An example of a ‘fix and flip’ house

Like I said on Saturday, I went to a BBQ where attendees were able to walk through a current fix and flip house.  I was able to meet my mentor again, and luckily he remembered me.  There were about 2 dozen people there, most of them were “newbies” like myself who just wanted to learn as much as they could.  When we got to the house, apparently the exterior was already done (you can see before and after photo,) but the interior was in the middle of the upgrade where everything was pulled out already.  The kitchen was totally gutted, the bathrooms had no toilets, the bedrooms had no carpet, etc.  Everyone was given a sheet of paper and a pen, and we all had 30 minutes to walk through the house and guesstimate the repair costs.  I had NO CLUE whatsoever.  I didn’t know if a window cost $100 or $1,000, and so I just walked around in shock.  Clearly I’ve been watching too much HGTV because I was expecting the Property Brothers to have knocked down the wall that separated the dining room and living room (to make it one big open space,) but the flipper decided against it.  I think that’ll be something I learn as I go – deciding what to upgrade and what NOT to upgrade just because the ROI is different for each item.  For instance, if they had knocked down the wall, they would have had to add a support beam that may have run $10K, but how much more would the house have been valued?  Anyway, I wish I had taken more photos, but these are all that I have.  We’ll run the numbers after the pictures.

The Math

This house was in Bremerton, Washington, which is 1.5 hours away from Seattle, but not totally in the middle of nowhere.  The house was 2500 square feet with 4 bedrooms, 3 baths, and will have a finished basement.  It was bank-owned and listed for $192K.  It was sold for $212K.  Houses in the area (aka the comp aka comparative value) were around $360K.  This is why you need a good real estate agent because the number they give you will make or break a deal.  The estimated cost to fix the house came out to be around $60K and that involved fixing the roof, new windows, new kitchen, new bath, doors, carpet, paint, fixtures, etc.  That meant the total cost was $272K.  If the house sells for $360K, you have to subtract out the 6% realtor fees, maybe 2-3% if you pay for the buyer’s closing costs (YMMV depending on area of country), and because the buyer borrowed “hard money”, another 4% perhaps, so total fees come out to be about ~12%.  360K * .12 = $43.2K = $317 net minus 272K costs = ~40K profit.  $40K / $360K = ~11% profit margin.

Hard Money

Some people may be asking what “hard money” is; it’s basically when you don’t have the 212K to buy the house, you find someone to lend you the money (NOT A BANK) at a going APR of 12%, so about 1% a month.  Since this rehab will take about 2-3 months and figure another month to sell the house, that’s 4 months of borrowed money.  I realize the 4% should be applied to the $272K and not off the $360K, but the rule of thumb is about 10-12% selling costs if you borrowed hard money.

Finding the house

Now the question is – how did the buyer find this house?  Well since it was bank owned, I believe it did hit the MLS since there were multiple bids on the house.  For how long, I’m not sure.  I’m not sure how long it took to close either.  But the buyer had to have had a good relationship with his realtor to find him the opportunity, and that’s why networking is key in this business and virtually any business endeavor.

It’s not an HGTV house

Now what if there were unexpected repairs?  Well there will always be that risk.  Just like there’s risk in everything.  That’s why you should try to factor all of these things in before you bid on a house.  If you haven’t watched Property Wars, you should.  Don’t know what it is?  Google it.

Anyway, as I was walking through the house and the master bedroom, at least there was a walk-in closet, which you walked through to get to the master bathroom.  Please don’t picture an MTV cribs master bathroom.  I really wish I had a picture.  Anyway, the master bathroom had a  standup shower and no bath tub.  I guess the owner decided to just rehab the shower while I would have liked to have put in a bathtub instead.  Once again, you have to decide the ROI on everything.  I kept having to remind myself that I’m not the one that’s going to live in this house.  The future buyer doesn’t need a tiled rainfall shower.  They don’t need stainless steel appliances.  They don’t need a granite counter-top.  The goal isn’t to make the house the most expensive house on the block.  You just want to get it from the lowest to the middle of the pack.

What now

Like I said, I talked to my mentor when I first got to the house.  While I was talking to him, a lady approached us, and she recognized him and struck up a conversation with him too.  While they were talking, I overheard her mention Bigger Pockets, which I ONLY recognized because of Frekwentflier’s comment to my post on Saturday (hey buddy, if you’re ever in Seattle, I owe you a drink.)  Anyway, after a little bit, my mentor walked away.  I was at that crossroad in life where I could either introduce myself to her or turn and walk away like the introvert that I am.  Well, I didn’t drive 1.5 hrs to be a hermit.  I then turned to her, introduced myself, and yada yada, it turns out she started up the Seattle chapter of Bigger Pockets.  It was like the moon and the stars and even Pluto lined up!  Turns out she’s also a realtor, an investor, basically a full-service person who could help me with my first fix and flip.

Later on at the BBQ, I was able to talk to my mentor some more, and he mentioned he had 2 houses that he was about to send out to his buyers’ email list.  He told me about them, and I told him I was very interested.  I then told the realtor I had met about the 2 houses, and she then talked to him about them some more.  I then called up my financing buddy, and he gave me the green light.  Next thing you know, the 3 of us hand-shook on the deal, and as I type this on Sunday night, the realtor is running comps on the 2 possible houses.  My mentor said he’ll walk me through my first fix and flip.  He decided not to do the flip himself since the margin wasn’t high enough for him, but for my first house, profit margin wasn’t a big concern.  My buddy just wanted me to learn the entire process, so if it breaks even or even takes a minor loss, we are okay with it.  The learning experience will be worth the loss.  So now I’m super excited.  My realtor had said, “The rush you get when landing a deal is like no other,” and while I’m not there yet, I can feel it coming.  Reselling is my passion (see my 15 years of eBay), and this is basically the same thing, just on a much bigger scale.  Like my other buddy said, “Reselling Kohl’s blenders is small time.  You need to be doing this instead since you love reselling so much.”  Couldn’t have said it better myself.