How to Fix and Flip Houses: Case Study #1

by Mark Ferguson

House-Flipping

 

I have bought and sold over 70 fix and flips with my father over the last ten years.  Fix and flip projects were what I first loved about Real Estate and kept me going until I discovered the world of REO.  I loved and still do love finding properties, deciding what to repair and then selling them for a profit.  There are many ups and downs in the fix and flip world.  There are many unexpected expenses, legal issues and sometimes selling issues, but overall we have made a lot of money fixing up houses and selling them for a profit.  This property I will be discussing is the first fix and flip I have purchased since I took over the business from my father and I have three more properties under contract!

My blog focuses on investing in long-term rental properties, but fix and flips are a great way to earn additional income.  I recently took over our entire business from my father and I purchased my first fix and flip without a partner last week.  Lets look at how to fix and flip a house by going over the numbers on this property; what it will cost to repair and what I hope to sell it for.  For additional information on my long-term rental strategy please check out my guide to investing in long-term rental properties.

You must buy fix and flips well below market value

The reason I am so successful at investing, is I buy homes for less than market value.  Here is an article I wrote on how to buy properties below market value that describes exactly how I do it.  With fix as flips, you have to get properties really cheap to make a profit.

This property was for sale on the MLS and surprisingly most of the properties I buy I find on the MLS.  We used to purchase 90% of our fix and flips at the foreclosure sale, but the competition has gotten crazy at those sales with people paying more than houses cost on the MLS.  I prefer buying properties of the MLS for multiple reasons; I save a commission on the buy side because I am an agent, I can do an inspection on most homes and I have time to get a loan if I need one.

This property had been for sale for months with no offers, was a REO and needed a lot of work.  The bank asked $120,000 to begin with and slowly dropped the price down to $77,500.  Once the home was priced less than $80,000, I was ready to make an offer, but I missed the price drop and someone else got it under contract!

At the time of the price drop, I was in the middle of figuring out the business transfer and not in a great position to buy.  However, A few weeks ago I noticed the home came back on the market.  I hadn’t seen the house in months, but I made an offer right then for $65,000.  I drove over to the property and I noticed the seller had sent a counter offer to me for $76,000.  This was an online bidding system (not HUD) and I knew there would be other interest at this price.  I quickly inspected the house and clicked “accept” on the counter offer and it was mine!

The location must be right for a fix and flip to be successful

One of the biggest reasons this house did not sell faster, was it’s location.  The home was in a rural subdivision about 5 miles outside of large town.  The subdivision has 1/4 acre lots and dirt roads with no sidewalks.  The houses were built in the 50′s and built very cheaply with space heaters and no central heat.  The homes don’t have any basements and there is a railroad track very close to the subdivision.

The good thing about the neighborhood (depending on how you look at it) is it is outside of city limits.  There are no covenants and people can pretty much store whatever they want on their property (as long as its legal).  Since this home was vacant the neighbor decided to store four cars, a trailer and some other stuff at the home I bought.  I am sure this was a huge turn off to most buyers, although we have talked to the neighbor and he said he would be happy to move everything.  Whenever you buy a home in an area with some questionable characteristics, make sure you do your homework to determine value.  It is imperative that you use comparable sales from the same neighborhood to determine values.  The neighborhood can make a huge difference on how easily you can sell a house.  

Don’t be afraid of homes that need a lot of work when fixing and flipping

This house also needs a lot of work and that is another reason it is so cheap.  The biggest concern with the home is the ceiling has dropped two to three inches in the living room and kitchen.  I had my contractor look at it and he thinks someone took out a wall at some time and forgot to put a header in. Other repairs include a kitchen that is 50 years old with ugly knotty cabinets, one space heater for a 1,200 square foot home, laminate flooring that is bowed and very worn, old doors, old bath, some broken windows and peeling exterior paint.

The house used to be a basic two bedroom one bath ranch with an attached one car garage.  At some point the garage was turned into living space to create a larger living room and an extra bedroom.  It is now a three bedroom one bath home and the best part is it has a huge detached garage.  The garage is listed as 720 square feet by the assessor, but it is much bigger.  I have not measured it yet, but I would estimate the dimensions are at least 25 feet by 40 feet.  Based on sold comps in the area I am figuring the house will be worth at least $160,000 after it is repaired.

Repair estimates

Here are the repairs and what I estimate the repairs to cost.  We will get a bid from our contractor, but I don’t have it yet.  A bonus we discovered after we bought the home is there is hardwood underneath all the junky laminate.  Why people cover hardwood with laminate I have no idea.

Repair ceiling                  $2,500
Replace kitchen              $5,000
Refinish hardwood        $1,200
New interior paint.        $2,000
New exterior paint.       $2,000
Replace windows.          $1,500
Install central heating. $3,000
New fixtures.                  $1,000
Refurbish bath.              $1,600
New doors.                      $1,000
Miscellaneous.                $2,500

Total                               $23,800

I always add money for miscellaneous items I may not think of or that come up unexpectedly.  There is always going to be a repair that pops up that I didn’t see or my contractor couldn’t see until the work was started.  The total costs on this flip aren’t too high, because this is a basic house and we aren’t doing anything fancy.  Whenever we try to fix up a fancy house we tend to make less money, because it is so much more expensive to repair a home with upgraded materials.

How to determine value on a fix and flip

I am a Real Estate agent and REO broker, part of my job is figuring values and I do it all the time.  I have a very good idea of what most houses within 45 miles of me are worth.  I still pull comps and have my assistant do a quick valuation to make sure I am accurate with my values.  The best way to figure values or ARV (after repaired value) is to use the most recent sales comps you can find in the subject’s neighborhood.  If you are not a Real Estate agent, it may be very difficult finding sold comparable property information.  You may have to enlist the help of a Real Estate agent to help you determine value.   If you are buying and selling properties you are going to need a Real Estate agent anyway.  If you need help finding an agent, let me know I may be able to help If you are thinking of becoming an agent, I highly recommend it! 

This property did not have a lot of comparable sales available.  I did find a couple from last year and there are some active homes for sale in the neighborhood.  It is possible to use active comps, but be very careful because there is no guarantee they are priced right.  I found a modular home very close to subject under contract with a list price of $154,900.  Since my home is a stick built home and has a much larger garage than this modular I am confident I can get at least $160,000 for my property once it is repaired.  I am putting  a lot of faith in this active comp, because it is under contract.

What costs need to be considered on a fix and flip?

Repair costs and purchase costs are not the only thing to figure when running the numbers on a fix and flip.  There are carrying costs (interest, utilities, insurance, maintenance) and selling costs (commissions, closing costs, recording fees, and more).  We make our offers with cash on the fix and flip homes, but I also have a commitment set up with a local bank.  I am able to obtain short-term loans at 75% of the purchase price for 2% over the prime interest rate.  I think that equals 5.25% right now, which is an awesome deal even with paying a 1.5 percent origination fee.  The bank can close these deals in less than two weeks and I only need an appraisal if the loan is more than $100,000.  This setup allows me to purchase multiple properties at the same time and lets me use my cash reserve for repairs and down payments instead of the entire purchase price.  This setup is also much cheaper than hard money.

Estimated costs on this fix and flip

Origination fee      $861

Interest                   $2,000

Utilities                   $1,200

Insurance               $1,000

Maintenance          $500

Commissions         $4,800

Title insurance      $1,000

Closing costs          $750

Miscellaneous        $5,000

Total                        $17,111

You may have noticed I added another $5,000 in for miscellaneous costs.  These costs could be closing costs the new buyer asks for to help pay for their loan, or repair or inspection items the buyer asks for or an appraisal issue.  You can get insurance for fix and flips, but it is usually much more expensive than regular home owners insurance or insurance on a rental property.  Maintenance covers mowing the grass or snow removal on the house while it is being repaired and listed.  The costs add up very quickly on these homes and that is why you have to get a great deal to make money.  I am able to save money, because I am an agent and I actually received a commission check for $2,800 on the purchase of this home, which can be added into the profits.  If you are not an agent, you will have to figure much more than the 3% commission I figured into the selling costs, because you have to hire an agent to sell the home for you as well.

Conclusion

Our total repairs are $23,800 and total selling and carrying costs are $17,111.  We bought the home for $76,500 and our total investment will be $117,411 after the home is fixed up.  That will leave us with a profit of $42,589 if we sell it for $160,000.  When I think about fix and flip deals, I want there to be at least $20,000 in profit after I total all the costs and extra costs for miscellaneous items.  Fixing and flipping is not easy, but once you learn how to do it and do it well it can provide a great source of income.  I hope to fix and flip at least 12 homes this year and hopefully many more (they won’t all make $40,000).  I hope this article helps you understand how to fix and flip houses!

 

 

http://investfourmore.com/2013/10/21/how-to-fix-and-flip-houses-case-study-1/

You must be logged in to post a comment Login