To Wholesale or to Flip: Case Study of an Investment Property
I freakinâ love Real Estate. Days like today make me love it even more. Earlier this week I got a lead for a house. Today the property went under contract. Iâm now faced with a very difficult question.
Should I wholesale the contract and make $10,000 next week or complete the project myself and make $30,000 in six months? These are the types of problems I donât mind having.
Many of my students ask me about how I determine whether an investment is a winner or a loser (yeah, Iâve had experience with both). So Iâve gone through the process of evaluating a property using this house as a template. At the end of this post Iâve included a short poll to get your feedback. Should I wholesale this deal or flip it myself?
On Monday I received a contact from a homeowner requesting an offer on their property in South Philadelphia. I spoke to Frank, the owner, on Tuesday and we discussed the property. During my initial contact with any owner, I try to do three things. First I collect the basic details on the house: address, number of bedrooms and bathrooms, condition, etc. Second, I try to evaluate whether the seller has any emotional attachment to the property. Finally, I want to determine the sellerâs level of motivation. Why do they want to sell? Do they want to sell or do theyÂ need to sell? When do they need their money? During the course of my phone call with Frank I began my evaluation.
The property is a 3 bedroom row house with one bathroom and a partially finished basement. The house has been occupied by a long term tenant for the last 7 years. Recently the tenant was evicted and left behind a mess. The owner considered fixing up the property, but heâs now retired and just wanted to unload the house. Frank was fed up. I asked him how soon he wanted to close on the house. He said, âHowâs tomorrow at 10?â While this wasnât a âneed to sell situation,â the owner was motivated enough to sell the house at a significant discount. Before getting off the call, I gave him a price range on where my offer would fall. We then scheduled an appointment for Friday morning so I could check out the property and firm up my offer.
Before viewing a property I find it helpful to do my homework. This includes determining the estimated resale value of the property, contacting some of the investors on my wholesale list to determine their interest in the area and get an idea of how much theyâd pay for a property. I also search the public record to find out what the property last sold for and when.
Philadelphia is an urban market. That means that home prices can change drastically within a few blocks. So when I search for comparable sales inside the city limits, I stay within 3/10th or even 2/10th of a mile from the subject property. The results for the South Philly house were all over the place. I saw sales for $70,000 and I saw sales for $240,000. Even after I refined my search to include similar square footage, the range was huge. When I reached out to my investor list, they helped me narrow down the range.
According to two âflippersâ in the South Philadelphia market, the after repair value of the property ranged from $169,000 to $189,000. Both investors said theyâd offer around $75,000 for the place based on the information Iâd provided.
The public record revealed that the house had last changed hands in 1991 for $45,000. There were no mortgages recorded on the property. Based on my conversation with Frank, it didnât sound like thereâd be any utility liens on the house.
Friday morning I was armed with the knowledge I needed to make an offer. The house was owned free and clear, or nearly so. It would likely sell for around $175,000 once I completed approximately $40,000 in work. I had two investors willing to buy a $75,000 contract on the property. If everything checked out, I was ready to make my offer.
The onsite inspection has two purposes. First I need to determine whether there are any significant environmental factors or structural conditions which would affect the value of the property or impact the rehab expenses. Second, a face-to-face offer with a written contract has much more impact than a verbal offer over the phone. I also like to establish some common ground with the seller. That common ground can go a long way in getting your offer accepted.
When I arrived at the house on Friday, I drove around the area. I was looking for the environmental factors. How did the area look? What kinds of cars were parked in front of the houses? Was there any evidence of drug trafficking? You get the idea. I was looking for the good, the bad and the ugly. What I found was a nice, working class neighborhood.Â There were no abandoned buildings or shady looking kids lurking on street corners. The vehicles ranged from late 90âs model fords to newer BMWâs. I also saw two other rehabs in the immediate vicinity and new construction being built a block away. So far, so good.
The block itself is very tight. I had a difficult time driving my car comfortably down the block with parking on one side of the street. Though thatâs not a plus, itâs not atypical for the neighborhood. The tight blocks tend to keep out non-local traffic and can actually be attractive to buyers.
When I met Frank for the first time, he started telling me about his tenant. As we walked through the house I was able to find that common ground by relating some of my tenant horror stories. By the end of my inspection we were old friends.
The condition of the house was precisely as heâd told me. The prior tenant left trash and abandoned furniture in every room. The walls were dated with wood paneling and stained carpets. But the structure was sound. From what I could tell, the electric and plumbing needed to be updated. The bathroom and kitchen had to go. I saw evidence of a roof leak, so weâd have to replace the roof. The heating system was 2 years old, but Iâd need to install an AC unit. The scope of work fell right into my $40,000 budget. It was time to make my offer.
Before I make an offer to any property owner I want to make sure Iâve accounted for everything. So I excused myself and took a minute to run my numbers before discussing them with Frank. To calculate all of my costs on any project I use a simple piece of software that I developed called the BirdDog Investor Profit Maximizer . Itâs a lot easier to run the numbers and make a solid initial offer than it is to change your price after realizing youâve offered too much.
For this South Philly property I calculated a profit of about $37,000 with a purchase price at $60,000. Iâve broken down the numbers below.
|Selling Costs (Agent Fees, Transfer Tax, Seller Concession)
|Purchasing Costs (Transfer Tax, Title Insurance, Hazard Insurance)
|Finance Costs (Hard Money – Points & Interest for 6 months)
After running the numbers Â I went back into the house to discuss them with Frank and make the offer. In the past Iâve found the best way to make an offer to a seller is to be honest. I mean overly honest. Show them the numbers. Give them the facts. Then if they come back and say, âHey youâre making all this money. I want more,â I just tell them, âFine. You take the risk. Your house is a mess. Spend $40,000 to fix it up. Deal with the construction. Then find a Realtor. He or she will charge you 6%. Pray that you get an offer. If you do, pray that their financing goes through.â Usually that conversation puts things in a little better perspective.
I didnât have to have that discussion with Frank. I told him what I thought the house could sell for and how much I was going to spend on the rehab. I showed him my expected profit and how long it would probably take to sell. I told him I could close and heâd have his money when the title work came back. I gave him a copy of my bank statement as proof of funds (obviously the account numbers and pertinent information is blacked out). Thatâs when I made the offer: $60,000. Then I shut up.
We sat at the kitchen table for about three minutes without a peep. It got a little bit uncomfortable. He asked for $90,000 over the phone. I told him at the time my offer would be between $50-80,000. Though it was a lot less than his asking price, I thought I had a shot. Finally he said, âLet me talk to my wife.â We agreed to speak Saturday morning.
This morning when he called he said I could have the house for $65,000. I agreed and emailed him the contract. An hour ago I got the signed agreement in my fax machine.
This business is full of upâs and downâs. Sometimes I feel like there will never be another deal. Thatâs when I end up talking to a guy like Frank. So that brings me to my question, should I wholesale this deal or flip it myself? Give me your feedback. Click on the poll at the bottom of this post to voice your opinion. Iâll update you on my decision in a future post.
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