How did we find the seller?
The seller was on the market back in 2018 but wasn’t able to sell his property at that time with the listing price that he had put the property at initially. I reached out to him as a licensed real estate agent, to see if he would be interested to put his property back on the market as a traditional listing but he mentioned that he wanted nothing to do with the listing process, he wanted an investor to buy the property in as-is condition.
Back in the day when I would come across sellers wanting to do house flipping, my mind was just thinking about working with the sellers as a traditional real estate agent and making a commission versus thinking about it from an investor standpoint on house flips. Now as a more seasoned real estate agent and investor, I give the client exactly what they want. If they want to do a listing, I do exactly that however, if they want a private cash offer, I’m happy to go in that direction and serve them.
What are some of the lessons I learned when flipping houses?
First and foremost, I always flip under an LLC (Limited Liability Company) which reduces some of the liability, and for tax purposes, it’s better. Talk to your accountant about this option.
Secondly, I realized that the 10 pages of the California purchase agreement can be kind of confusing at times, especially when you have other investors offering a 1-page or 2-page contract. Whenever you are working with a client, it is different than when you are buying a property. Always keep it short, simple, and easy for them.
What was the original offer on the property and how did the negotiations go?
In the negotiations, my original offer to the seller was $510,000 but the seller informed me that they had a higher offer on the table at $560,000 and asked if I could match that offer. Unfortunately, I wasn’t able to match this offer because I didn’t think that I would be able to make money, be profitable or earn income at that price and I advised the seller, to go for the higher offer price. After further discussion on the property, he also informed me that the other offer of $560,000 had extra conditions such as repairs and that he was more comfortable with my offer. We ended up settling at $520,000 plus closing cost, the price came up to $525,000
How do you calculate profit or margins on a flip?
MAO (Maximum Allowable Offer) = (After repair value x 85%) - repairs
* After repair value is the value of the property after you have done all the repairs
** The 85% covers commissions, taxes, insurance, holding costs, and profit
Our flip margin
$ 639,000 (assuming the property would sell at this price) x 0.85- $20,000 (repair costs on the property)
MAO= $523,000
You can play around with the 85% if you want to be a little bit more conservative or aggressive. Remember, the larger the number, the more profit you are going to make!
What are some of the costs associated with a flip property?
The cost breakdown for this particular property was a follows:
Purchase price: $520,000
Seller closing costs: $5,000
Buyer closing costs: $5,000
Total cost= $530,000
Always factor in the holding costs if you are not buying in cash. So this will be the interest rate if you are looking to borrow from a bank/ lending institution. Whenever you are purchasing the property, you get to choose how much to put down as the deposit, the more the amount you put in as downpayment, the lower the points and the lower the interest rate. The less the downpayment, the higher the points and the higher the interest rate.
In this case, the loan amount was $ 364,000
There were 2 points charged which came up to approximately $ 8,000
Charged interest rate of 10%= $3,000 per month
Taxes= $500 per month (the taxes are always based on the purchase price)
Insurance and utilities
Total cost = $ 567,000 (break-even point)
What was the renovation budget and what did you spend it on?
The actual budget was $20,000 but we spent $18,000 so we were $2,000 under budget.
The breakdown was as follows:
Carpet- $3,000
Paint- $12,000
Bathroom reglazing- $ 1,000
Staging the property and miscellaneous costs- $ 2,000
The old me, when I was renovating properties would have wanted to renovate the entire property even if it had a good kitchen, I would have wanted to update it to the most modern one with top-notch appliances. Now, we do as much as we can to make the property functional and modern and this does not necessarily have to be a full home renovation!
What are some of the mistakes that you made earlier on in your career in flipping?
When flipping homes, one of the mistakes I made earlier on was not staging the properties flipped meaning that the buyers would walk into a property that they could not really visualize what the property would look like after they bought it. Now, for all our flips, we do staging and even offer this service to our clients because I have realized that it is very important to guide the potential buyers so that they can really visualize their future homes as this increases the home’s perceived value.
What did I sell the property for and how much did I make?
We ended up selling the property at $757,000 while it was originally listed at $ 675,000. We increased our original listing price because a house on the same street came in the market and was being sold at around $700,000 and had no pool. So we had a bidding war that took the property price even higher than we had anticipated.
From the $757,000, there was $ 45,000 in commission, $26,000 came back to me because I am a licensed real estate agent and so I can list and sell my properties and there was approximately $7,000 in closing costs.
This made the final profit on the property= $164,000
This takes into account the money that we made from the property and the $26,000 in commission. Originally, I was only expecting to make between $20,000- $50,000 but the marketplace ended up appreciating during the time that I was holding the property which really benefitted me. Not all flips go like this, some of them take longer to sell. My advice is that the faster you can get in and out, the better off you will be.
