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Lessons Learned in Flipping

-- Posted: May 25,2007 | Brian Varvel

This year I set some goals that I wanted to accomplish by the end of the year. These goals included both personal and business accomplishments that I felt would stretch me, but still be somewhat realistic. They included sales goals, personal convictions and beliefs, and a couple of new projects that I'd never set out to do before: buy one flip house and buy one rental property. This May, a friend of mine and I nearly took care of that flip property goal - I say nearly.

The home was a good home with a lot of potential, in a good neighborhood zoned for good schools, and we could buy it at a steal. There were really only two problems with the house, it was located on a busy thoroughfare and it need a LOT of work. There's really not a lot you can do about where a home is located other than try to combat it with price reductions and amenities. We knew this going in so it wasn't really a problem. The real test for this home came from estimated repair costs. We knew there would be a lot of work to be done but we never figured we'd get the education of a lifetime.

My friend and I were looking for a project that we could take on together, buy cheap, fix up, stage, and sell for a profit. We'd done similar work on a home that she owned that hadn't been updated since it was built in the late 70's. The home didn't sell for the first several months that it sat on the market so I discussed the option of doing updates on the home to get it sold. After going through rehab, my friend staged the home herself and within a week, it was under contract near the full asking price (which we raised after repairs). This is the very foundation of how making money doing flips works. You're after the market that wants a home that is available for immediate movein. They usually pay more and closings can happen very quickly.

The home was originally priced by the bank at $124,900 as-is. We determined that the after repair value of the home should rest somewhere in the $165,000 - $170,000 range and figured we'd account for the location by pricing it near the lower end of the market. Even still, we could make a good profit. After having our contractor come take a look at the home, he gave us a verbal 'guestimate' of around $20,000 for repairs - a very preliminary number because we didn't want to take his time until we felt sure the bank would budge on the bottom line.

After submitting the repair estimate to the bank, they reduced the price to $109,900 which was an improvement and got us to nearly where we thought we needed to be. We immediately submitted an offer that rested at $105,000 after several rounds of negotiations. We were finally under contract for our first flip house.

I immediately scheduled an inspection because we wanted to be sure exactly what was going to be involved in flipping this home. The inspector came out the following morning and spent the better part of the afternoon accounting for all the problems with the home. We also called the contractor back out to perform a full on repair estimate for us. We went around the house and through it making note of all the things that should be done, and how we wanted them done. Our contractor took notes as we built a list of things that HAD to be done, and things that COULD be done. These will make all the difference in the world when trying to cut costs and as we soon found out, can eat right through your profit margin.

The inspection report and the repair estimate came in roughly at the same time and boy were we shocked. We started with the estimate because if the numbers aren't right, it won't matter what the inspection says. The repair estimate came in at roughly $42,000, almost double the original 'guestimate' that the contractor had given us. We could pick away certain repairs, but all the ones accounted for in the estimate we felt would be mandatory to sell the home.

Since we only had a total budget of $30,000 to buy and repair the home, the deal soon fell apart. We looked to the lender for options with financing: lower down payment, financing some of the repairs, seller contributions... anything at all that could keep the deal together. In the glory days of flipping homes you could get 100% loans at higher interest rates and you could find loans that included repair funds, but since the bottom fell out of the sub-prime market, lenders simply don't offer these types of loans for investment properties anymore. We could even get the bank to lower the price of the home again, but that still wouldn't change the fact that the repairs alone would bust our budget. There was still a lot of room to make money in the project, but only for someone who had the upfront funds to do all the repairs. At best we'd get about 2/3 of the repairs done... simply not enough to turn around and make a profit on the home.

So what did we learn from our first foray into the home flipping project? Several things:

• Always get an accurate estimate of repairs before signing.
• Wait until after your estimates are in before ordering an inspection.
• Know the limits of what you can and can't take on.
• Don't get too attached a particular property - it may not work out.

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