Fliperati

Key Magazine, the quarterly real estate publication from The New York Times, features a great article on flipping houses in its Spring 2007 edition.  It focuses on the intersection of the entertainment industry and the house flipping phenomenon in modern America and it does not present the typical glossy overview of the renovate-to-riches dream.  I enjoyed the article a great deal because it digs below the surface of the usual story about flipping houses and is brave enough to ask questions like: Is there any hard data behind Joe Flipper’s assertion that adding a privacy fence increased the home’s value by X thousand dollars? and What does the current obsession with home improvement say about our values as a society? 

The author takes a cynical look at these questions and there is a clear theme of greed, reckless consumerism and destruction of individuality that underlies the entire story.  It’s not very pretty, as illustrated by the leading sentence in a section titled “How to Obliterate the Self”:

“Many citizens set out to buy a house because of an indistinct yearning, for which an actual house was never the right solution to begin with and may only be a quick (and expensive) fix that briefly anchors and stabilizes them, never touches their deeper need, but puts them in the poorhouse anyway.”

The author connects his thesis through all of the most popular real estate programs currently on TV, even including some snarky commentary on the lead personalities on some of the shows.  From Kirsten Kemp on TLC’s “Property Ladder” to Richard Davis on A&E’s “Flip This House,” no one is safe from deconstruction.

It’s a great read and, although you may not learn anything about how to be a better real estate investor, you may learn something about yourself.

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I was going to continue telling the story of finding buyers for my flip and closing on the sale, but that chronology is getting a little boring so I thought I’d break it up with an overview of the project from an investment perspective.  Or, in short, an answer to the question: Did I make any money flipping this house?

If I benchmark everything against the budget and timeline I established at the outset of the flip, I would say I did very well.  I set three different budget levels for labor and materials at the start of the project (an aggressive low-ball number, an expected middle-of-the-road number and a worst-case scenario number) and my final renovation expenses came in just below the middle estimate.  I would say this is due to luck and conservative estimating more than any tremendous foresight on my part.  I say this because, although the total renovation costs were inline with my expectations, the distribution of the costs were nowhere near what I had planned for.  Some things ended up costing a lot less than planned (landscaping and garage repairs, for example) while other areas (like the floor and the plumbing) ended up way over-budget.  Fortunately the net result was still right in the middle of my total renovation budget for the flip, but it’s frightening to consider how only a few other unexpected problems could have totally destroyed this part of the profit equation.

I think the timeline could be considered my greatest success.  I started full-scale renovations on July 1, 2006 with an extremely aggressive eight-week renovation schedule and still managed to hold an open house on October 1, 2006 in spite of all the setbacks I faced at various stages of the project.  I know 12 weeks sounds a lot longer than eight weeks, but the original compressed timeframe was totally unrealistic and, even in retrospect, finishing all the renovations in three months was nothing short of astounding considering that almost every single surface in the entire house was ripped out and replaced.  With the exception of the exterior siding and the basement (and the garage, of course), you would be hard pressed to find anything on the renovated property that looks anything like it did when I first bought it.  This wouldn’t necessarily be anything to be too proud of if you were a seasoned flipper, but I think it’s a decent performance for a first-timer who started out with no good contractor leads and no practical renovation experience.

Of course, success with the budget and timeline is of little practical value if you don’t end up making any money on the deal and unfortunately that was the case here.  While I didn’t lose money, it looks like the actual profit is fairly negligible and I’m considering it pretty much a break-even deal.  While I did take a bit of a hit on the holding costs (I had budgeted for six months of carry and it ended up taking almost eight months), the biggest failure of this flip was clearly the resale value — which ended up coming in roughly 20% below the original target.  I’ll cover how I ended up taking an offer at this level and the reasons I think the resale fell short of expectations in another post.

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Based on my descriptions of the Realtors I met over the course of selling my first investment property, you probably won’t be surprised to learn that I hired someone from outside the circle of agents who had already visited the house.  I’m not sure if I discussed this before, but I briefly contemplated hiring the agent who represented me during the purchase of the property.  While I had a generally favorable impression of my Realtor after closing on the purchase of my flip, this viewpoint soured quite a bit when he gave me the run-around on a flat-fee listing.  Back when I was first listing the property, I told him I’d prefer to give him the $500 to put my house in the MLS rather than hand it over to a total stranger at another agency and he said that sounded reasonable but he would have to discuss it with his boss (the named broker at his agency).  After several days of back and forth this was the final verdict: they wouldn’t do a flat fee listing, but they were willing to do a hybrid FSBO/broker setup where I wouldn’t have to pay them a commission if I found my own buyer, otherwise it would be a typical 5% commission setup if the Realtor secured a buyer.  Of course there were also a ton of disclaimers about how any buyer who originally saw the property on the MLS would fall under the 5% commission category (although I have no idea how this could be proven/enforced) and other fine print. 

I understand if flat fee listings don’t fall under their existing business model, but I didn’t appreciate all the fake interest in the idea on their part while they tried to sell me on this other fee structure.  Plus, I still don’t understand how turning down free money fits into any sane business model.  I was trying to give them $500 of immediate income (99% profit since there are no costs to adding the listing beyond the time it takes to enter the data) and they turned it down in favor of attempting to earn a 5% commission on a sale that could take several months in a slumping market.  Plus, that 5% might not even cover their expenses (advertising, mileage, open houses, man-hours spent showing the property, etc) — especially if a series of price reductions were to erode commission value as the costs pile up while the house sits on the market.

So, how did I end up choosing a Realtor to represent me after I was unable to show the property myself any longer?  In short: the Internet!  My impression of most of the Realtors that came through my property was that they had access to very few buyer clients (they kept on telling me: “You have a beautiful property, but there just aren’t any buyers right now”), so I wanted to find someone who was still kicking ass and closing lots of deals.  If I were a buyer looking to find a Realtor to show me around, I would probably start on the web and search for a successful local agent, so I used that thinking to choose a seller’s agent. 

A single Realtor kept coming up at the top of numerous Google searches for local real estate agents and, beyond her strong search engine rankings, she also had a great website with mountains of useful info and a nice marketing platform for her listings.  She seemed to have tentacles in every corner of the web, from a presence on all the major real estate search pages to a dedicated personal section on her agency’s main website to an independent portal of her own at www.[realtorname].com.  I sent an e-mail to her on her personal site and received a reply right away.  Pretty soon we were chatting over the phone and I was grilling her about the local housing market, her sales approach, her current deal volume and a host of other questions.  I was impressed with all her answers and it was a pretty easy decision to hire her.

We set an appointment to meet at my flip a few days later to sign the papers.  That was a very fateful day and I’ll share more about in my next post.

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Okay, the term “Real Estate Agent” is a mouthful, so I’m going to shorten to “Realtor” for the purposes of this post, even though I generally avoid that word because it’s apparently copyrighted by the National Association of Realtors (NAR) and generally requires that little trademark symbol to be written correctly.  That little symbol is a pain and I’m just going to capitalize the first letter and hope that suffices.

Anyway, the point of this post is to share a little bit about my interactions with Realtors over the course of the sale process.  There were generally two types of Realtors that I came into contact with over the past few months: 1) the type that actually had buyer clients who were interested in seeing my property, or 2) the type that used the pretense of previewing my property as an excuse to give the hard sell about why I should list with them.  Unfortunately, neither interaction was ever positive.  The Realtors that had shown my house to buyers were generally aloof and reluctant to discuss their clients’ reactions to the property, the neighborhood, the price, etc.  This boggled my mind since I thought they ought to be happy to be showing such a nice house with the prospect of a 3% commission.  I know that this isn’t much more than a 2.5% commission when you’re dealing with a mid-$300k property, but my impression was that times are tough for real estate agents and every dollar helps.  A friend later clued me in to the theory that Realtors are generally unhappy about representing buyers in a FSBO situation because “they have to do all the work and don’t have the benefit of another experienced real estate agent at the other side of the transaction.”  I had never considered this before, but it does seem to make sense within the traditional perception (as promoted by the NAR) of how difficult real estate transactions are.  In reality, executing the sale wasn’t difficult at all once a qualified buyer was in the picture (and I have experience on both sides of the process now), so I think the value added by Realtors in this regard is generally over-sold by those within the industry.  This discussion could easily fill several posts of its own, so I’ll just drop it for now except to say that I don’t see how there could be that much work involved as long as both sides have competent attorneys (which generally cost a fraction of what Realtors charge, I might add). 

The second type of Realtor I encountered was even worse than the first.  There were 10 or 12 agents who insisted on walking through the property with me under the guise of educating themselves about the house before showing it to their clients.  Not a single one of these Realtors ever returned with a potential buyer — they were just using the walk-through as an opportunity to convince me to sign a listing agreement with them.  This was really infuriating because once the renovations were complete I didn’t have any reason to be at the property except for when I was showing it to potential buyers or doing routine upkeep.  I wasted several afternoons on appointments that were nothing more than protracted sales pitches from hungry Realtors.

My favorite example of this strategy was when I was tag-teamed by two very colorful characters from one of the larger real estate offices in the area.  Realtor A was the charming “local” who had lived in the neighborhood for many, many years and oh my goodness she just knew every house inside and out oh la la la there’s no way I’d ever find anyone who could do a better job than her, while her partner, Realtor B, was clearly a top-producer in the office who had a lofty title and was probably there just to add clout to their pitch.  They came about six weeks after I first put my house on the market and went into an exceptionally lengthy sales pitch about their experience and talent at the end of the walk-through.  Realtor B actually had the listing agreement tucked under his arm the entire time and kept peppering me with glossy promotional materials and a variety of very cheesy lines.  They spent a great deal of time talking about how their office really kicks ass and regularly wins this award and that award blah blah blah and by this point I was ready to vomit.  They had wasted a large part of my afternoon and I was pretty ticked off when I asked: “If your office is so great and your agents sell so many homes in this neighborhood, how come not a single Realtor from your office has ever brought a potential buyer to my property?”  I opened a drawer and pulled out a stack of business cards from Realtors with other agencies at this point to emphasize how many buyers had been through the house.  Their response was that my house had been on their radar for a long time and they were just so busy with other deals that they hadn’t gotten around to this property yet.  Whatever.  I managed to be polite for a few more minutes before showing them out.

I think my original intent was to discuss how I chose the Realtor I actually ended up hiring, but this post has gotten pretty long so I’ll save that for another time.

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As you might guess from my out-of-exile post on 2/27, I don’t like to walk under ladders and I get nervous when a black cat crosses my path.  However, the quirks I’ve already described are pretty much the extent of my superstitions, so I was caught a little off-guard when my grandma insisted that I bury a small statue of some long-dead saint in my yard to facilitate the sale of my flip.  I’m sure everybody already knows that I’m referring to St. Joseph and the notion that burying a statuette of the earthly father of Jesus will bring you good fortune when selling your house.  I had never heard of this until she brought it up, but a quick Google scan confirmed that this is indeed a very common practice. 

Grandma was adamant about its utility and I was willing to try anything to facilitate the sale, so I went ahead and buried St. Joseph immediately after the first open house.  There are of course a variety of opinions about how/where/when to bury the thing.  My approach was to survey as many people/websites as I could and execute the most common approach, which turned out to be an upside-down burial near the foundation in the backyard. 

Well, I’m not sure if I’ll bury St. Joseph at future properties because it certainly didn’t seem like the statue’s presence did anything to improve my luck on this project.  Digging a hole in my backyard for an upside-down saint did make me feel a lot better about my other superstitions, though.

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So what happened after the November buyers fizzled out?  Well, losing out on a good deal is never pleasant and I took this loss particularly hard.  This was the first time I had ever tried to sell a property and it was beginning to feel like an impossible feat.  The fact that this couple couldn’t get their sh*t together and close on a house that they clearly were in love with made me wonder how I was ever going to find someone with both the desire and the means to buy the house.  It was also frustrating to work with people who approach major decisions (such as buying your first home) in such a lackadaisical manner.  

Although I never took the house off the market and continued to show it sporadically while I was working with the November buyers, I didn’t market it nearly as aggressively as I otherwise would have.  One of the (many) mistakes I made was that I was (irrationally) optimistic about the ability of the November buyers to close on the house and I was lazy about responding to the requests I would get for additional information / showings from other potential buyers (whereas it never took me more than a few minutes to respond to buyer inquiries before I had the offer).  I even ignored a few inquiries from people who didn’t sound very interested or prepared.  Actually, I started ignoring quite a few inquiries after getting burned by a buyer who convinced me to set up an appointment to view the property at a very inconvenient time and then turned out to be a no-show.  I know, I know…  This is a terrible business strategy, but it’s hard to describe how terribly disillusioned I was by the average buyer’s lack of competence and seriousness.

This attitude worsened once the November buyers were out of the picture and I think I only showed the property a handful of times in December.  Fortunately, I had a trip planned for early January and there were a number buyers who were asking to see the house and could only come the week I was out of town.  This prompted me to consider hiring a real estate agent to take over the showings and inject new life into the marketing campaign.  I held real estate agents in pretty low regard by this point (mostly because of their poor manners when showing my property — leaving the door unlocked, leaving the toilet unflushed, leaving lights on, etc), so my willingness to sign a listing agreement was a good indicator of my exasperation with the sale process.  Of the scores of agents that had shown my property, I had a good impression of only two or three of them.  That made it easy to choose someone to take over the listing and I’ll share more about that in another post.

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