How a First Time House Flip Went Bad
By Scott Ames
Let’s call him John. A bright and hard worker just trading time for dollars at his regular job. His first house flipping experience could have been a lot better.
John was watching “Property Ladder” on the A&E network one day and got the bright idea to flip a house himself. After all, those people were making money. A complimentary show “Flip This House” confirmed that money could be made, lots of money.
If you haven’t seen Property Ladder, it’s a television show that features first time home flippers. Usually in that show the inexperienced flipper, egged on by Kirsten Kemp, make almost a year’s salary or more by fixing up an old house and selling it. Kirsten Kemp is a veteran of flipping houses and is a bit too pretty to be mistaken for Bob Vila.
John figures that the people featured in these shows are not all that bright and certainly he could do as well. With a bit of nervousness John put a 10% down payment on a home that needed repairs and begin the repair process. Or did he?
The first thing John did was to ponder what really needed to be fixed and if he needed a contractor to do it. Two weeks went by.
After getting several bids, John chose a contractor to come in and totally renovate the property for $11,000. That included paint, carpet, appliances, and a new wall to turn an open area into another bedroom. Once it was agreed, the contactor was to start working. As luck would have it, the contractor had some unfinished jobs and couldn’t start for another two weeks. John was patient, after all it was going to be a great flip and he was going to make money. It was just another $800 for an extra month, no big deal.
Once the contractor started he stared with a bang. Just like on the show “Flip this House” a big yellow dumpster was deposited on the lawn and a crew started ripping out wall paper and junk from the house. That demolition lasted about two days.
The next thing this “go getter” contractor did was to disappear for another two weeks. The excuse: Men had quit and another job was pushing them behind.
To make a long story short, the contract took 8 months to get nearly complete, and then John pulled the plug and fired the contractor.
John paid others to come in a finish what was started. He had now 9 months of house payments into the project, 10% down, and construction costs.
After the house was ready, John listed it with an agent, and it sat another month. John lowered the price a bit with the prompting of the agent, but got cold feet after two weeks and wanted to raise it again. Too late! The house had a full price offer. Good news, sort of.
All said and done John made a little money and got a whole lot of experience. It was a flop, but at least he didn’t lose money.
Let’s review what John, now wiser, could have done differently on his first flip.
Firstly, putting 10% is ok, but not ideal. John should have used private money or have financed the property at 100%. That money could have been used for fix up rather than being tied up in the property.
Second. John waited too long to decide what he was going to do. He should have known before he bought the property what his plan was. This would have saved two weeks at least.
Third. While John got a referral for the contractor, he should have gotten more bids. A deadline for the completion of the job, with penalties, should have been written in the contract.
Fourth. John waited too long to fire the contractor once he knew there was a problem. He was afraid that he would still owe the full amount if he terminated the contractor before the work was done. A proper contract would have prevented that fear.
Sixth. John listed with a realtor too early. The property should have been for sale by owner from day one and John should have tried to market the property himself.
Seventh. The price was set, and then changed too quickly. Better marketing would have netted John with a nicer profit. John should have known the selling price even before buying the property.
A lot of mistakes were made, but John still made a slim profit. All is well that ends well, but you don’t need to make these same mistakes. Learn from John.
Scott Ames is publisher of BirdDogCity.com a website dedicated to those interested in flipping houses for profit, either retail or wholesale. You may visit the site at http://www.birddogcity.com
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Southern Investor's Comments on the Article:
A quick review of these seven deadly sins.
1) If you are going to get a mortgage, you will be paying at least
ten percent down these days. The 100% NOO loan is gone, at least
for now. (NOO=Non Owner Occupied) The private money route is
still an option. If you need hard money, we know a group who is
lending in the $50,000 to $500,000 range. If you use hard money,
though, be aware of what it will cost you to carry the loan.
(Actually, that's always good advice, but especially so with hard
money.) If you have enough equity in your personal home, you can
get a home equity line of credit at a much better rate. Now, I
suspect that some banks are uncomfortable with the idea of you
"flipping" homes with that LOC. However, they seem
perfectly comfortable with the idea of you purchasing the property on
the LOC and refinancing (a good option for a long hold) or holding the
property on the LOC during a lease-option.
2) Delays are deadly in investing. Line up your money before
you decide on a property. Have your plan set before you make an
offer. Investment Real Estate not only moves quickly, it must move
quickly. Before a contract is signed, delays cost nothing other
than lost opportunity. After the contract is signed, it means
money out of your pocket.
3 and 4) Excellent advice.
5) Oddly, no fifth mistake is listed. Did you notice?
6) Southern Investor supports working with Realtors. There are
a few options here. The idea of selling quickly at full retail
without a Realtor is unrealistic.
The first step is to determine what is most important. The
answer needs to be time and money. If planned from the start, an
investor should be ready to unload a property at a discount and still
make the target profit. The discount buys time--time you're no
longer responsible for the property, time you're no longer paying a
mortgage, time your money is not tied up, and time you can invest in
another project. If you choose to use a Realtor, you can consider
a 5% discount to market value. If you sell it on your own, go for
a 10% discount or more. Be sure to advertise the fact the property
is listed at a discount. Prospective buyers need to know they are
looking at a deal.
Either way, you're looking at about 10% off the price of the home in
discounts and commission. Add to that your other closing costs and
that's a big chunk. That's why buying right is so important.
A property 15% below market value is a great retail buy. It can be
an investment property if the numbers work to make it cash flow as a
rental. Maybe you could line up someone with a lease-option before
you close. However, 15% gives you no room for a comfortable flip.
When you are considering a purchase, look at the ARV (after repair
value) and subtract that 15% off the top. Then subtract your
estimated repairs and closing costs. That number gives you your
break-even point if nothing goes wrong. What you negotiate below
that number is your comfort zone and your potential profit.
7) Without knowing the market and how the original price compared,
it's hard to comment here. In general, though, it's easy to look
at a full-price offer and gripe that you could have asked for more, but
that's spitting on your blessings. Know your market and know your
plan. Second guessing yourself later won't make you any money, and
it will rob you of the joy of the deal
For more information see the e-book: The
10 Deadly Sins of Renovating for Profit
You're due for a touch of Southern Profitability. Southern
Investor is your real estate investment resource, presented by Wade
Ogletree, Century 21, Professional Services.