from this one had been on the market for a few days before going under contract for 325k. Even though this comp was much bigger, it was so close that I felt it validated my assumption of the value.
I had to do two things, and do them quickly!
Figure out what it would cost to bring it to a sellable turn key condition.
Win out over all the other HGTV overnight investors trying to thwart my dreams.
I started the process for both simultaneously and went back to the property, this time with my maintenance coordinator Nick. Now Nick is fairly new to my company and I was training him on the fly (as if I had any business doing it in the first place). We walk the property and this time took proper dimensions. We discussed all the things that we needed or wanted to replace. We took copious notes, and then we entered our findings into my customized “Scope of Work” sheet.
This scope sheet allows us to walk through every aspect of the home from the demo stage from the mechanicals to beds, baths, kitchen, living room or other features and gives us the ability to go through line by line to estimate the cost. In case you didn’t already know, attention to detail on your expenses is paramount to not only making a profit but knowing if you made a profit at all at the end of the day.
We came up with our estimate repair costs before we even ran it by our contractors. So we were taking a bit of a risk proceeding with those figures, but at the same time this whole business has a lot of risks, and I am a bit of a cowboy so away we rode.
I went to the listing agent and sent him an all cash offer of 204k to close in a week. I figured that even though I was coming in at 15k under asking in a hot market, my hope was that the crappy way the home presented would behoove me. I began to learn at that moment that buying property from a bank is such an unemotional and slow process. I mean think about it…the house has been empty for 3 YEARS and they just finally got around to listing it. So what happens now?
We did end up going back and forth over a few weeks over this deal. Part of my emphatic plea to the listing agent went something like this – “Look man, I am a broker, I am a general contractor, I am a cash buyer and I live in the area. I can close super quick!” All sorts of other quasi begging you could imagine, all the while trying to justify ME as the best option to get this to the finish line. Luckily for me it worked. The agent, the bank, or whoever decided that I was appropriately compelling and chose to go with my offer…success. We ended up closing in a few weeks, but only because of the bank’s timeline.
THE REAL WORK BEGINS
Since taking possession there have been a few gaffes with repairs already.
The first was we didn’t get the furnace replaced right away. This took almost a week. Thankfully again by a little luck it started to warm enough inside for my demo team to get started. The second was with the plumbing issue, remember that unknown issue the agent knew nothing about? Well, we soon found out for ourselves. The actual repairs needed to resolve the issue went well enough, but the city of Burnsville wouldn’t turn on the water.
I had to call them, set up an account, send my plumber to apply for the appropriate permit and schedule an inspection. At the time of the inspection, the overly zealous inspector nearly put my burly contractors into tears by threatening to shut the job site down over a lack of permits.
Much to my surprise (and chagrin) the city of Burnsville requires a permit if you want to change a light bulb…OK so I may have taken it too far there, but seriously I needed a permit to replace a faucet, toilet, shower valve and so on. To make it even more interesting because I was replacing the counter-tops, the city also required an electrical permit to replace the existing kitchen outlets with GFIs to bring the kitchen to code…good to know.
I can easily add a page to this blog by going off on a political rant, but I am going to bite my tongue and be diplomatic.
We’ve since applied for all the permits, and are awaiting their feedback. Luckily for us the inspector seemed to cool off on his desire to shut us down after he realized that we had pulled permits for the HVAC and plumbing work already, and it was only the standard stuff that you shouldn’t ever need a permit for that we didn’t also apply for a permit to perform.
More to come on this flip, it’s not quite over. Lots of details regarding the scope of work, material choices, and I am sure more missteps as we fumble our way through the business of flipping in 2019…stay tuned.