Fliperati

Sorry for the dearth of posts lately but, as you might have guessed, I’ve been working overtime trying to get my first property ready to put on the market next month and haven’t had much time for blogging.  It doesn’t help that I have a mini vacation scheduled for next week (planned long ago) and I’m squeezing in some extra work this week to make up for time that I will lose will I’m sitting on the beach.  Also, this is supposed to be a real estate investing site focused on flipping houses and I’m trying not to let it completely transform into a renovation blog while I’m rehabbing this house.  Unless Fliperati readers clamor for more details about my day-to-day labor at the house (like how I taught myself how to install a sub-floor and lay ceramic tile in the kitchen this weekend), I’m going to resist the urge to discuss the renovations in excess.

That said, I wanted to share an article I came across last week in the New York Times that had some encouraging real estate news (from a flipper’s perspective, at least).  While most real estate journalism these days had been focused on weak housing data and apocalyptic bubble bursts, this story was comparatively uplifting because it covered the high demand for houses with old school character and new school amenities.  When complete, I hope my property fits that niche and attracts tons of the wealthy, not-a-second-of-spare-time home buyers described in this article.  I particularly enjoyed a quote from one of the real estate brokers describing how people want things that look charming and rustic but function like new:

“The ideal is what I call the Pottery Barn formula house: shingle-style exterior, white Carrera marble kitchens and the white subway tile in the bathrooms, so it looks like the background in the catalog. It’s trite, but it’s so sellable.”

Although I have been trying not to make my house that trite (see past posts about spending a bit of extra time to preserve some of the original details in the house in lieu of simply buying new stuff), I did strongly consider subway tile in the bathroom or the kitchen and I definitely want my flip to be in the “so sellable” category.  I’m more than happy to abandon any further originality at this stage in the game to make a healthy profit on this project.  Rah Rah Pottery Barn!

p.s. I also loved the many investment banker references scattered throughout the article. 

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Things were going too well and I knew I was due for some bad luck.  Here’s a summary of all the terrible things that happened today at my flip house.  When it rains it pours…

Leaky Shower Pipe?

I was pulling staples out of the living room floor late this afternoon when I noticed a small ribbon of water winding its way down the wall by the stairway.  I immediately knew it must be coming from the shower area directly over head and ran up to the bathroom to investigate.  It took me a few minutes to figure out that the water was simply spilling out of an open pipe that Clyde had cut while he was re-framing the shower area.  I couldn’t put a bucket immediately under the pipe and was forced to stand there trying to catch as much water as I could with a rag while I waited for Clyde to come take a look.  While I was waiting I grew very confused because I remember Clyde telling me that he had shut off all the water in the house.  I tested this by trying to flush the toilet and sure enough, nothing happened.  How could this pipe be dripping water if the all the water in the house is off????

Clyde showed up a few minutes later with the answer and a fix to the drip.  Apparently the water shut off valve in the basement is ancient and does not completely stop all the water coming into the house when it is in the off position.  To fix the shower drip, Clyde installed a valve on the pipe he had cut and the drip was gone.  Fortunately, the damage to the wall and ceiling below the bathroom is fairly easy to repair, so I breathed a sigh of relief that we caught the leak quickly and took care of it.

Premature Relief

Then I went down to the basement to see what the main shutoff valve looked like.  I heard the hiss of spraying water the minute I set foot on the steps and my heart sank.  Our theory is that this was probably the first time in many years that the shutoff valve had been used and it likely disintegrated when we turned it off to work on the shower.  Water was spraying everywhere and Clyde did his best to slow the flow to a small, steady stream.  The valve was practically useless and the only solution was to shut the water off at the street and replace it with a modern ball valve.  This required an emergency plumbing service since it was now almost 7 p.m.  We called several and the earliest anyone could come was in 45 minutes.  This left me stuck in the basement changing the small drip bucket every thre or four minutes to prevent the floor from getting soaked.

Of course the plumber was late and didn’t come until almost two hours later, by which point I was starving and exhausted.  In spite of his tardiness, I was ecstatic to see the guy and he quickly diagnosed and repaired the problem.  It cost me $450 (not in the budget!), but that’s a lot less than I would have spent cleaning up a flooded basement if the valve would have completely ruptured.

Time to Think

My ride home tonight was consumed by the news I got from the design-build firm I hired to draw-up plans for the new garage.  As if the plumbing issues weren’t enough, I also learned today that it would likely cost in the neighborhood of $25,000 to replace that wimpy single car detached garage in the backyard of the property.  I had less than $10,000 budgeted for this project and I thought that would allow plenty of room for cost overruns in construction of a simple wood frame garage.  The architect informed me that the high cost was largely due to the fact that I would need to rip out the existing concrete slab and replace it with a foundation buried three feet underground and covered with rock and cinderblocks to build the new garage according to local building codes.  I could not believe that such a simple structure would have to be constructed so painstakingly.  I may as well build a full addition to the house if I’m going to spend the time and money constructing a garage this rigid.

Now I’m not sure what to do.  Even if I shop the garage plans around, I can’t imagine anyone is going to quote me less than 50% of what the design-build firm estimated.  I could potentially find someone to slap up a simpler structure on a concrete slab (against code) and save many thousands of dollars, but I’m worried about not being able to get a certificate of occupancy when I sell the house if I rebuild the garage improperly.  The project is already on the building department’s radar since the architect has been working with them to get the plans approved, so I feel like my only option is to leave the garage standing as-is.  Would anyone pay good money for a beautifully renovated home with a ramshackle eyesore of a garage in the backyard?  It’s certainly not a selling point, but I can’t imagine it’ll prevent anyone from making an offer if they genuinely like the house and the neighborhood.  I’m going to show the plans to a few other builders and continue to mull this question.  Unfortunately, I don’t have much time to waste now that my target open house date is just over a month away.

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I was browsing through one of my favorite blogs the other day and decided to check the comment section of a shout-out they gave me earlier this month to see if there was any new feedback.  That’s when I came across the comment below, which I couldn’t resist quoting and responding to:

“I wouldn’t hire anybody from any of those matching websites. Don’t you want workers who are in demand because of their good work?

Get references from friends and aquantances or even other workers(plumbers, electricans, etc.)

This guy will unfortunately probable end up losing money and having all sorts of headaches unless he hires one great contractor to oversee the whole thing.

By the way, house prices are falling fast, so he better hurry up!”

                           -Anonymous

I believe Anonymous is referencing the contractor-finder website I used where you submit a description of the work you need and the site administrators farm it out to someone on their pre-approved list of contractors.  While I agree that finding a contractor through a referral is probably one of the best tried-and-true methods, this approach proved difficult for me as a flipper working in an unfamiliar neighborhood.  I did not have any local friends to get references from and the references I got from other workers did not work out.  In fact, most of the referrals I got never returned my calls or disappeared after coming to do the initial estimate, which may be a sign of them being good and in high-demand, but they were useless to me in the end.

Meanwhile, the contractor I found through the web service (“Clyde”) turned out to be the very best of the bunch I interviewed and has done a great job so far.  He told me he would finish the drywall and other miscellaneous jobs in three weeks and is 95% done after 16 days.  The quality of his crew’s work has met or exceeded my expectations in every part of the house (I’ll post new pictures soon) and I’ve even hired him to do a few additional jobs when the drywall is done.  My only complaint is that his workers have been using my tools (which had just been sitting in the kitchen pantry) and they’ve gotten really dirty (my hammer and ladder are splattered with drywall joint compound for example), but that’s just me being anal retentive.

As for losing money, you’ll notice in my last post that I recently re-examined the local housing market and have not felt the need to adjust my target resale price.  Granted, I was a bit befuddled by using comps to gauge home prices in my area, but I do not believe there has been any significant decline in the local housing market since I originally set my target resale price nearly two months ago.  Since I my renovation costs are inline with my original budget and the market hasn’t dramatically shifted downward, I’m optimistic about proving Anonymous wrong when I flip this house with a healthy profit.

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Slightly unnerved by today’s less-than-stellar real estate market news (see Sales Slow for Homes New and Old in the New York Times), I decided to revisit the numbers I had crunched long ago when I was trying to decide on an offer price for my current property.  Obviously, the expected resale value is a key component of the equation when you’re flipping houses and at the time I had settled on $399,000 as a reasonable target for the renovated property.  Concerned that this target may need to be adjusted, I pulled up some recent listings and sales data for my town and decided to take a break from back-breaking brick patio removal (see picture below) to take a walk around the neighborhood and size up the houses I had price information on. 

Now this is the paragraph where I’m supposed report back on my findings and discuss how they impact the expected resale value of my first flip, but unfortunately I didn’t get any strong feelings one way or another after viewing nearly 10 comparable properties.  I know it’s one of the most widely-used forms of home valuation, but I’ve never liked using comps because it’s such a fuzzy method when you’re evaluating something as unique as a house.  This problem is particularly pronounced when it comes to flipping because the flipper is often creating a unique property since individual owners rarely take the time to completely renovate their homes before selling them.  Most of the houses on my street were built in the early 1900’s and have piecemeal renovations (maybe the kitchen was done two years ago and the bathroom was done in the mid-90’s), but none of them have been totally remodeled room-by-room.  Also, while my house only has one bathroom, many of the other homes have 1 ½ or 2 bathrooms. 

Finding a recent sale (or a current listing) of a property with a comparable configuration and similar renovations has been nearly impossible and I’m having trouble assigning value to the different variables in play to adjust the prices of houses that come close to fitting the bill.  I think this is mostly a function of my inexperience and my imperfect knowledge of the local market, so I shouldn’t disparage comparable sales analysis too much.  I’m confident that my buying agent knew what he was talking about when he helped me arrive at the original $399,000 target and I don’t things have shifted too much since then in my town, so I will most likely stick with that number and plan my budget accordingly.  I’m just about to make some major expenditures (new roof, new windows upstairs, demolition and reconstruction of the garage) and wanted a quick reality check before I start writing checks.  I think my research today puts my house comfortably in range of my target price and I’m hoping there are enough buyers out there who agree with me when I put it on the market in September.

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I don’t think I’ve discussed this in detail before, but the plan for my first flip is to do the majority of the labor myself.  There were multiple reasons behind this decision:

• I have time to work on the property now that I have quit my regular job
• I want to learn as much as possible about the labor required to renovate a house so I have a better understanding of the true amount of work that goes into flipping property
• I want to improve my sense of the labor required for certain jobs (demolition, laying tile, painting, etc) so I can better estimate costs if I choose to hire them out in the future
• I want to maximize my profit on this first flip by minimizing my renovation expenses

Although I think it’s very important to learn about the labor required to flip a house, the profit portion of the equation is really what’s driving my DIY attitude.  My experience so far has shown that finding and purchasing a desirable investment property is the most difficult/uncertain part of the process, so I figure I ought to maximize the return on my current project rather than rushing out to start the process over.  Of course, there are certain tasks that I consider beyond the scope of my novice capabilities (drywalling the entire house, replacing the roof and building a new garage from scratch, for example), but I am trying to do as many of the simpler tasks as I can.

I believe this strategy conflicts with popular flipping doctrine, which seems to encourage leaving all the renovations to the professionals while you focus on getting more deals in the pipeline.  However, I figure I’ll have a fair amount of time to seek out my next property while my first flip is under contract, so I’d prefer to take the DIY approach and increase my profit margin on this particular project.  I’m feeling good about this strategy so far, given that I’ve come a long way in the renovation process without spending much money (barely $3,000 to date).  Also, the only projects that are behind schedule are the ones that I’ve had to hire out (the drywalling and the garage), so the DIY approach has been good for my timeline as well.  This has required a lot of back-breaking labor, so there’s definitely a chance this strategy will change in the future when the excitement of the first project wears off.  In the meantime, I’m enjoying learning new skills and tackling repairs I had never dreamed of doing in the past.

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Fortunately for me, my sense about the very first contractor that came by the property turned out to be correct.  I had a whole circus of people come through to give me estimates on the drywall/plaster work and the first guy (let’s call him Clyde) was by far the best of all.  That doesn’t necessarily mean his price was the best (in fact it was probably the 2^nd worst), but he was definitely the most honest, rational and trustworthy of the bunch.  The loser contractors ran the gamut from cheap sleazeballs to eccentric “drywalling artists.”  One of the crazier guys ate up over an hour of my time walking through the house, touching (almost massaging) each wall as we went along taking measurements and discussing the amount of work required in each room.  By this point I really didn’t care to learn every nuance of the drywalling process and simply wanted to hire someone who would do a good job at a fair price. 

Clyde turned out to be the man for the job and I was even able to negotiate a substantial price reduction (although to be honest I probably would’ve paid more than his original asking price to get him on board).  He said he and his crew would start this morning at 8:00 and I couldn’t believe it when his van pulled into the driveway at 8:00 on the dot (he was very punctual when he provided his estimate as well).  They have been working hard all day and have accomplished quite a bit.  The medium and small bedrooms both have new sheetrock on the walls and the wacky closet they once shared has already been split into two neat and clean new closets (in a 1/3 – 2/3 ratio with the larger bedroom getting the larger closet).  I’ve just been trying to stay out of their way, which has given me a chance to get lots more work done outside (would you believe they had put an acoustic drop ceiling on the porch too?  it’s gone now.).

I haven’t discussed this with Clyde yet, but I’m considering asking him to work with me upfront when I find another house that I would like to purchase and flip.  This is obviously very premature since I haven’t even finished the renovations on my first flip (or seen the finished product of his work), but seeing the speed and efficiency of a team of workers (vs. just me) has gotten me thinking down the road a little bit.  If his progress continues at the pace they worked today, then I’ll be able to comment on the finished product much sooner than I thought.

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I have neglected the outside of the house in my drive to finish all the interior demo work and get the place ready for fresh drywall/plaster, but the delivery of the dumpster this weekend forced me to spend some time cleaning up the front yard area.  Since the dumpster will be picked up tomorrow, I had to spend much of today outside in the insane heat pulling the storm windows off the porch, taking down the aluminum awning, ripping out the iron railing and taking down the chainlink fence.  I didn’t have any trouble removing the chainlink part of the chainlink fence, but the fenceposts themselves were (and continue to be) a much different story.  They took the time and effort to pour concrete around the posts when they were installed, which to me is like using super glue to make macaroni art.  It’s going to take more work than I anticipated to dig them out, so they may not make it in the dumpster tomorrow — especially if it’s still a million degrees outside.

Here is a picture of the current state of the front of the house, along with a “before” picture for contrast.

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Everyone likes pictures, so shame on me for not posting any new ones in a while.  Here are some that I took yesterday while I was waiting for the primer on the back side of the cabinets to dry.

Last weekend’s house wrecking party shed some light on what was hiding behind the wood paneling on the front porch.  I’m very pleased with the look of the brick pillars supporting the wood columns.  I think I’ll rip out the little wall that encloses them and link them with a simple railing.

Hey - nice brickwork behind the wood paneling, right?  Oh no, my friend, there is nothing nice or natural about this house in its current condition.  That is not real brick.  It’s some kind of shingle-like material designed to replicate the appearance of real brick.  I haven’t had a chance to see what’s behind the fake brick wall yet.  Maybe I can just paint it?

The living room has become a temporary demolition waste storage area.  Don’t worry, a dumpster will be dropped off tomorrow and this will all be history.  What a fun way to spend a Saturday…

The kitchen has almost been stripped to its bare bones.  I just sold the stove and fridge on Craigslist to defray the cost of new appliances (these ones look pretty good in pictures, but are really dented and dirty in person).  Cabinet doors are in the process of being primed and painted (waiting until later to paint the frames since there will be a lot of work going on in the kitchen).  Still have a lot of tasks in this room (install new subfloor, lay new tile on floor, frame out ceiling, install / wire recessed light cans, patch plaster, put new sheetrock on ceiling, have new countertops installed, put backsplash in, paint pantry, install new pantry door, install a large-windowed back door).  Yikes. 

The wood paneling on the upstairs railing encased four lonely spindles.

Lots of work left to do in the bathroom too.  I can’t decide which surfaces to tile and which to leave as drywall/plaster.  I haven’t been able to pick materials or colors either.  I would like to drop a nice marble or granite countertop into the existing vanity, but it’s a non-standard size and the sink is strangely positioned off-center, so having a custom top made is looking expensive.  I did buy a toilet, so I guess that’s some progress, but I don’t have much done beyond that.

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Even though I started this project with a full renovation plan, there is no handbook on which improvements to make and which to skip when flipping houses (contrary to what many property flipping book writers would have you believe).  The plain and simple truth is that there is no real estate guru waiting for you at your property with a list of improvements to make for maximum return on your investment.  You are on your own when it comes to deciding what to change and how to change it.

This leaves a whole universe of possibilities open.  Do you invest the time, money, and effort to change the layout of the house if the existing floor plan is awkward, or do you just spruce everything up as best you can without worrying about the layout?  If the flip property is in a borderline neighborhood, do you spend the money on nice surfaces and fixtures and hope you attract greater value to the area or do you simply use the least expensive materials you can find to make it feel new?  Do you knock a kitchen wall out to create a more open feeling or would the new owners prefer the more traditional, segmented layout?

These questions are all the more difficult when the probable answers conflict with your personal preferences.  For example, local buyers may expect carpeting in all the bedrooms of the property I am currently flipping, but I think the house would be much nicer with hardwood throughout.  Also, most of the houses on my block have enclosed porches, but I think an open porch would be infinitely more appealing.  In both these cases, my preferences match how the house was originally constructed, so I’m banking on finding a buyer who will appreciate a restorative approach.  Using the original construction as guidance for my renovations also resolves the debate about opening up the kitchen and altering the floor plan because hopefully the new buyer will prefer the classic layout.

I may not be making the right bet with a lot of these choices, but time is money (very literally in this case!) and I desperately need to start moving forward with the actual renovations (which I had been reluctant to start before making a final call on big questions like layout, flooring, porch, etc).  The big issue now is getting good contractors to start working on the jobs I’m planning to hire out.  More to come on that subject in another post.

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Thanks to a very nice shout-out from Brownstoner, the comment section of this post about the conflict between profitable flipping and detail preservation has sprung to life.  Not surprisingly, most of the feedback emphasized the value of preserving the original character of the house and avoiding a low-quality, character-less renovation.  As someone who has lived in his share of shoddy new construction rentals built by money-hungry developers, I can assure you that I will not go down that path (think paper-thin walls, poor workmanship, every detail overlooked, bland apartment living).  I’m having a lot of fun with this project and taking pride in my work, so I will opt for the higher-quality, more original choices whenever I can.

That said, I must confess that I’ve decided to cover the majority of the plaster walls with drywall (at least I’ll be retaining the insulating qualities of the underlying plaster, right?).  This was a tough choice, but the wood paneling adhesive and years of leaky plumbing / roofing have really taken their toll on the plaster and a full restoration would take tremendous time and effort.  Even if I were to spend the time and money on fixing the plaster, I still don’t think I could ever achieve that fresh-out-of-the-renovation-oven feeling that spanking new sheetrock will give to prospective buyers.  I feel a little bad about what seems like the easier route, but at least I’m not doing a half-assed job of it (like leaving the door and window trim on during the new drywall installation so the moldings are “swallowed” by the additional layer of wallboard).  At this point I have to think about my schedule, my budget and my prospective buyers and all three seem to be pointing me toward new drywall.

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