I Flipped My First House
This housing market is changing rapidly. It’s becoming harder to make real estate investing — or as some call it flipping — deals work. I’m now paying more for the homes, more for the labor and materials and more for capital. My costs are going up faster than the values of renovated homes.
My biggest headache, as always, is on the construction side of things. Contractors are busy again. Their prices are going up and their attention to my projects is being split between the multiple jobs they’re trying to manage.
All of these factors forced me to reexamine my life at least when it came to one deal I recently completed.
I just tried a different exit strategy that many in the business are calling wholetailing. Wholetaling refers to your exit strategy. You’re selling a wholesale deal to a retail buyer.
As many of you know, rehabbing or flipping is when you buy a home fix it up and immediately resell it to a retail buyer for a profit.
Wholesaling can be done in a variety of ways but typically an investor will get a home under contract at a big discount and then sell the contract to another investor on their buyer’s list and the home never hits the open market. So, in the ideal wholesale scenario the wholesaler never actually owns the property. The right to the contract is sold not the property. This saves thousands of dollars in closing costs. But, the key point here is you’re selling to other investors so the buyer’s pool is limited. Risk is also limited because the middle man never takes ownership of the home.
But, the wholetaling strategy is a somewhere in the middle. The investor does actually buy the property so they incur thousands of dollars in closing costs and they take on the risk of ownership. But, the property is then relisted on the open market, as-is, to a larger pool of potential buyers. This increases your buyer’s pool but it also ads costs. However, a retail buyer has much lower costs than an investor. As I’ve said before a retail buyer could pay 10% more for a property than I can and still come out just as well. The other potential benefit to the retail buyer is they can fix the home up to their own specifications and tastes. There are a lot of people looking for project homes. The big advantage to the investor here is that he or she doesn’t have to involve contractors.
A few months ago, a gentleman received one of my flyers. I market pretty heavily in one particular area of Alexandria that I see as having a lot of upside potential. I regularly send out my little “We Buy Homes” flyers to the area.
This good gentleman received one of my flyers and he even did a little research on me before he called. He was interested in selling his home, conveniently. I set an appointment and I met him at his home the next day. I was already familiar with the neighborhood, having recently completed a project nearby, but I still pulled fresh comparable sales data and took that information to the meeting.
After touring the home with the man, I was convinced that I would not be the best buyer for him and his home. The home was a little one-level rambler. It needed a complete makeover but structurally it seemed pretty sound.
When we were done with our inspection, we sat down and I explained the numbers to him. I showed him the comparable sales information. I told him that with about a $65,000 renovation he could probably get about $375,000 for his home or if he listed it as-is with a Realtor he could probably get $280,000 to $300,000. I showed him all of my expenses and told him that I would only be able to pay him about $230,000 for the home. Even after Realtor fees he’d probably make at least $30,000 more listing his home on the market.
To my surprise, he said he was good with $230,000. He told me that he had a good amount of money in the bank already. He was retiring and he was moving to an active adult community in Fredericksburg, Va. He just wanted some certainty and flexibility on the closing date. He didn’t want to deal with all of the nonsense involved in selling the home conventionally.
I can’t compete on price but flexibility on closing date, certainty of sale and convenience is exactly what I offer.
We wrote up a contract with an open closing date to take place two to three weeks after his acceptance into the active adult community. Once he was approved by the community he would give me notice and we’d settle on the home.
It took about a month for him to complete his application and get approval on his new residence and then just a couple weeks after that I was the proud new owner of a little old rambler just outside the Beltway.
My hands were pretty full at the time. I had a project that was taking about twice as long as it should and it was tying up a lot of resources. I started looking closely at the numbers on this deal.
The home was structurally sound but it needed new everything. After renovation, and holding costs (such as utilities, insurance, property taxes and capital) I wouldn’t make all that much money and it would take months to complete.
So I did the math on selling the home in it’s as-is condition. I found that I could make a pretty good little profit just selling the home as-is. Plus, it reduced a lot of risk of having more contractor problems, faulty work or permitting delays.
I decided to just list the home as-is for $299,000. I figured I would just give it a month or so and if I couldn’t get a good contract then I’d go ahead with the renovations. Within a week I had a contract on the home for $286,000 and we settled a week later. It’s the quickest deal I’ve ever turned.
I do wish I could turn deals more quickly but I also enjoy envisioning what a home could be and bringing that to reality. There’s no other business that gives you such a satisfying and tangible end result as renovating a home.
On several deals in the past I’d considered selling the homes as-is but I chose to do the renovations because I thought I’d make more money and because I felt like I had an obligation to the owner to make their house a home again.
I can think of two specific deals that fall into this category. I looked at the numbers on these homes and said I can just sell these and make a good little profit but I went ahead with the renovation. I regretted my decision. On both of those deals I had problems with contractors that drained the profit and ballooned the schedule.
In this deal I explicitly informed the seller that I was considering immediately relisting the home and he was fine with that. He wished me well.
In fact, the seller and I have become good friends and pen pals. He is also a former Marine and he worked in the trades for years. We have a lot in common and I consider him a top friend now.
Most deals still do not work out for this type of exit. I just bought a home in Germantown Md. This home cannot be resold as-is to retail buyers because it is not really livable in its current condition so I am steaming ahead with the renovation.
With the “wholetailing” in Alexandria, I didn’t get the nice before-and-after pictures but I still feel pretty good that it seemed to be a win for everyone. The seller was able to execute his plan. I made about $25,000 and my investors made an excellent return in just three weeks.