When a flipping deal works out right

April 30

 


(Justin Pierce)

Sometimes a deal just falls into your lap and it’s really nice when it does. This is the advantage of having an established presence and a benefit that new or part-time investors don’t often get. That’s one of the biggest reasons why I wrote my last post.

My point in that article is that flipping is all about finding the right deal at the right price. Finding deals has become more difficult, especially for the newbie. But there are a lot of real estate “gurus” selling courses that would have you think otherwise.

But let me tell you about one of my latest deals.

Last fall, I purchased a home in North Arlington right off Lee Highway. As much as I like to try to save houses, this one was just too far gone. The foundation had failed and the entire house was tilting. We just couldn’t save her.

The choice was clear. We were doing a tear down. The problem with tear downs is it’s a lengthy process, especially when you have all of your contractors busy on other projects. So while we drew plans and began the permitting process, I stuck a sign up in front of the house. It’s just one of my basic signs simply saying, “Snow Goose Homes LLC, We Buy Homes Fast.” You know the signs. Mine are permanent, not the throw away ones you see at intersections. You know, much classier.

By luck, one of the neighbors was also looking to sell a home she owned. This home was just around the corner. It was only about 1,200 square feet with no basement and it also appeared to have major foundation problems. The problem with this home was that it could not be torn down. The lot that it sat on was too small. The existing home sat almost right on the property line. Modern setbacks in Arlington require that a new home sit a minimum of eight feet from the property line on one side and 10 feet on the other. The lot was only 25 feet wide so if I were to build a new home I could only make it seven feet wide.

Clearly, that was not an option. So without the possibility of building new, I had to make my purchase price low enough that I could afford to spend $125,000 in repairs to end up with just a 1,200-square-foot home with no basement.

I’m always very honest with the people who express interest in selling me their home. I never pick apart or criticize the home. I know many people have deep emotional attachments. I never try telling the seller that their home is worth less than it is. I’m no saint — I just think that’s good business. I tell them up front that if they put their home on the open market they will likely get more than what I can pay them. The only things I can offer them are speed and convenience.

I told this nice seller about the home’s foundation problems. I told her what I thought I could sell the home for and I told her my repair costs. And finally I told her what I could offer her as a cash purchase price — $245,000. I even told her that she could probably get much more than this if she listed the home on the open market. I even offered to list the home for her on the open market with a significantly discounted real estate commission at $350,000 because I thought she could get that much. I was very pleased when she responded with a counter offer of $257,000 to sell it now.

We were so close on price. So I asked her if I could get a couple people over to the house to try to better understand the extent of the apparent foundation problem. She agreed and gave me access and a few days to get some inspections done.

I had a couple different structural engineers and contractors look at the home. Unfortunately, there was no access to the crawl space. We could not see the foundation without cutting up the floor or digging up the footing from the outside, which, in this case meant we’d basically be digging in the neighbor’s yard.

So I took a guess. Working with my contractors and engineers I came up with a best-case scenario, a worst-case scenario and the most-likely scenario. We guessed that the renovation still would probably cost about $125,000 based on the most-likely scenario. I made the seller an offer of $250,000 and I would pay her closing costs. To that she agreed and we closed the deal a couple weeks later. Normally, I would close in a week or so but our closing date was delayed due to a snow storm. That’s just how this year has been.

We met prior to closing just because she wanted to meet me. She wanted to know to whom she was entrusting her home. She told me that she’d grown up in that home and that she grew up very poor. Back then, they’d rented the home. When she got out of college, the landlord offered to sell her the home. She told me how she didn’t have any money back then so the landlord agreed to take payments. This is a textbook case of seller financing.

She knew all the old neighbors and she told me who used to live in many of the properties around the house and how things had developed around the neighborhood. But now almost all the old neighbors were gone.

At the closing, she gave me an article from The Washington Post that talked about the area, High View Park. I was surprised to learn that this area was originally a community of freed slaves. An area that was once home to the very poorest now holds million dollar bungalows.

I love old houses and communities like this. It’s such an opportunity and a blessing. An established deep-rooted neighborhood like this really puts the project together for you. I don’t have to make up a plan from scratch — the neighborhood tells me what to do. Having respect for the community pays off by simplifying my project and enhancing my margins. Doing the right thing is always more profitable in the long run.

Yes, I was excited and eager to start but the first thing we did was send crews in to take up the majority of the floor so we could see the extent of the foundation problem. It turns out that the foundation wasn’t the problem. The foundation looked good and stable. However, it wasn’t really good news, all the wood that was sitting directly on the foundation was rotted away. They don’t make homes like this anymore and it’s a good thing. Back then, they didn’t use any pressure treated or rot resistant lumber. Now, any wood that touches earth or masonry has to be pressure treated or some type of rot resistant wood or material. Almost all of the floor joists were also rotted away.

We do not have to rebuild the foundation but we still have to jack up the house as originally expected. Then we have to replace the sole plate or bottom plat (the board that the wall sits on.) We also have to take up and remove almost all the existing floor joists and most of the interior walls on the first level.

In the end, the total price for the renovation still looks like it will come in right about at the $125,000 total, as originally anticipated. Right now, we are still trying to decide on a new layout so we can get plans and final permits.

Now that the home is all opened up, my creative juices are flowing. I found that the home has a nice open attic and I’m trying to have the architect work out a plan where we can have an open loft above the master bedroom. Since the home is too small for any kind of staircase, I’d like them to be able to access the loft with a ship style ladder where there will be closet area or a little office or reading room.

Once we hammer down what the county will let us do and what I can afford we’ll then lock down a set of plans and get permits.

Here are my anticipated costs and income:

 

Project Estimate
Income
After Renovation Sales Price $525,000.00
Costs
Closing Costs at Sale $26,250.00
Holding Costs $6,000.00
Costs of Capital $28,000.00
Renovation Budget $125,000.00
Closing costs @ Purchase $7,500.00
Purchase Price $250,000.00
Total Estimated Costs $442,750.00
Expecte Net Profit $82,250.00

 

In this business, deals can come when you least expect it. Being able to capture those deals when they come is critical. Having a wide network is important to finding that rarest of seller who actually needs or wants to sell their home at a wholesale price.

But most of all, you need the knowledge and experience to know when to pounce on a good deal and when to walk away from a bad one.

 

Read Justin Pierce’s previous posts:

Why you don’t want to flip homes

Remodelers — not consumers — have the upper hand as their workload picks up

At long last, investor’s pop-top house sells

Setback may push Temple Hills renovation beyond Oct. 1 deadline

Crews make up for lost time in pop-top project

With plan approved, race is on to reconstruct house for fall sale

Pop-top renovation becomes pop-back plan

Gone are the low lying fruit of real estate investing

 

 

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