It's been over a month since Part 1 of My First Flip - What it Takes To Flip A House article series :). I promised that I will disclose what it takes to flip a house, the expenses, and the headaches. Well, it has definitely been a huge expense and a major headache!
I was hoping to update on the progress of the flip in this article, but unfortunately, the most upsetting, #wtf event happened. If after reading this article you do not feel upset or actually feel sorry for me, then you are a cold-hearted person!!! Okay...that wasn't nice of me to say. Let me restate...after you finish reading this article, you might think that I am ridiculously dumb, stupid, dimwitted and all those nice words. I honestly feel pretty stupid, banged my head on the wall several times, pulled my hair out and even want to shave my head (okay, not quite there yet) so no offense taken if you do think so :).
Before I get started, here are some photos of the property. I know you have been curious :). Look more like a disaster than progress:
Let's get started on the list of what it takes to flip a house:
Find a realtor agent
A good realtor agent, especially those who deal mostly with investors, searches for all the good deals and run all the numbers for you. He/she will usually send you a spreadsheet that includes the address of the property, listing price, offer price, budget, ARV (after repair value). He/she will work with you on your schedule to view the property and even go look at the property themselves if you are not available to go. If he/she is really good and experienced, he/she can also recommend contractors who can do the rehab, without you having to go search for contractors yourself.
It's absolutely important and I cannot stress enough how important it is to find a reliable, trustworthy contractor, specially those that are by word-of-mouth. I will talk more about this subject later in this article.
Work out a deal with your realtor agent on when you buy from him/her and when you list your properties with him/her. Some realtor agents will give you 1% back when you buy from him/her and some will give you more. Some will charge you a fix amount of dollar to list with him/her or a percentage (i.e. 1.5 %, etc). All realtor agents are different so make sure to ask what he/she can offer you. Some realtors ask you to sign some paperwork that states that you can only use him/her to buy or list until a certain date, and some do not ask you to. I prefer not to sign this kind of contract, but I have and will not do it again.
A lot of the investors are either real estate agents or brokers, so they don't need to worry about this task. They also save a couple of thousands on agent commissions.
Find a reliable, trustworthy contractor who is licensed
As I mentioned above, it is imperative to find a reliable, trustworthy contractor who is licensed. Before you go out and buy any properties that you want to flip, it is a good idea, for me it's a must, to have the contractor with you when viewing the property. The contractor can give you a ballpark of about how much it will cost to rehab the property and if they feel it's a good buy or not.
A lot of the investors are general contractors themselves so they don't have to worry about this task. They save lots of money being their own contractor. They just pay sub-contractors by the hour or when a job is complete.
If you need to hire a contractor, I would suggest using contractors recommended by your realtor agent or through investor friends who have used the contractors before. I had a wake-up call and quite a pricey lesson using someone I found on the internet. Bad, bad, bad idea!!!
Here is my story. Sorry, I have to digress for a bit :). I must tell my story because I am beyond upset that any contractor would do this to anyone. This ordeal actually does happen to a lot of people, so I want people who are looking to invest in real estates to be aware of these crooks.
I hired a contractor, Landmark Home Services LLC in Plano, TX, who I found on Thumbtack to rehab this property. I've used him on a minor project before and he's a very personable guy. Always talking about why any contractor would take people's money and run off. How anyone can sleep at night doing that, blah, blah, blah. He introduced me to the realtor agent that I bought the property from, so he sounds legit, right?
Well, that contractor screwed me over big time. Not only did he take off with my 25k payment that I've been paying him every week plus the upfront money, he made the property a complete disaster. When I finally realized at week 3 that there was no actual progress and this guy is scamming me for money, I confronted him. The contract stated that the house should be completed in 5 weeks. I saw no progress whatsoever for 3 weeks, just a complete mess all over the house from the interior to the exterior. I told him I will not pay him any more unless I get a list of things that have been done, the things that have not been done and the expected complete dates for each item. After that, I did not hear from him. I called and emailed and no responses.
During this time, his workers who had worked on my other property contacted me to ask if the contractor is still working at my property. They've been looking for him because he owes them lots of money. The workers also disclosed that this contractor screwed over other investors as well.
Due to the damages that this contractor caused, it cost me more money to fix and to put the property back to what it should be. I have to go through 6 different contractors, recommended by friends (no more finding one on the internet), to find one that can fix the property at a decent price where I can break even with this property if I sell it. One of the best thing about investing in real estates is that you don't have to lose money on a property, unless a catastrophe such as the 2008 event happens, as there are many options that you can take.
Now you see why I continue to stress the importance of finding a reliable, trustworthy contractor? Don't let this happen to you because this will add a ton of grey hair. I think I aged about 10 yrs because of this. This ordeal has completely changed and delayed my money-making strategy :).
Okay, done with my story :). I'll get back on track.
Determine your profit amount
Determine if the cost to rehab the property and the time it takes to complete the rehab give you good enough profit to purchase the property. This is especially important if you are using hard money loans or private lenders. I have not dealt with either one but do know that hard money loans and private lenders have a much higher interest rate as compared to a conventional loan. It's rightly so because flips are quite risky. If you do use hard money loan or private lender, that's another task that you have to deal with (finding a lender who will fund your project). And if you want to be able to sell the property to clients who are qualified for an FHA loan, you have to hold the property for at least 3 months.
Every investor is different on the amount of profit they want to make. A lot of the investors I know will only buy the property if they can make at least 20k. For me, it's a little lower. I am aiming for at least 15k.
There are also 'other expenses' that you have to take into consideration when figuring out your profit amount, but most of these expenses should all be included in the budget that your realtor agent provides in the spreadsheet. Other expenses include things such as realtor agents commissions, closing cost (for hard money loan/private lender), insurance, mortgage payment (for hard money loan/private lender) utility bills, and property taxes.
Make an offer and try to win the deal
Flips are hot and investors are thirsty to find the best deals. Winning a deal is not easy. I lost out on a lot of great deals before I got this one, and my offers were all cash. For some deals, it was gone the next day even before I was able to open the spreadsheet to look at the numbers. Some I lost because other investors offered higher or they put down a higher earnest money or a shorter options period.
Investors are smart, they are quick, and they know the right amount to offer for a good deal. So if you want a good deal, you have to be quick, know the right amount to offer, and having cash really helps.
Get the property inspected before the option period ends
As with buying a home to live or to rent, flips are no exception when it comes to home inspection. It's quite important to have a professional home inspector inspect the property to see if there are any major issues that might reduce your profit. Plumbing issues, roof issues, foundation issues are just some of the major issues that can drastically reduce your profit.
Once you get the inspection report, forward the report to your contractor. He will be able to tell you if any items listed on the inspection report will effect the budget for the renovations.
Look for the right insurance
Insurance is definitely a must to cover any unexpected catastrophe that might occur. If you use hard money loan or a private lender, insurance is required. If you are a cash buyer, then you have the options of whether to buy insurance or not, but it is highly recommended. Make sure that you get insurance before anyone starts working on your property.
Flips require a different kind of insurance, not the homeowner's insurance that you would by for your primary home or a landlord's insurance for your rentals. Some investors buy 'vacant home' insurance for their flips and others buy 'builder's risk' insurance. As flips are risky, most insurance companies do not offer vacant home or builder's risk insurance, so you have to search around for one that does offer these insurance. Here is a good discussion about insurance for flips that I found very helpful, https://www.biggerpockets.com/forums/67/topics/72454-insurance-on-flip-property. I got the builder's risk insurance that insures the property for 6 months and costs about $600. The price is different based on the insurance company you use and the ARV (after repair value) or the coverage amount you want to purchase the insurance for.
Have the utilities turned on
Sometimes this task is overlooked with all the other, bigger tasks you have to do. Find out what utility companies service your area. My property, for example, is in Garland, TX where the City of Garland provides electric, water, and waste service. But since my property is on the border of Richardson and Garland and the school district is Richardson, the City of Garland does not provide electric for that area. So I had to search around for another company to turn on electricity. Luckily, this property does not use gas so I didn't have to search for another company to turn on the gas.
Sign a contract with the contractor
Once you close on the property, it's time to do a thorough walk through of the property with your contractor. During this time, if you have any design ideas that you want to do, discuss with him. He will be able to tell you if it's feasible, within budget, or if it's worth doing. I usually have designs of my own.
As with anything that deals with money, a signed contract is always a must. Make sure that the contract details out everything that is going to be done, from room to room, the time-frame for the project, percentage of upfront payment, payment schedules, any penalty percentage if the contractor do not finish on time, who buys the materials, etc. The contract is between you and the contractor so you both decide the criteria for the contract. Every agreement between you and the contractor should be written on the contract. Do not take any oral agreements.
A trustworthy contractor will have no problems with the above. Most contractors will ask for some kind of upfront payment, but it should be a small amount to buy the materials needed to start the project. You should be able to negotiate with the contractor on the amount of upfront payment. If a contractor ask for too much upfront payment, maybe that is a red flag.
There are some contractors who do not ask for any upfront payment and will ask for about 50% payment once about 50% of the job is complete, with the review and approval of the owner before the payment is made. These are the kind of contractors I recommend. They are rare but are out there. I met one through an investor friend :).
Don't make the brainless mistake that I made and lose money, time and your youth, and make sure the contractor is reliable and trustworthy. Thoroughly read through the contract before you sign. Once the contract is signed, try not to change any plans/designs that were discussed. This many change the cost of the project and the time-frame. You want to finish the project quickly and within the budget so that you can list it, get it sold, get the profit you expected and move on to the next project.
Put on your design hat
As if all the above isn't enough work to take on, now you have to be a designer too! Well, yes you do, unless you want to hand over the design work to your contractor, which most do not like to do. It's the investors responsibilities to pick out colors (wall color, cabinet color, exterior color if you plan to paint the exterior, etc), tiles (floor, bathrooms, backsplash, fireplace, etc), flooring (vinyl planks, engineer wood, carpet, laminate, porcelain tile, etc), bathroom fixtures, ceiling fans, just to name a few.
This is where HGTV and Google come in handy! 🙂
Monitor the progress
Although having a reliable, trustworthy contractor to oversee the project saves you a lot of time and headaches, you as the owner of the property should also monitor the project. You must ask for updates from the contractor if you are not able to come look at the property yourself. Question the contractor if you see anything that is questionable.
I made the mistake of not asking for updates on a regular basis and not asking why this looks like that or why this has not been done, etc. Frankly, I put 100% trust in this shit-head contractor and didn't push for updates. There were so many red flags, so many excuses one after the other. I guess I am that clueless. By the way, I am a self proclaimed clueless person. 🙂
List or not to list
Now the final decision, should you list or not to list your property for sell? Some investors flip to rent. Some investors flip to sell. Some investors have other strategies.
My original plan was to flip and sell to make a quick profit. Now that I have spent so much money on this property because of the shit head contractor (I guess I am still very upset), selling it right away might cause me to lose a little money, or if lucky, I break even. One option I can take is to keep, do a cash-out finance and rent, but with the kind of money that I have spent so far, I am not sure that I can get a good rent price to cover all the expenses (mortgage payment, insurance, property tax, etc). I just have to do the calculations once the house is almost complete and see what I will decide on. As you guessed it...there will be a Part 3 article!! So stay tuned....
This is what I have spent so far on this property. It's a lot of money!
- Purchased price: $180,000
- Home Inspection: $495
- Closing cost: $537
- Builder's risk insurance: $600
- Foundation repair: $2400
- Money ripped off by the shit head contractor: $25000
- Electricity/water bill: $238
- Lawn service: $40
The cost for the new contractor to fix the damages and put the house back to what it should be is not included here yet. I might have to hold off on disclosing that info until I get this property sold or do something about it. 🙂
As you can see, there is a lot of things to consider, lots of headaches and decisions when flipping a house. Quick profit is not that quick. It's not glamorous or fun like it is depicted on TV. But....the potential to make money is limitless. You really do not need a lot of money to start investing in real estates, as long as you know what you are doing. There is so many resources out there that you can read and learn from. There are networking groups that you can join and the people in those group are absolutely helpful and possess a wealth of knowledge. I met some really nice and helpful people on there. Making money is not easy, but there are so many ways that you can make money with real estates. If you have the desire and motivations, you can do it!
Last and Very Important Note
Who was the contractor that damaged your property and took off with your money? Glad you ask the question! Here is his info:
Landmark Home Services (Plano, TX)
Phone: 972-480-2981/ Cell: 469-506-2529
He can't say that I am not helping him out. I am giving him free advertisement!
Articles you might be interested in reading:
- I Purchased My First Investment Property In Cash In My 20s! – Part 1
- How I Turned My First Real Estate Investment Property Into My Best Investment In My 20s – Part 2
- Disaster to Desirably Decent – Another Home Renovation
- How I Turned A Decent Closed Floor Plan Property Into A Beautiful Open Floor Plan And Rent Out In 1 Day
- Transform a Boring Condo Into a Modern Condo and Maximize Rent Income
Thanks for reading and stay tuned for Part 3! 🙂 I hope by then the house is complete and I have photos to show. Have a good one!
Disclaimer: All content is the opinion and experience of the author and should not be construed as advice. Make sure you do your due diligence before taking on any project.
Hey, Welcome! I am Thuy. I learned how to live frugally and saved money during my early 20s and purchased my first investment property in cash. I also invest in stocks, ETFs and Mutual Funds.