Considering a flip

[keepinthefaith]

DH and I are considering investing in our first flip project, and I'm hoping for advice regarding things we should consider before jumping in. First of all, we're not going into this completely naive. We will be partnering with a friend who has done this several times already and is doing well with a number of rental properties. He is very handy, knowledgeable, trustworthy and hard-working. I am very aware that, even though he is a friend and we trust him, we need to have a thorough contract with him and make sure everything is spelled out. The house is on the market for about $235, but it is a foreclosure and we think it is overpriced based on comps. We're going to try to get it for around $150, then convert it from a 3-bedroom to a 4-bedroom by making the basement "bedroom" conform. The hope is that it would then be worth what they say it is. DH and I will continue to live in our current home, though we do hope to sell it next year. The flip would ideally be a very quick turnaround, priced to sell when we finish. We're not looking to get rich with the first project. We haven't seen the inside of the house we are considering, but we know that the outside needs a decent amount of work (landscaping, siding, roof and removing above-ground pool).

If you have experience with flipping, please tell me what I need to be aware of financially. Although we haven't discussed financial details with our friend (plan for that tonight after we view the house), I am assuming that he is providing his expertise and labor while we are providing the financing. DH plans to do the landscaping work, though.

Feel free to flame me if necessary. I can take it. Not like you need permission...

[hoops902]

I would be worried about the plan to make a basement bedroom "conform". It's likely not going to be worth much more whether they currently have a non-conforming basement bedroom vs a conforming one. Yes you might be able to "count" the square footage, but unless you're doing something significant to make that room more valuable, it's just semantics. Seems like that portion might not be worth the return, I'd be wary of that specifically.

[keepinthefaith]

unless you're doing something significant to make that room more valuable

What would it take to do that? And why in your experience does adding a bedroom not increase the value? I'm not doubting your knowledge, I just want to hear more if you are willing to share.

[Tiny]

Where's the 20% downpayment coming from? Where's the 25-30K you will need to 'fix up' the house coming from?
I doubt you'll get a bank to do 100% financing on the house much less give you an additional loan to 'fix it up'.

* I guestimated 5K for the siding, 5K for the roof, 5K for landscaping/pool removal, and then another 5K for interior fix ups - paint, a fixture here, a door there, new carpeting there... and then a generic 5K for whatever guesstimates were too low... I'd even guestimate that 25 - 30K is too low...

[keepinthefaith]

Whatever budget you come up with, double it and the estimated time to do this project and DON'T figure on being able to sell it right away. If you can't handle the mortgage for any length of time, don't do this.

DH and I talked about this last night. I know it sounds silly, but we've watched the flipping shows where this happens and we know it's a possibility. We do have ways that we can cover it if necessary.

[keepinthefaith]

Where's the 20% downpayment coming from? Where's the 25-30K you will need to 'fix up' the house come from?
I doubt you'll get a bank to do 100% financing on the house much less give you an additional loan to 'fix it up'.

Sorry, I don't have these details at the moment. DH and I have talked about it but we still need to contact banks about the financing options.

[Tiny]

You think you can get the house for 150K (do some fix ups) and then flip it for 235K.... are you assuming the extra bedroom is gonna give the house a 80K bump in value? Or even 35K bump in value? What's keeping someone who wanted to live in the house bid 160K for it (beating your 150K), then in 25/30K and get a really nice house just the way they want it and way below market value to boot!

[hoops902]

Jul 7, 2011 12:52:46 GMT -5 keepinthefaith said:

unless you're doing something significant to make that room more valuable

What would it take to do that? And why in your experience does adding a bedroom not increase the value? I'm not doubting your knowledge, I just want to hear more if you are willing to share.

It's not that adding a bedroom doesn't increase value...it's that my impression was that there was already a non-conforming bedroom there and you were just going to "make it" conform. That could be anything from adding a closet to doing extensive work. If it's something cheap, go for it.

I just don't see anyone going through the house and differentiating between "this can be called a bedroom" vs "this is a basement sleeping area not called a bedroom". A lot would depend on what needs to be done and how much that would cost. Making it conform, while the rest of the basement presumably does not...I don't see impressing anyone who's going to buy. We have a lot of both conforming and non-conforming basement bedrooms around here, the pricing seems to be roughly the same as people still view it as "bedroom in the basement".

Like I said, a lot depends on why it does not conform. Around here that's often the ceiling is too low (so then you've got to dig out the basement floor just to get another few inches of height). If it's a simple fix...go for it. I just wouldn't expect it to be much difference in value. People don't pay 4 bedroom prices just because you technically can call it 4 bedrooms...they're still going to walk through and say "I only see 3 bedrooms, oh, they're counting that one in the basement too" the same way that they would go through it now and say "well there's 3 bedrooms, but we could use that room in the basement as a bedroom too". To me, in a practical perspective, it's largely semantics.

[swasat]

Jul 7, 2011 12:52:46 GMT -5 keepinthefaith said:

unless you're doing something significant to make that room more valuable

What would it take to do that? And why in your experience does adding a bedroom not increase the value? I'm not doubting your knowledge, I just want to hear more if you are willing to share.

From what I know, adding a basement bedrrom does not increase the value UNLESS you have a full size bathroom there as well. Even then its not a surity. It will definitely be counted a s a bedroom, and the square footage would be included in the living sqft, but that does not mean it increases the value.

Think on the lines of adding landscaping...The curb appeal increases, but that does not increase the value of the house.

Take it for what its worth because I am no house expert This is just what I have heard from realtor friends and family.

Is it a walk out basement?

[Tiny]

Have you considered the tax implications/impact of this undertaking and how you'll preserve any capital gains from the eventual sale?

[zibazinski]

I used to flip when the market was good. The market is not good now and there are more houses than there are buyers for them. I would only do this if I planned on renting the house out. Plenty of renters.

[Tiny]

Yeah, those basement bedrooms aren't always as 'valuable' as you think. If you've got enough kids under 10 to fill 3 bedrooms (assuming you are using one as a master bedroom) do you really want your older kid (or kids) sleeping maybe 2 floors away (basement, mainfloor, upstairs bedrooms) from every one else? I guess it's great when they are teens so they can party with privacy,slip out with ease at night, and discreetly have 'overnight guests' and you can pretty much ignore the goings on...

[hoops902]

Jul 7, 2011 13:11:01 GMT -5 Tiny said:

Yeah, those basement bedrooms aren't always as 'valuable' as you think. If you've got enough kids under 10 to fill 3 bedrooms (assuming you are using one as a master bedroom) do you really want your older kid (or kids) sleeping maybe 2 floors away (basement, mainfloor, upstairs bedrooms) from every one else? I guess it's great when they are teens so they can party with privacy,slip out with ease at night, and discreetly have 'overnight guests' and you can pretty much ignore the goings on...

And if you're going to have your oldest kid down there, is it REALLY that important to you if it's a decent room but just technically doesn't conform, or if it's a decent room which technically does? You don't wanna put them in a death trap, but do you really care if there's a closet, or if the ceiling is slightly too low or something if that's the issue?

[Tiny]

I guess the real issue with the 'conforming' versus 'nonconforming' bedroom for the investor - would be knowing the Building Codes in effect for the house in question... if you don't know exactly what the building codes sez and how it effects the room in the basement, you could call the room a gazebo and maybe pass it off as a Valuable Feature of the house to a perspective buyer...

[Angel!]

I agree with hoops - what you are doing is largely semantics. You aren't really adding a 4th bedroom & people aren't going to pay 80K more because there is now a closet or an escape window. Other work you put into it may help your pricing, but I would do a lot of research to determine what the actual sale price might be.

Have you looked at comps with a non-conforming 4th vs. a conforming 4th to try to determine the impact on pricing?

[keepinthefaith]

You think you can get the house for 150K (do some fix ups) and then flip it for 235K.... are you assuming the extra bedroom is gonna give the house a 80K bump in value? Or even 35K bump in value?

You're right, this is probably wishful thinking.

hoops, thanks for the helpful info on the basement.

Have you considered the tax implications/impact of this undertaking and how you'll preserve any capital gains from the eventual sale?

I'm quite clueless on taxes, but our friend is very knowledgeable so I was hoping to pick his brain about it when we meet up tonight. And atsiaru, thanks for the info on researching codes.
angeld: thanks for the input. I have looked at comps some, but will dig deeper.
lonewolf, the house is about 10 years old and in a great neighborhood. The outside is really crappy so I'm sure the neighbors would love to see if fixed up.

[bobosensei]

So what does the friend get out of this for all his work? Are you splitting expenses and profit 50-50 or does he get a bigger share of the money for providing the know how and labor for fixing it up?

I don't think this is a good idea. If it was such a sure thing your friend would be doing it by himself without asking for your help. Why is he wanting a partner in this?

[Tiny]

Don't forget about the cost of permits for work being done - even if you are doing it yourself. Usually the contractor gets the permit(s) and works with the city inspector. If you are doing work yourself you'll need to do that kind of stuff (it takes time...)

[zibazinski]

You are going to have to get it for way less than 150k and see what 3 bedroom homes are selling for because regardless of what you do with that bedroom , it isn't going to be counted by anyone as a bedroom. Consider the costs for buying and selling. Do any of you have a real estate license? How long do houses sit on the market in your area? How are the ones that do move priced?

[phil5185]

What would it take to do that? And why in your experience does adding a bedroom not increase the value? I'm not doubting your knowledge, I just want to hear more if you are willing to share.

Adding/finishing basement area does not count as livable footage to an appraiser, unless you have a walk-out basement. I wouldn't spend any money in the basement except for clean up, that would be lost money IMO.

A friend does flips, owns up to 20 at any given time. He buys one, has the landscapers, painters, flooring people all go thru in about 3 days. Has Sears put in all new SS appliances, puts in granite countertops. And does what is needed due to the foreclosure - garage door openers, ceiling fans, door knobs, ruined toilet fixtures, whatever is missing. He usually spends about $25,000 on the 'make ready', turns it over to the realtor priced for a 3-week sale. Wants to clear about $25,000 after RE costs. About $10k goes to Fed & State taxes, leaving $15k net/house. The idea is to have $200k invested for 4 weeks, get a $15k profit, re-invest the $200k into the next house. If he can do 10 'turns" in a year, that is a $150,000 return on that $200,000. He has several $200k lumps at work at all times.

As you can see, the costs are $25k +$12k RE + $10k tax , ie, $47k. So to net $15k, his mark-up has to be about $62,000. Buy for $200k, sell for $262k.

[zibazinski]

Unless you are buying in an area that considers finished basements standard, as in a couple of bedrooms and a full bath, I'd pass on re-doing it or at least do not pay or list it as a 4 bedroom. We live in an area where finished basements are the norm and that is where guests, and in our case, my DD or DS, and a guest could go or both of them if they were here at the same time as in holidays. We have one bedroom up, the master.

[debtheaven]

I'm still not sure what the deal is: you put up the money, and your friend does all the work? Are you sure that will cause no resentment?

As far as the basement goes, I agree with Hoops and others, a basement bedroom is a basement bedroom. I live in France so I don't know how things work in the US. Here our finished basement bedroom does "count" in our square meters even though there is no bathroom there. But, it still doesn't mean you can put just any child down there. (It does have a small window with natural light.)

That fourth bedroom will probably make a great room for an older kid at college, or a playroom, or an office, or a guest room. But if it's even halfway underground, it's never going to be a "real" bedroom like the others. It will always be "the room in the basement" (unless it's really walkout and gets tons of natural light). JMO.

[mwcpa]

"but we've watched the flipping shows where this happens and we know it's a possibility."

you do realize that this is tv and not reality, even though they call it reality tv... it's edited... and they only show the success stories, not the failures....I am amazed all all of the successful people who buy the infomercial plans... no one fails according to the ads, so it must be true....

Be careful..... not trying to talk you out of it, but do you have any construction experience? the flippers on reality tv (bravo, hgtv and the like) generally all do

"I'm quite clueless on taxes, but our friend is very knowledgeable so I was hoping to pick his brain about it"

see a professional, there are lots of issues.... is this a "business"? is this an asset held for capital appreciation? what you may want and what the law says may be two different things.... and these days with the huge tax rate differences between long term capital gains (15% federal income tax) and self employment income (up to 30+% federal income tax plus up to 15.3% self employment tax) the IRS is looking for these....

[keepinthefaith]

Thank you all for the helpful information. This gives us a lot to think about. We did decide not to go with this one. Zibazinski is right, there is so much work to do on this house that they'd have to sell it to us for even less than $150k for us to hope to turn a profit. The place was poorly built and then poorly maintained, plus the layout is just terrible. We'll keep our eyes out for other opportunities, but this one wasn't it.

[zibazinski]

That happens and you are/were smart not to get emotional. The right one will come along at a steal which is where it has to be to make money at it. I did ONE higher end one but the location was awesome(golf course in golfing community.) Bought for 230k and part of the deal was a new roof but EVERYTHING had to be done, bathrooms, kitchen, floors, celings, doors, fans, closet shelving removed and new stuff put in, even the bathroom tile had to be painted over and toilets replaced. Add in new AC, handler, and hot water heater. The ONLY thing not done was replace the sprinkler system!!!! Landscaping as well. I was lucky enough to only put in 50k because of doing a lot of the work myself as well as hiring 2 other teachers and their dad to help me-Dad painted the exterior of the house while we 3 did the inside) Held it for 2 and a half years and flipped it for 320K with no real estate agent involved, just spread the word I was "thinking of selling." That was my kids college fund, what their free tuition and books didn't cover. But that was a once in a lifetime and the price I paid for it was a good one.

[zibazinski]

NEVER EVER partner. Pay him for his work.

[Deleted]

You also have to think long and hard about a plan B e.g. if you can't sell it in this market you need to be prepared to rent the property for a couple of years. Are you ok with having your capital tied up for a couple of years? With being a LL?

[2kids10horses]

Ok, I am a "flipper" and regularly buy, fix, and resell houses. So, I am giving real world, experienced advice. I am also a REALTOR, and a landlord. I've been doing investment real estate on my own account for about 16 years. So, here are my observations about your deal:

Basements: I love basement houses, but I prefer the basement to be UNFINISHED! Why? When it comes to selling the house, everyone has a different idea of what they want the basement for. That is, some want a home office, some a home theatre, some a home gym, others an in-law suite. An unfinished basement will appeal to ALL of them, but a finished basement will only appeal to the subset of buyers who want that particular use. Let's say I finish the basement as a game room with pool table, bar area with sink, refrigerator, etc. And the buyer is a guy who wants a basement to restore Harley Davison motorcycles in. He's not gonna want to pay for the carpet, bar, appliances, etc. He wants open space where he can spill oil!

Basement bedrooms: Usually they will not count as "finished space" for a Fannie Mae or Freddie Mac appraisal. They only count bedrooms that are "above grade". I am NOT an appraiser, but I have sold homes as a REALTOR that had wonderfully finished basement bedrooms, on walk-out basements. The basement bedrooms did not count as "bedrooms". Sometimes because of the amount of space available, the basement would have the Master bedroom. Didn't matter.

Location, location, location: Needs to be in an area of good schools, and easy access to the primary method for commuting to work.

Mold: Avoid any house with any kind of mold problem. Sure, Clorox will kill it. But, presence of mold indicates there is a water problem which will encourage the mold to return.

That all said, what DO I look for?

Timing: I don't buy in the height of the buying season. I buy when others aren't. So, that means I buy in the fall or winter. Maybe late summer. Which means, I sort thru the leftovers. I look at the houses others chose NOT to buy. I then try to figure out why they didn't buy it, and determine if I can fix the problem and still make money.

Cosmetic fixers: I look for ugly paint jobs. Easily remidied, but turn off buyers with lots of options. I look for ugly carpet. Easily replaced.

Easy upgrades: I like to choose "cookie cutter" neighborhoods. Back in the 90's early 2000's, Atlanta had a building boom where hundreds of houses just appeared. Subdivisions of dozens of homes appeared out of nowwhere. They were all built buy the same developers, and used similiar building materials: vinyl in the kitchen and bath, white cabinets, white or black appliances, laminate countertops, carpeting thru out, except maybe a little tile or hardwood right at the entrance, shiney yellow (gold) fixtures. Figure out what you can do yourself. I install tile flooring in the baths and laundry rooms. The labor is more expensive than the materials, so if you do it yourself, you make the profit. I generally install hardwood floors on the main level of a two story house. New wall to wall carpet upstairs. I buy new plumbing and lighting fixtures. Shop for these items! Find the places that sell overstocks and closeouts in your area. When I find them, I buy them, and store them myself for the next house. Same with lighting fixtures. I install a pedastall sink in the powder room, replacing the el cheapo cabinet in there. I install crown molding in the dining room and Master bedroom. Sometimes I rehab or remodel the front door. Almost always install a new pretty front door handle. I repaint with neutral colors. I have found I can get a granite kitchen installed for $25 a foot including new sink. I replumb it myself. (Granite people install the sink, I install the plumbing.)

Handyman: I do as much as I can to lower costs. I do hire out roofing, electrical, HVAC work.

REALTORS: I'm a REALTOR, so I get 1/2 the commission when I buy, and save 1/2 the commission when I sell. I study the comps of the neighborhood carefully before I buy. I try to pay 1/2 what the homeowners are selling their for. When I sell, I try to undercut the homeowners 10% on my list price.

Plan B: I've always been able to sell my houses, so I haven't had to rent, which is Plan B. Plan C would be to sell via owner financing, which I could do since I buy 'em for cash.

Landscaping: I usually don't do anything lavish, but I usually have to heavily prune back overgrown bushes and trees. If there is something ugly about the deck or patio, I'll fix it. One concrete patio had an ugly crack. I patched/repaired the crack, then installed slate tile. Beautiful! Slate is cheap, but the labor is expensive. Doing it myself earned me a lot!

Your mileage may vary.

2k10h