Saturday, December 17, 2005

Why Flip? Because it Pays

Let's try some numbers from another blog:

An investment house in Palm Springs. Purchase $475,000 in Jun '05. Tear out the kitchen, granite countertops, etc. Add a second sliding glass door to the pool. Minor landscaping, minor paint/patch. $75,000 improvements.

$550,000 total investment
$699,000 listed
- $40,000 commission, fees, opex
= $109,000 profit

What is wrong with this picture? First they didn't pay cash. For the sake of discussion let's assume 20% down 30yr fixed 6%. So for 6 months investment is not $550k but approx $210k. That's an amazing a 100% annualized return on your money.

But of course even this isn't true. Flippers don't put 20% down and take out 30yr fixed mortgages. And who-in-the-hell pays cash for $75,000 in home improvements? These things were all debt purchases so let's look at something closer to the real financing.

Bring $40k to the table in June. Finance interest/only or intro ARM $450k so the payments are $2300/month. A $75,000 HELOC would probably cost $3,000 to start so we are paying on $0 to start up to $78,000 by the 5th month. Call it $700 by he end. So, how much have we "invested" in the last six months?

$40,000 down plus the lost opportunity 6mos interest, $1,000
6mos taxes $2,300
6mos payments $13,800
HELOC repayments $2,300
Total+10% misc = $65,000 while carrying $528,000 in debt instruments.

Sales price to get out even? $640,000
At the $699,000 sales price $56,000 cleared on $67,000 invested in 6 months. A lot more than 100% returns. The theory of OPM strikes. OPM = other peoples' money.


Nina Smith said...


Thanks for the nice comments yesterday and the math listed above :)

I'll show 'em the real ROI soon.

mogger said...

Great analysis Robert, but it is just another reason why ROI is a pointless exercise in the scheme of things imo.
$640,000 to break even does not leave much breathing space.
Especially given there are four people involved in the investment.
Goes to show how often in R/E a deal can sound great but isn`t.
All the same we all live and learn good on you Nina for having a go.
Great reno!.

Rob Dawg said...

It's all the different -respectful- opinions that make the world an interesting place. The outcome will be interesting no matter the result. I'm guessing $3,300/month to hold so another $10k investment to see if they can get their price in the spring. Hey, it's an investment not a sure thing. Me personally? I'd sure like to be sitting on these expected returns in my pocket ready to invest this summer. But then again I'm not selling any of my properties. Tax protection and low basis costs make it insane in my case to do otherwise. Every deal is different. I've got one rental property free and clear so if I spot a cash positive property I can pull more than enough equity no matter the markets to do a desperation deal.

I liked the whole deal. The only difference, and this may be just hindsight, I'd have spent less money faster and have tried to roll quicker. Landscaping, paint, patching, the patio doors were all good but imo, opinion only mind, tile tub, artsy sink and euro-kitchen were too pricy for the property and probably not appealing to the target audience.

This is also one of the things i don't understand about residents. The original sellers left a lot of money on the table and could have been living better besides. If you have to update to get the best price why not do it a few years earlier and enjoy the improvements? Oh and I've had wired the whole house and patio for technology. $2-$3 grand during a remodel and you've got a standout feature that everyone values.

mogger said...

That`s right spending too much is a trap for all renovators, I`ve seen it countless times.
It`s why so far I have done 99% renovation work myself, but everyone can`t do that of course.
IMO experience though to go in with others is a mistake simply because it serves only to make you less frugal, less selective and cuts any gains to minimal.
When renovating my mentality tends to run along the lines of "go hard or go home", no in between, no sitting back, no spreading risk and like you say do it fast!.

Rob Dawg said...

Interesting perspective. Can you expand on "go hard or go home?" I understand not letting anything slide but are you talking about doing the big projects, say a room addition if needed or are you saying put lipstick on the pig with a new water heater and pressure washing the deck?

You are correct that group dynamics can be "overhead" in these situations. There needs to be a general partner structure at he very least. Gosh, how much is a ruined friendship or relationship worth anyway? I don't want to find out.

A bit of psychology advice; leave something, something small, something obvious like an old screen or leaking faucet outside. People like that.

mogger said...

I mean many read books and get some idea that things will pan out, 9 times out of ten they don`t.
You need a plan and to go and go until everything is done, you need to do a quality job with quality materials at low cost which means auctions, and do it fast, otherwise the interest payments will knock you for a six, as time flies.
Your last idea is not so bad either, some jobs people have no trouble finishing themselves, in a good market I have sold unfinished houses for much more money than I expected, you do a bit, plant the ideas and owner occupiers come along and finish how they want, but to me it is all about doing a house you would live in yourself and pay the money for, and as others have said give it features and style others don`t have.

ocrenter said...

well, unfortunately for nina, we are looking at a senario where it doesn't pay. even with the newly lowered price of $669,000. Why? can't sell a 40 year old renovated home at 1900 sqft when a brand new 2004 never lived in 2500 sqft home is also not selling at $599,000. see my comment on her blog.

Rob Dawg said...

I posted this thread on my blog rather than reference hers because I suspected the true record would be muddled and sure enough it has been. My comments were Dec 17th. Notice that I also went out on the limb with a get out alive number of $640k. That was a month and $3500 ago. She cut $30k last week 5% and also exactly half her profit. Assuming a quick sale (yeah right) her new break even $647k.

Thanks so much for compiling the listing of comps. I agree it is a race to the bottom in places like Palm Springs. People clearly don't understand the market where so many homes are occasional use. In fact I have a new prediction. Palm Springs will be flooded with FB Gen Xers and their families overwhelming the community as these people lose their primary residences in the Inland Empire, etc. and move into their parents "extra" house that the bomber (not a misprint) can't get rid of. Can you see next Sept when school starts and the PS school system has thousands of unexpected students? Chaos.

ocrenter said...

true, or the other way around, the parents move into the vacation home in PS and give the primary home to the kids.

that $75,000 in renovation seemed awefully high to me. really cut into the profit potential. And if she used HELOC to get taht money, well good luck. I think some folks' HELOC are now 9%.

I certainly would be scared sh!tless if I'm in her shoes and saw those comps... the even scarier part is how many more you can find.

She stated pretty clearly she's hoping to net a snowbird. My friend with a 55+ property in Queens Creek in AZ is also hoping to net a snowbird. There's thousands more like my friend waiting for their snowbird in AZ with properties half the price of Nina. The next post on the issue will prove interesting.

Debt Consolidation Refinance said...
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Debt Consolidation Refinance said...
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