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Flip #2 - Learning From Past Mishaps!

Sometimes you just know a good deal when you see it, and that was certainly the case when I saw this potential flip for the first time!

Tenant occupied until the week of closing, this nice brick ranch was tucked back in a cozy neighborhood in western Gastonia, NC in an area full of opportunity. This property brought together the quintessential elements of an investment acquisition - the deal came from a wholesaler, the funding came from a hard money lender, and the crew for the rehab work was upended within a week of closing. While there were a couple of lessons learned, this was a relatively successful and simple acquisition process! Let's dig in.

Finding the Deal

Source: Off Market (Wholesaler - Virtus Investment Group)

Nearly any investor can probably share stories about wholesalers, some good but many bad. People trying their hand at "easy" money find and list properties with wildly generous ARVs, incredibly understated rehab budgets, inflated asking prices, and extremely aggressive terms. These types of wholesalers are a dime a dozen. But when you find a good one, hold onto them! They're extremely valuable, as I found on this deal.

I'm a part of quite a few Facebook groups for real estate investors and like to scroll through for deals from time to time. I found one a while back that had potential but was overpriced in my opinion. Huge credit to the wholesaler (good sign #1) - he reached back out to follow up. I told him that the numbers didn't work for me and that they'd need to come down considerably, and I didn't want to lowball him like an asshole. He thanked me and wanted to understand how I saw it (good sign #2). We had a great conversation, built rapport with each other, and said we'd certainly stay in touch about future deals.

A week or so later I got a message from him about this property (good sign #3). He was in the final stages of getting it locked up with the seller and sent me all of the info he had on it, which included information from the current owner as well as a Google drive filled with pictures.

I'm not sure if you've ever seen what most of the pictures look like from a wholesaler, but spoiler alert - it's usually awful. These guys included an in-depth video walkthrough of the property taken from the perspective of someone who knew what an investor was looking for. This video took me through from the front door to every room in the house and gave me everything I needed to analyze the deal (good sign #4).

The deal itself

Asking Price: $60,000

The subject property was a brick ranch built in 1978, a 1,050 sqft house containing 3 bedrooms and 1 bathroom. As you can see from the pictures it was certainly dated...I love blue as much as the next guy, but that carpet throughout the house was an indicator of the age of the most recent update.

The rehab looked to be relatively straightforward! On the inside everything was pretty much cosmetic. Paint the entire house, lay new laminate flooring, replace the kitchen cabinets, update all of the fixtures, and remodel the bathroom. Aside from a small soft spot in the bathroom subfloor next to the tub, the guts throughout the house were sound.

Of the major capital equipment in the house, it needed a few things. The roof was more than 30 years old and needed replaced, as did all the windows throughout the house (luckily there are only 6). The foundation was in good condition, but the crawlspace needed new insulation and a vapor barrier. But aside from that I was excited for a house with good bones!

That left the exterior. It didn't look too bad, and a new roof would certainly help, but those horrible porch & window overhangs certainly had to go. Once those are removed, a nice light grey brick with some new shutters and a little landscaping would go a long way in making this place look brand new!

All in all the rehab was estimated around $30,000. Just down the street an almost identical house had sold in February for $135,000 which provided a fantastic comp. With the comparable having one extra bathroom and a couple nice touches, the ARV for this deal looked to be between $125-130k. Sounded great to me!

I went back to the wholesaler and told him I'd buy it at his asking price of $60,000, and we had it under contract within 48 hours of him locking it up with the seller. Easy all around!

Show me the money!!

Source: Hard Money Lender (TMD Capital)

I tried a new lender on this one, someone I was in touch with due guessed it...Facebook.(Seriously though, if you aren't using Facebook to help you you're missing out!)

TMD Capital offered extremely competitive terms - 9.24% interest only, funding 90% of purchase and 100% of rehab up to 75% of the After Repair Value (ARV). Many other hard money lenders I'd found were closer to 12% and while one did up to 100% purchase + rehab, they would only do 65-70% LTV. TMD also provided a slight break on points, coming in at 2.5 as opposed to many lenders requiring 3 or more. I was excited to give these guys a shot.

The process was easy! I sent in all the documentation they needed including my rehab budget, and they went to work. There were a couple of questions here and there, but within a day or two they had their appraiser get in touch with me. Coordination was a little difficult due to the tenant, but the process was easy!

A few days after the appraisal I got an email with the results, and the ARV was even better than expected at $132,000! In addition, the as-is value was $95,000 which also provided options!

For a time I considered doing an even smaller rehab to recognize the immediate equity and sell it to an investor around $110,000. My thought was that it would lessen the risk by reducing the variability of a $30k rehab while still providing the same return. That wouldn't end up working, but was a great thought exercise to take with me on the next deal!

With due diligence complete and the funds ready to go, closing was a breeze! I paid $6,000 as a down payment, plus another $6,300 in closing costs (including points, fees, taxes, & insurance). How did I pay for that $12,300 you might ask? With the line of credit from my first BRRRR! This required no cash out of pocket, just the funds from the line of credit. Investors compound interest!!!

What's next?

As is the case with the #NewellFlip, it took longer than expected/desired to get the contractor crew properly lined up. I planned to have the same crew do this work, but due to the many challenges on that project there were enormous delays and I changed course. I also put into practice lesson #5 below that I learned from that first flip - nothing started until the signed & detailed contract and scope of work was in place!

The total project should take 3-4 weeks, putting the estimated completion date at around November 1. I'm sure by the time this is all said and done there will be plenty of additional lessons learned, but this is what we have so far!

Lesson #1: follow ups are critical, but treating people respectfully is even more important!

Lesson #2: good people are everything. When you find someone good, recognize it and hold onto them!

Lesson #3: utilize local/regional Facebook investor groups!! If you're in the Charlotte area, check out the ones that I frequent!

Lesson #4: be cognizant of a shifting landscape and take advantage of opportunities! In my case it was the potential to realize the same profit with less risk/a smaller rehab

Lesson #5: apply the power of compounding interest to your business! Continue reinvesting your profits until you're no longer playing with your original principal!

Lesson #6: don't start a minute of rehab work until the contract & scope of work is signed!!

The project begins! Stay tuned to the website and to the @InvestDGP Instagram page to see the progress, and comment with any suggestions or questions!

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