Flipping a house for the first time

by Avi

Hi Luis,
I came back to check if anything else is going on at your end with new project. I would very much like to have your advise in flipping a house for the first time, as I am into this as full time. I am still looking to get a house to do a flip. The first house I choose was 72 k. However when I got a quote from a GC he quoted 55 k. This is just ridiculous. This house needed work no doubt. However that figure is just too exorbitant for me to make any money in the location and the type of house.

So I am thinking of doing a flip myself now acting as my own GC. Since this house is a bit too much for first time flip on my own I am looking for lesser value and lesser complicated project now. Is there any software in the market that will give me ball park estimate of project by adding the various data? Also I do not yet know anybody in my area who will recommend good contractors for various jobs. How would one get that. Finally if you have more advise for me it will be so helpful. Also good luck to your house number 6 sell.

LM says:Avi, there is a lot involved when flipping a house for the first time so let me give it a shot. First of all my advise has to be general because I do not know your market, the house in question, the price of stuff where you are at, etc. What I can tell you is that in order to figure out if a house makes a good flip candidate you need these key pieces of information:

1. What is the house worth after repairs are done? Otherwise known as the ARV (after repair value). If you don’t learn anything else as an investor, you NEED to refine this skill. It is hard, I am still working on it but it is absolutely crucial. This is the number that determines everything else in your flip calculations. For this the MLS is critical so that you can find out what similar homes to the one you are considering have sold for in the last 6 months, 3 months is better. Be brutally honest and conservative and nail down that number. Have a realistic expectation of what this house can sell for when you are done with it.

2. Cost of rehab. This is another crucial skill, not as important as #1 and you’ll see why but it is important still. The thing with the rehab is that you can bring it up or down. You can put in granite countertops and marble floors or you can do Formica tops and vinyl floors. It all depends on what the neighborhood and price range are calling for. If the GC is telling you $55k then what is he basing this on. From what you say I think this guy gave you the retail price not the investor price. You will have to differentiate the contractors that work with the general public vs. the ones that work with investors. The best way to find them is:
a. by talking to other investors – look for investor clubs in your area or online like Bigger Pockets.com
b. Showing up at 6 am at the Home Depot/Lowes parking lot and see who is there. Good contractors are busy and start early
c. Going to the supply house for a specific trade (paint, drywall, roofing, etc.) and asking for referrals
d. Showing up to another investors rehab property and see who is working there
e. Showing up to a new home construction site and talking to the workers. Those guys often do work on the side

The only thing I caution you is when you say that his $55k figure is too high is to make sure that your expectations are realistic. Why do you say it’s too high? What were you expecting? What was he including in his scope of work?

I know there is construction estimating software out there but that is probably expensive and too much for this project. The best way to estimate costs is to spend several hours at home depot. You can also just hire a GC just to walk you through cost estimating.

3. Finally, what are your holding and selling costs? This is includes everything from what you have to pay in mortgage payments, utilities to how much you are paying in real estate agent commissions.

When you have these 3 key figures you will be able to calculate both the expected profit and what is the maximum that you can pay for both the house and the rehab. When flipping a house for the first time if the price you are paying for the house and the expected cost of rehab plus the selling costs minus what you can sell the house for leave you with a profit of AT LEAST $20,000 (more is better) then you might be able to make the deal work.

Why $20,0000?

Because that number gives you a big enough buffer so that if you have calculated 1-3 carefully enough you will still survive any surprises or unexpected costs. If you have no surprises (doubtful) then you walk away with a nice profit! If the crap hits the fan and everything goes wrong then at least you walk away with a small to no profit, which is better than a loss any day…

As you will see with House #6 I was willing to accept a lower profit than the $20k but it was because I had some experience and I was confident that this house needed minimum work. But in your case, this being your first one , I would stick with $20k as minimum accepted profit.

P.S.- I am way past due on an update on House #4 and #6. They are both under contract to sell and hopefully will be sold before the end of the year (knock on wood) I’ll post an update soon.

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After getting an offer
by: S. Smith

I am not sure how this works, but I have an offer on my house of 20,000. The house needs a lot of work its old and I believe it has asbestos and lead paint. We are not really sure, but I asked the buyer what he had planned for the house and he stated, he wanted to push it down to make parking room for his business next door. We purchased it for 5,000. and the home was built in 1950 it is also commercial property.The home is appraised for $45,000. Could you please tell me how this needs to go down. Will I have to draw up a contract and we both sign and take it to the closing table.Is this like a outright sale. I don't have a clue how to make this sale. I don't want to get screwed because, I understand there is some hidden fees such as closing cost and taxes. So if I flip it I still stand a chance of netting 15,000 from it. Please direct me on where to go after the offer is made. I want to do this on my own without the fees of a realtor.
S. Smith

LM says: Smith, since this is unrelated to this thread, I have moved this over to it's own page. You can find that here: http://www.wealth-steps.com/house-flipping-my-first-deal.html

Thanks for the help
by: Avi

Thanks Luis for the generous answers to all my questions. I appreciate it very much. I like the reasoning of all your viewpoints as those are backed by sound logic. Hope to see your updated post on especially house # 6. Good luck.

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