Fliperati

While you don’t want to start fantasizing about a big payday before you’ve even closed on the purchase of a flip, you have to think about the resale value and profit to come up with a budget for acquisition and repairs.  To the right is a summary of the rough numbers I worked with to get to my original offer price.  I’m hoping that every line is conservative and that I have a reasonable margin of error built in, but I have a feeling some of the numbers (like the rehab costs) might spiral out of control if I run into any unexpected expenses.  On the other hand, I’m also hoping I low-balled a few numbers.  The Target Sale Price, for example, was estimated based on the comps, but I have a (completely irrational) sense that the house is really going to shine when it’s all fixed up and break through the theoretical $399,000 ceiling in this neighborhood, maybe fetching something in the $410,000 - $425,000 range.  Also, I’ve budgeted for 5% of the sales price to be lost in real estate broker commissions, but I’m contemplating going FSBO (For Sale By Owner) to pocket an extra ~$10,000.  I feel like I’ve learned a lot over the course of the purchase process and could handle the logistics of selling the place myself, but who knows if I’ll be able to find a buyer on my own.  I may go with a flat-fee service to get the place listed on the MLS and do some of my own internet marketing as well, but it might also be worthwhile to negotiate a discounted commission with my current broker and not take too many chances on my first project.  At this point I’m just trying to convince myself that I would be happy with any four-figure (pre-tax) profit on my first project and treat anything below my target as invaluable experience bought at a discount.

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I was surprised by how difficult it was to get quotes on home insurance when I began looking a few weeks back.  Given my current lack of insurance-worthy personal possessions, no one would be surprised to learn that I don’t know much about the insurance industry.  However, I had always imagined insurance agents as fast-talking, work-around-the-clock, bend-over-backwards-to-make-a-buck people.  That image quickly changed after I reached the third “office closed” voicemail message at 4:15 on a Tuesday.  Apparently most New Jersey insurance agencies only take calls from 10 a.m. to 4 p.m. on weekdays.  When I was finally able to talk to someone on the phone and go through the lengthy questionnaire about how old the house is, what I want my deductible to be, how many bedrooms are in the house, etc, etc (I can’t believe how hardly any of these agencies have websites where the applicant could just fill in a form), I was surprised by how high the premiums were.  The New Jersey Department of Banking and Insurance has a great website that lists the range of home insurance premiums by provider and county and all the quotes I was getting were coming in at the high end of the range.

Frustrated with the dial-from-the-phonebook approach, I submitted quote requests through a couple home insurance websites and crossed my fingers for better luck.  While this approach was convenient in that you could fill in a single questionnaire about your home and get multiple quotes back, it was supremely annoying in that you voluntarily identify yourself as somebody looking for insurance on the vast, soulless inter-web and are instantly bombarded by spam and marketing materials from all corners of the universe.  It was worth it in the end because I was finally able to get a very aggressively priced policy from a large, reputable company that was highly ranked by the NJ Department of Banking and Insurance.  Now I just hope I never have to file a claim under the policy and that the house will be sold long before my first year of coverage expires.

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While I feel pretty good about most of the renovation plans I’ve put together so far, I’m struggling with a few issues.  Namely:

• Kitchen Cabinets: The cabinet framing, shelves and doors are all in decent condition, but I’d like to update the look of the wood and brighten the otherwise dark kitchen area by painting them white.  My dilemma here is that I’m not sure if I want to sand and paint the existing doors or just get new doors custom made.  Sanding and painting would probably be very labor intensive and take a lot of time, but it’s a fairly straightforward process and would cost very little.  New doors could be comparatively expensive and challenging to mount in the existing frames, but it would give me the chance to change the style of the cabinets and probably wouldn’t take as much time to complete.
• Kitchen/Living Room Floor Plan: There’s a nice opportunity to create an open floor plan by opening up the walls that divide the kitchen from the living room and the dining room (Wall A and Wall B on this rough floor plan), but I’m not sure if it’s worth the expense and the hassle on this project.  It seems like a waste to have a formal dining room in such a small house and I think it would really brighten the whole first floor to open up the kitchen, but I know that costs can escalate quickly when you start changing structural items.  I doubt there will be room in the budget or the schedule for this in the end, but it’s worth considering.
• Bedrooms: One of the three bedrooms in the house is quite small (9’ x 9’) and is probably better suited as a den, but I’m wondering if the house would sell faster if I combined two bedrooms to create a master suite with a walk-in closet.  The master bedroom would still be lacking its own private bathroom and I definitely don’t want to deal with that level of renovation, so it’s probably better to leave the bedrooms as they are. 

Update: See a more detailed version of the open kitchen question on apartment therapy with lots of great comments from AT’s stellar editor and thoughtful readers.

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Given that there are a couple major projects I’ll need to undertake in order to complete the renovation of my first flip house, my agent wisely suggested I contact the township building department to learn which projects would require a permit and how to go about getting one.  He even suggested seeing if I could get the department supervisor to stop by the property and take a quick walk-through with me to get on his/her good side and perhaps smooth the process.  Even as a novice I knew that it would probably be a bit of a fantasy to get a building official out to the property for sign-off on all my projects in a single visit, but I liked the idea and thought it couldn’t hurt to give it a shot.

Well, I quickly learned that the simple act of getting somebody from the township on the phone is nearly impossible, so I completely gave up on getting someone to come by the property.  Although the recorded message at the township building department states that “Your call is very important to us,” that statement must have been recorded under a different administration because it was clear to me when I called that nobody gave a rat’s ass about me and my questions, despite my stated desire to do everything “by the book.”  After a week of trying, I was finally able to get some answers regarding one of the major projects: the reconstruction of the dilapidated detached 1-car garage in the backyard.  Actually, “dilapidated” is a very generous term in this case, because the garage is literally on the brink of collapsing under its own weight.  The entire frame is rotted through and the roots of a large tree are tearing through the foundation and rear wall of the structure.  It also has a built-in skylight, courtesy of a large patch of rotted roofing that has led way to a gaping hole in the ceiling.

This is why I found it laughable when I learned that I can’t even tear down the garage without a permit, especially given the stated purpose of the permit process as a means of ensuring safe structures in the township.  Walking into this garage would be taking your life into your own hands, but the township won’t let me demolish it without their pre-approval.  Even better, if I do demolish it, I must immediately reconstruct a similar structure (after I have gotten the plans approved following the 4-6 week review process and received a permit for the new garage, of course).  Hilarious!  Maybe it will just mysteriously fall over in the night shortly after I close on the house.  You can’t force the wind to apply for a permit before blowing over a flimsy old shack.

On a less cynical note, none of this was unexpected and I knew very well when I set out to renovate this place that the permitting process would not be fun.  Also, I learned that they have a fairly liberal interpretation of “cosmetic” interior changes (not requiring permits) and that I could have a dumpster parked in my yard or driveway without a permit as long as it is not full to the brim or on the property for an extended period of time, so the news wasn’t all bad.  Now if only a wind storm could sweep through north Jersey in the next few weeks…

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Having completed a very encouraging inspection of the property, I’ve taken a few moments to jot down some of the major tasks I’d like to complete over the course of the renovation.  See a choppy list of my current plans after the link to the full posting.  Also, check out the gallery page I’ve created with a bunch of “before” pictures showing the current condition of the house.  I still have a lot to learn about web page design and the gallery section has some formatting issues, but I’m just happy to have it working.  I hope to have it cleaned up and looking a bit more professional in the next week or so. (Read the article)

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I spent just over an hour on Saturday afternoon with a very thorough home inspector, poking and prodding around every nook and cranny in my first project house.  The results were surprisingly good.  He said the roof was in better shape than I had previously thought (not great, mind you, but more than adequate for several more years by his estimate) and all the major systems (heating, plumbing, electrical) seemed to be in great shape.  Most importantly, there was not a trace of excess moisture or past water damage anywhere in the basement.  In fact, I would say it’s one of the driest basements I’ve ever been in – without a hint of mustiness or dampness even after a week of heavy rain.  This has put to rest the concerns previously raised by the flood zone revelation.  It would of course be better if the house were nowhere near a flood zone, but I don’t think it’s enough of an issue to stop me from moving forward with this deal.

Of course, there were also a few negative surprises during the inspection.  The oven, which looked to be fairly new and in good condition, did not work (I think it’s an easily repairable issue with the igniter) and there was a leak in one of the radiator pipes in the kitchen.  Also, while the MLS data had a 1960 construction date for this property, the inspector was quite certain that it dated back at least to the 1920’s or 1930’s.  This made a lot of sense to me because, even from my novice perspective, everything about the construction suggested that it was much more than 46 years old.  Given its probable age, I’m quite pleased with the condition of the home and looking forward to getting started with the renovations.

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Over the course of attorney review, the sellers disclosed that their home is located in a flood zone.  Clueless about the implications of this revelation, my heart immediately sank.  My thoughts drifted to the small canal that runs behind all the houses on that street, imagining a torrential rain swelling the waters and submerging my very first investment property before I even have a chance to change a light bulb. 

Fortunately, I didn’t let my imagination get the best of me.  A little research showed no notable history of flooding and I began to think that the canal was a blessing instead of a curse, given that it was probably constructed to manage water runoff and prevent flooding.  However, even if I did not think flooding was a potential hazard, there was still the concern that potential buyers of the renovated property would not be so easily comforted.  Also, the cost of flood insurance could provide justification for discounting the resale value of the property against the comparables I had been using.

I decided that I would use the home inspection, scheduled for this Saturday, to make the final call.  If there is no trace of water damage or excess moisture, I can proceed with the knowledge that an inspection at the time of resale will also reveal no evidence of water issues.  Good plan, right?

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After getting approved with a couple different mortgage brokers and comparing their programs, interest rates and upfront fees, I ended up going with the broker that my agent recommended.  The numbers that the different mortgage companies came back with were all largely the same, so I ended up making my decision based on the experience of the actual person I would be working with.  While I liked a Manhattan broker the best (pleasant, easy going, very professional), I ended up working with a fast-talking NJ mortgage guy because he understood exactly what my investment objectives were and was able to assemble a loan program that accommodated my desire for minimal upfront costs, no pre-payment penalties, etc.  The other brokers I spoke with seemed completely unfamiliar with the concept of purchasing a house solely for the purpose of fixing it up and re-selling it in short order.

Everything has been going smoothly and I’m happy with the financing plan that we have set up (5% down 30-year fixed rate mortgage with zero out-of-pocket closing costs thanks to a 3% seller’s concession), but I had an odd conversation with the mortgage guy yesterday when I noted that he had checked the “Owner Occupied” box on the application forms.  I believe I had told him that I live in NYC and would be working on the property during the week, so I wanted to clarify that he heard me correctly – even though I suspected he was giving me a break by filling in the owner occupied box so I would qualify for a wider range of programs.  His response was a chilling mini-lecture on how it certainly is an owner occupied property (rib-rib nudge-nudge) and how all my other documents will of course reflect that as well.  He then repeated that message, prefacing the statement with: “Just to be ABSOLUTELY CLEAR…”

This exchange was a little unnerving, but I suppose he is just trying to cover his butt and make sure I don’t put contradictory information on any other forms.  Also, it isn’t that much of a stretch to call it an owner occupied property because I’m not renting it out and I will likely spend many, many days and nights occupying the home over the coming months.  I can’t imagine I will be able to continue securing owner occupied financing after 3 or 4 flips in a single year, but I feel fortunate to have an aggressive broker working to get me a good deal as I first start out.

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Not a lot of activity on the real estate front today.  I didn’t have an attorney so I just had my agent forward the documents to a guy he recommended.  I trust my agent a great deal so I’m not at all concerned about the quality of his referral, but I felt a need to do some due diligence before diving right in and hiring the guy.  Fighting back the urge to be lazy, I took a few minutes to call him up this morning and get some info on his experience and his billing structure.  He sounded very much like a dry, lawyerly sort of guy based in Piscataway, NJ.  That was fine with me, though, because I suppose it’s good to have a lawyerly-sounding lawyer.  When asked about his experience he told me that he had been working on residential real estate transactions since 1975, joking that I was probably in diapers at that time.  He also quoted me a flat fee of $850 – assuming no issues arise that will force him to spend an inordinate amount of time on my purchase (such as a title dispute).  I don’t have much to compare this to, but it was less than the estimates I got from Manhattan lawyers that were referrals from friends.  It was also in-line with what my agent estimated for the average fee on a residential purchase like mine, so I went ahead and hired the guy.  Hopefully he will make a solid addition to my growing real estate investment team.

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I did countless web searches for all varieties of real estate investment information in the months prior to the point when I was actually ready to seek out and purchase a run-down property.  The limited (or weak, spammy, expensive and misleading) sites I found are part of what inspired me to start my own blog and develop a better forum for new and experienced investors to share their questions and insights.  However, I never specifically searched the many existing blog directories for flipping and real estate investment materials over the course of this research.  Only when I began submitting my own blog to the many directories and feed aggregators did I accidentally stumble across other blogs with a very similar mission.

While my first reaction was “WTF! I’m not the first person to start a candid real estate investment blog?!?!,” I quickly got over myself and began poring over the materials in some other good blogs (which often included links to other good blogs, and so on).  One of the first blogs I came across, Shaun’s Real Estate Adventures, is worthy of specific mention because it is exactly the kind of resource I wish I had come across months ago when I first started thinking about delving into real estate investment.  Shaun’s blog is packed full of detailed, real-life experiences that you can’t easily find in most of the published literature on these subjects because all those materials have been distilled down into generalized formulas for success and motivational gibber-jabber.  The play-by-play case studies available in blogs like Shaun’s are, in my personal opinion, much better motivational tools because they demonstrate how a regular person can successfully execute the strategies that you find in all the real estate investment books and seminars.  Even better, blogs are free and they provide glimpses into the thoughts and lives of their authors that no other medium has been able to match.

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