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Old 08-07-2015, 06:39 PM
 
404 posts, read 667,543 times
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I was talking to a friend of mine in the D.C. area that has experience in flipping houses. Although his last experience was during the real estate boom in 2003-2007. He wants to start flipping again.

Let me know if you agree with his strategy:

Find a home that needs work in a good neighborhood.

Price: $500,000 (pay it with all cash between 4 partners)
fix up cost: $50,000
Sell for $$650,00
Profit of $100,000
Profit for each partner would be $25,000 a piece


What say ye? Does this make sense. Is it worth it? What kind of numbers do you look for?



P.S. His thought is that the risk on your initial capital is low because there will be no mortgage, so your equity is protected.
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Old 08-07-2015, 06:47 PM
 
Location: Ozark Mountains Arkansas
2,716 posts, read 2,010,240 times
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You would have to look at comparables for the area to see if the $50K in improvements would give you another $150K in market value, that's not always going to be the case. You have to make sure you get the house at a deep discount to leave room for profits.
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Old 08-07-2015, 07:15 PM
 
Location: Mount Laurel
4,187 posts, read 10,763,272 times
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You would want to determine the roles/expectation of each partners on paper. Buying a house for $500K, spend $50K to fix and sell it for $650K is not $100K profit.

Your equity is not protected when you buy real estates. Paying cash lowered your carrying cost.

Bottom line. It's an over simplified plan, especially with 4 partners.
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Old 08-07-2015, 08:19 PM
 
Location: NYC
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You forgot real estate fees, unless you are doing FSBO.
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Old 08-08-2015, 01:35 AM
 
Location: MSP
442 posts, read 512,824 times
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If the final goal is a market price of $650,000, they should be paying no more than $390,000 for the pre-reno property. And 2:1 profit over the renovation budget is nonsense. Your friend is watching too much HGTV.
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Old 08-08-2015, 05:53 AM
 
404 posts, read 667,543 times
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Default equity protection

what I mean by equity protection is that we can get our money back/break even if it doesn't work out.

example: $500,000 (put down all cash)
improvements: $50,000
Sell for $550,000 worst case scenario (no harm no foul)

I'm simplifying this for conversation purposes. I'm aware of realtor fees. We would most likely partner with a realtor and contractor on the deal to keep the costs in check.
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Old 08-08-2015, 06:35 AM
 
Location: MSP
442 posts, read 512,824 times
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Quote:
Originally Posted by midlifeman View Post
what I mean by equity protection is that we can get our money back/break even if it doesn't work out.

example: $500,000 (put down all cash)
improvements: $50,000
Sell for $550,000 worst case scenario (no harm no foul)

I'm simplifying this for conversation purposes. I'm aware of realtor fees. We would most likely partner with a realtor and contractor on the deal to keep the costs in check.
No, the worst case scenario is that you put your $50,000 in but run out of cash to finish it. Then you're trying to sell a mid-flip house with open studs, no flooring, tore up yard, etc. I've seen a lot of short sales of properties where flippers ran out of funds and had to take a hit.

And just because you partner with a realtor doesn't mean you have no closing fees or real estate costs. You'll still need to pay buyer's broker commission (2.5-3%) unless your partner finds the buyers (dual agency is more rare than a lot of people assume), and whatever other closing costs your state/district lumps on the seller.

I'm not trying to sound harsh, just trying to give you a reality check.
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Old 08-08-2015, 06:57 AM
 
Location: Cary, NC
39,045 posts, read 67,632,059 times
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There are too many spoons in the soup.
Too many partners for the projected potential profit.
This is an overcomplication and sounds like a trainwreck fixin to happen.

One of the first costs is the legal documentation of the partnership, roles, investments, expectations of involvement, personal involvement, and who holds how much of the bag in the end if it derails, and that last should not be taken lightly.
Attorney(s). Contract law. The stuff that TV and Movie dramas are made of.
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Old 08-08-2015, 07:11 AM
 
46,491 posts, read 20,192,868 times
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It all sounds well and good that you can turn a lump of coal into a diamond with $50K of hardwood floors and granite countertops, but there is a lot more to it than that.

The shows make it look easy.

I understand the trick is in getting the house at a low enough price in the first place.
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Old 08-08-2015, 07:12 AM
 
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Price: $500,000 (pay it with all cash between 4 partners)
fix up cost: $50,000 (everyone disagrees with fixup ideas & unforeseen issues.... add $25k. $75,000 total)
Sell for $$650,00 (buyer negotiates it down to $630k because there are no other buyers and comps are low)
Realtor - Buyers agent 3% sellers broker 3% = $37,800
Property taxes while renovation - $5,000
Profit of $100,000 $12,200
Profit for each partner would be $25,000 a piece $3,050

This seems a little more realistic......

PS. Junk fixtures, paint and cheap carpet are not going to cut it with a $650k buyer. Reno costs will be high

Last edited by 399083453; 08-08-2015 at 07:25 AM..
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