first flip exit feedback - Posted by trandle

Posted by Jessie on April 18, 1999 at 23:19:51:

Well, I still think your deal is a too tight. I made the same mistake when I bought my first house. The house was appraised for over 145, and I bought it for 130, without any fixing ups. I know the market in my area is going up really fast and I thought, since we don’t own a home, why not live there a year or two then sell it later for a small profit? Boy! Was I wrong! We ended up putting up front 22k for downpayment. Now it’s been a year, and I am trying to sell for the market price, and I have reduced and reduced it again with no results. Then I founded out that this market could not bear paying full market price. (I assume that’s why the seller sell it to me so cheap at the beginning.)
So, I end up here, still with the house, with 22k tied up into the house, and can’t get it back out. We weren’t that greedy wat the beginning, we thought we would be happy for a couple thousand, but sometimes, calculations really goes wrong. I think you are in the situation where we are at before. I and my husband made the goal we have to buy a property by a certain time, and we did! Boy! I regret so much what we did.
Now, when I am buying property, I make sure I get it at least 20-30% below market value if I do intend to sell it.


first flip exit feedback - Posted by trandle

Posted by trandle on April 18, 1999 at 14:39:20:

I would appreciate some feedback on our possible exit strategies for our first deal. Here’s the details:

note to seller: 110k, 5 year balloon, assumable
down + cc: 13k (LOC - want to repay soon)
ARV: 138k to 145k (comps vary greatly)
repairs: carpet, paint, garage reconversion, misc 7k

We close by 5/3 (as soon as current tenants vacate) and haven’t run a sales ad due to not being able to show it until after close. Initially, we were going to do repairs and sell for 10% cash plus closing. Now, we think we want to just offer an allowance and repair after receiving a contract. Would it be better to just discount the price and sell as is? We would prefer to cash out, but don’t mind carrying a note for the profit as long as we can get most of the LOC repaid. As reality looms nearer, we’re getting confused as to the best way to handle this. Thanks in advance for your suggestions.

Re: first flip exit feedback - Posted by Bud Branstetter

Posted by Bud Branstetter on April 19, 1999 at 18:19:18:

I’m sorry that I have to agree with the others. I would try to go back and renegotiate the contract. First would be payments and interest deferred until you have an acceptable tenant.Since you can not do repairs nor show it this is reasonable. Second would be at least a 10 year balloon or super low interest.

I don’t know any of the courses that would tell you to put that much down without already having it sold. Or escape clauses. Retail flips are the hardest to do and 13K down is at the high end of expectations for buyers with having to refi.

Re: first flip exit feedback - Posted by JPiper

Posted by JPiper on April 18, 1999 at 18:16:10:

This deal looks awfully skinny. I get $8K to $15K gross profit before you deduct any selling costs. If you had to list this with a Realtor the commission alone would amount to $8400, plus other closing costs. Carrying costs are another factor which you say you have taken into account, but then again it depends on how many months you have built in here. Hopefully the repair estimate is accurate (sometimes they’re too low when you’re new).

If you make the repairs you have $20K cash tied up in this deal…understanding that some of this comes from a line of credit. I’m wondering what your payments are, and how this compares with prevailing rent in the area?

This looks like a tough one to me. It’s a deal I would walk from if I had the opportunity unless there’s a factor here you haven’t mentioned.


Re: first flip exit feedback - thanks - Posted by trandle

Posted by trandle on April 19, 1999 at 22:16:28:

Thanks to those who responded. I think this will work out okay and either way we’ll be a little more patient in the future. Thanks again…

Re: first flip exit feedback - Posted by trandle

Posted by trandle on April 18, 1999 at 22:40:28:

Yes, it’s skinny, but I’ve been reading for years about finance, investments, and real estate with no resulting action. It was time to get off the pot, so to speak.

Repairs are based on bids so they should be close. Total payment (PITI plus HOA) is $1,300 which we could get in rent if necessary.

We (I don’t suffer from multiple personalities - refers to my wife and I)can’t easily walk away. Our initial goal was to get the first one “DONE” with enough margin to at least walk away with 3k to 5k allowing for errors in judgment and calculations.

So, knowing this, won’t it reduce our risk to not put anymore into it, mark it up slightly above cost, and offer seller financing? Or is there a better way?

As an aside, we have another closing that same day on Deal 2 (NQA), which we will keep and rent. Fun and scary so far…thanks for the input.

Re: first flip exit feedback - Posted by JPiper

Posted by JPiper on April 19, 1999 at 15:31:04:

Just to point out the obvious, the fact that you’ve been studying real estate and finance for years with no action on your part does not change the merits or lack thereof regarding your deal. While I think it’s good (imperative) to take action, sometimes new investors get TOO motivated to take any deal at all, just to get in the game. In the end, whether you’ve been in the business a few days or a number of years, the numbers are what tell the story.

In your case, renting the property will create a negative cash flow?.because you’ll have ongoing maintenance and repairs.

If you make the repairs, you’ll have $20K in the deal. Whether you can owner finance and pull $20K from a downpayment from the buyer is questionable?but you know your market better than I. Even if you do, the buyer will have to pay a higher payment than your existing payment to create your profit. Again, without the interest rate details, etc. I can’t make a judgment on this, or for that matter your market.

If you don’t make the repairs, the question is whether this will still be marketable. Again, you know the picture better than I. But again, you’ll need to get a downpayment of at least $13K and terms that exceed your existing terms to create your profit.

The question in terms of owner finance is that you will have an ongoing responsibility for the underlying loan?.so there is an ongoing risk to you if your new buyer defaults. The purpose of profit is to compensate that risk. Whether either of the above scenarios will do that again depends on the exact numbers, and your appetite for risk. You haven’t provided enough numbers to judge this.

Again though, the deal is quite skinny. Trying to retail properties for a $3K-$5K profit as an expectation leaves little margin for error. If you’re in a position where you can’t walk from the deal, I wish you luck. But I would not make a practice of this type of deal in the future, even if it works out for you. It’s skinny, and is problematical because you don’t have an effective exit for your cash investment unless you are successful at retailing the house to a buyer who gets a new loan. Most buyers in this category will be people who want the house fixed, raising your cash investment.

By the way, if you sell owner finance you should be able to get an above market price?.assuming the market will be able to bear the payment at that price. But again, your cash requirement from possible buyers owner finance is important too, and you’re going to be in at a fairly high level.