Making the Switch - Tackling My First Flip!
After 12 months of focusing on nothing but generating rental cash flow, I realized that I needed to take a different approach if I wanted to hit my goals in my desired timeframe. While I had previously been opposed to the idea for a variety of reasons, I came to a point where I realized that flipping would be a vital component of my business. The search was on!
About a month later I found this deal - a good sized house on an even bigger lot, seemingly good condition with potential to add plenty of value. Here's the deal!
Finding the Deal
Source: Off-Market (FSBO)
After a couple of weeks of searching for a potential flip I had seen all sorts of disasters. Between the leads coming into my inbox from wholesalers and the "deals" that a lot of people peddled on local Facebook groups, they'd all come up short. They either needed too much rehab, they were asking too much, or the property just wasn't in a great area.
My friend and real estate agent Alex started telling me about some clients that he'd help find a couple of flips on the MLS so I hopped on Zillow to give it a look. Almost immediately I found this house listed For Sale By Owner (FSBO) and reached out to the seller. Within a couple of days we had talked it out and found a time when I could go take a look at the property and I was excited!
The deal itself
Asking Price: $102,000
It turned out the property was owned by a gentleman who had recently passed away, so when his family decided they weren't interested in holding onto it they put it on the market. One sister had been in the mortgage industry for many years, while the other had spent her career as a successful commercial real estate broker.
The house was listed on the records as a 1,254 sqft house with 2 bedrooms and 1 bathroom, situated on a large lot containing an equally large workshop. The records were deceptive - the 1,254 sqft did not include an upstairs bonus room, an unpermitted expansion of the living room into the old garage, or the remainder of the unfinished former garage. Even without running ductwork upstairs to finish the space, this house had the immediate potential to be nearly 1,600 sqft!
Estimates for the rehab came in around $40,000, which included nearly $6,000 of structural work. The project included the standard updates to paint, flooring and fixtures throughout, and as well as a renovated kitchen and bathroom. I know those are usually 2 of the highlights of a renovation, but that wasn't even the best part!
The most exciting part of the project was taking advantage of the unfinished space. The front glass door going out to the carport was to be replaced with a wall, the back door going out to a back patio, and the entire space turned into a master suite. This would kill 3 birds with 1 stone - add a third bedroom, add a second bathroom, and add a couple hundred square feet to the floorplan.
Estimating the ARV at ~$175,000, I offered $90,000 and we landed at $92,000! It turned out there was one other party interested that actually offered more, but because of the rapport I was able to build with the sellers they went with my offer!
Show me the money!!
Source: Private Lender
The initial plan was to go with the hard money lender I used on my pair of duplexes in Hope Mills. In a couple of conversation with a friend and fellow investor it sounded like there may be interest in private lending, so I asked him what he thought. He had funds from his wife's SDIRA that he was interested in putting to use, plus some of his own cash to go with it.
At the end of the day he agreed to finance 100% of the purchase price and $30,000 of the rehab! I was looking at 12% and 3 points from the hard money lender, so I paid him 10.5% and 1.5 points. We were able to easily work together to decide on how we wanted to make it work, and from there it was just a matter of getting an attorney to draft the paperwork and the manager of his wife's SDIRA to put everything in action.
The appraisal came in higher than expected at $194,000, a great surprise! With that in hand we submitted the documents to the trustee to finalize the loan...little did we know that this was a little more tedious of a process than him meeting the qualifications and requesting the funds. He had never loaned money out of the SDIRA before, and I had never borrowed from one, so this was a new learning experience all around. They needed all of the documents a few days before close, which became difficult when they required some of the documents that the closing attorney wraps up later in the process as well.
We experienced one short delay of a couple of days, but eventually we made it to the closing table and it was done!
I'm writing this post nearly 2 months after closing and the rehab is still in progress, so I'm keeping most of the issues I dealt with post-closing out of this article. That said, I will certainly emphasize two things that were extremely difficult lessons I've learned since closing:
Inspections are SO important! I've done them on almost all of the properties I've pursued (including those I haven't closed on), but on this one I just went with a GC walkthrough and a structural engineer inspection. This was an expensive mistake
Lay the groundwork and set expectations with your contractors before closing. Have a detailed scope of work, a solid contract, a strict budget, and don't start an hour of work until that contract is signed. This was an even more expensive mistake
The acquisition process was relatively smooth, particularly for a first flip. But these lessons were costly and painful, which is a hell of a way to live and learn!
At the end of the day, all of the books and podcasts in the world can only prepare you so much until you take action. The lasting lessons come from taking action and learning the hard way, so it's imperative that you stick with it and apply what you learn the next time around!
I'll share more about the mistakes and failures in the next post, but in the meantime please check out @InvestDGP on Instagram for additional posts about the deal!