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Posted at 05:30 AM ET, 11/28/2012

Flipping houses can come with its share of headaches

Back in June, I purchased a small bungalow in Capital Heights.  It was my first project there. 

I couldn’t resist the area’s abundance of opportunity, the reduced competition and the large number of homes in need of some loving care.  This particular home was on a nice quiet road backing to woods. The home had nice curb appeal, good bones and a great lot.  It also came with new siding and many new windows.

 

But what initially appeared to be a slam dunk turned out to be my worst deal since I began flipping houses. My experience shows how lots of unexpected problems — including damage from thefts that insurance didn’t cover — can end up costing lots of money in fixes that can dramatically eat into profits.

One of the first problems we encountered were the hardwood floors, which were in terrible condition and could not be saved. The plaster walls were also in very poor shape. The kitchen was small, dark and closed in.

One of my best contractors and I came up with a plan that maintained most of the home’s original layout and charm.  The kitchen would be completely remodeled and one wall would be opened to better join the kitchen and dining areas. The two bathrooms and one half bathroom would get complete make overs. 

Since the hardwood floors were not salvageable, we would install wall-to-wall carpet in every room, except the bathrooms and kitchen. We put a slate tile floor at the entry to add some interest and help protect the carpet.  The old oil furnace would be removed and replaced with a new electric heat pump system. 

In the basement, we finished off a large game room and left the rest for storage and utility.  On the outside, we replaced the old roof, and in the front yard added sod and some simple flower gardens and just gave the rest of the yard a general clean up.

For all this work I budgeted $85,000 but I was hoping we would be able to get the numbers down closer to $80,000.  This project was going to be tight either way.  I really needed it to go smoothly but it was not to be.  Soon after renovation began, the contractor showed up to find water gushing down the street.  Someone had stolen the water meter from the home.  They didn’t just steal it, they ripped it out of the ground.  When they did this it destroyed the entire water line from the street to the house.  We had to dig up and replace the water line at a cost of nearly $2,000 when it was all added up.

As the work progressed, we found that the home needed a lot of drywall and electrical work.  Progress was slow but after about two months the home was complete and it looked good. We put it up for sale at $189,000.

I put security alarms in all of my homes and one morning I woke up to find a call from the security company had came in on this property at about 3 a.m.  I knew it wasn’t good.  The home had been broken into and to top it all off the security company never called the police because all the proper paperwork had not been completed with the county.

The burglars had gained access to the home by kicking in the basement door.  Then they went up and smashed the alarm panel.  They didn’t take anything from inside the home.  Instead they tried to steal the outside air conditioning compressor.  I had a security cage installed around the unit but they apparently hooked a vehicle to the cage and tried to rip it out.  They didn’t get the compressor but they did destroy the cage. 

After this break-in, I replaced the destroyed door with a security door and I added security doors to the two back doors. I also replaced the air conditioning cage and repaired the concrete slab it sat on.  The main alarm panel was destroyed and had to be replaced as well.  Damage from this event again pushed the $2,000 range.

Eventually we got a contract on the home but when the buyer’s home inspector showed up to the home he again found water rushing down the road.  The water meter had been stolen once again and water had reached the home and seeped into the basement.  Luckily they were nicer about stealing the water meter this time.  They didn’t destroy the entire line but the water had soaked some of the carpet in the basement.  We had to replace the pad, do some touch up painting and dry out the basement.

In total, break-ins on this home cost us between $5,000 and $6,000 and destroyed all my hopes of coming in under budget.  And, no, the insurance doesn’t pick up those costs.  I have to get a builder’s risk policy and they do not cover theft.  The break-ins also forced me to be more flexible on my concessions with potential buyers.  I was hoping that I would get closer to $200,000 for the home and pay modest closing costs.  I ended up accepting $189,000 and paying nearly $8,000 in the buyers’ closing costs.

Here’s how the numbers came out:

I bought the house for $65,000 and paid about $4,500 in closing costs, taxes and transfer fees.

I spent just over $86,000 in repairs, insurance, and utilities.

My total costs upon completion were about $155,500.

I sold the home for $189,000 but from that I paid $10,500 in real estate fees; $5,000 in sellers’ closing costs, taxes, transfer fees; about $7,600 of the buyer’s closing costs; and $4,600 in interest. 

This left a net profit of about $5,500.  This was my worst deal since I started flipping homes.  By the time you figure in my travel and overhead costs, the amount I was paid for the project would be paltry.  The market is certainly getting tighter and less forgiving to mistakes and surprises.

Read more about Pierce’s experiences as a real estate investor

Justin Pierce is a real estate investor in Northern Virginia. In his occasional column, he will write about investing in real estate.

 

By Justin Pierce  |  05:30 AM ET, 11/28/2012

Tags:  investor

 
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