Fliperati

I received a detailed proposal from the second architect today (in PDF form, which I always find very convenient) and the price/terms were very reasonable, so I’m feeling good about giving up on the architect I had originally been working with.  I’m meeting with the new guy on Wednesday to get started on the plans, and although I had hoped to have plans submitted to the township by the time I closed on the property, I think I can still get the new garage approved and constructed by the end of the summer as planned. 

In other good news, a drywall guy came by today and took measurements so he could give me an estimate.  He contacted me after I posted a description of my project on one of those remodeler matchmaking sites (which I’m apparently a sucker for because I keep using them) and arrived right on time for the appointment (punctuality is a good quality in a contractor, right?).  We hit it off from the start and he seemed like a genuine, hardworking kind of guy, but you never really know what you’re getting until the job is actually done.  He took a bunch of measurements, made a lot of notes and indicated that he would e-mail me a bid on the job in a couple days.  Although I had only requested drywall work, he got excited when he saw the state of disrepair the house was in and insisted on picking my brain to see what else I plan to do to the property beyond new drywall.  I touched upon some of the other improvements I planned to make before I flip the house and he took notes and said he would like to quote me a price on these projects too, which include:

• Dividing that wacky upstairs closet
• Framing out the ceiling and installing recessed lighting in the kitchen
• Re-tiling the tub / shower area
• Installing a new sub-floor and new ceramic tile in the kitchen

He made a rough guess of $3,500 for all the drywall work but hedged by saying that was only off the top of his head and that he would need to crunch all the numbers first.  This sounded like a fair estimate to me considering that he’ll be putting new sheetrock on pretty much every wall and ceiling in the entire house.  He thought he could finish the job in about three weeks.  I’m crossing my fingers that his final estimate is good and that he is the guy to hire.  Flipping this house could be a lot less work than I thought if I end up hiring him to do all those other jobs (many of which I had contemplated taking on myself)…

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I knew that potentially unpleasant interactions with contractors, hired labor, zoning officials, etc, would be a regular part of flipping houses, so I wasn’t terribly surprised when the architect I was so excited about decided to completely disappear from the face of the earth.  Although, I am a little taken aback because I spent an hour at her office discussing the project on the day I closed on the property and she seemed pretty engaged.  The plan was that she was going to send me a formal proposal / contract for the garage the next day.  Well, after almost three weeks and many inquisitive phone calls with no word from her office, it’s pretty safe to say that she’s probably found bigger projects to work on and is dumping my little garage reconstruction. 

Fortunately, I had originally contacted multiple architects and one of them had given me his cell phone number and seemed pretty interested in the project.  I was able to reach him easily yesterday and set up an appointment for early next week to get things moving.  I’ll be done with my banking job then and I’m really looking forward to finally being able to focus on this project and successfully flip my first house.  I’m hoping to write more frequent / interesting blog posts as well…

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My first misconception about flipping houses was that the demolition stage would be easy and potentially fun. I mean, how often do you get to run willy-nilly through a house swinging a sledgehammer and knocking down walls? Could be kinda fun, right? WRONG! Contrary to my whimsical vision of this stage of the flip, the interior demolition has been an extremely arduous process. Every time you go to rip something out, you have to ask yourself: is there any wiring behind this? will this release a bunch of lead paint particles into the air? do I actually need to rip this out? how can a remove this without destroying that? can I preserve the 1928 ________ attached to what I’m ripping out?

This last question brings me to the focus of this post, which is the debate between a quick (character-less) flip and a slower, detail-oriented restoration of the property. I began to struggle with this issue when I was prepping the bedrooms for new drywall and went to remove the baseboard molding, which is secured to the wall with an outrageous number of 5-inch nails driven deep into pretty much every stud. Although none of the original moldings and trim survived prior “renovations” on the first floor, most of the original woodwork around the doors, floors and windows is still intact upstairs. This was one of the features that originally attracted me to this house because I thought that these rooms would look amazing once they were restored.

However, now that I’m actually in the thick of the demolition process and trying to get the woodwork off the walls without destroying it, I’m seriously reconsidering the wisdom of an attempt to preserve these details. It took me and my dad (in town for a weekend visit) more than fifteen minutes to remove a single (small) piece of baseboard molding from one of the bedrooms without damaging the wood. The doors and windows will be even more challenging because of their position (very close to the interior walls) and the amount of wood around each. Adding to the problem, I would need to carefully label and store each piece of trim so I know how to put everything back together after the new drywall is up. Each piece would also probably require stripping/sanding and new paint since the existing paint is flaking off. All told, the preservation of this wood would take a huge amount of effort when compared to simply ripping it off and slapping up new trim. I don’t yet have a sense of what it would cost to put up new (mid-range quality) trim, but I’m guessing it would still be less than the opportunity cost of the time it would take me to preserve the original wood.

It’s at times like these that I wish Fliperati were a little older and had a larger base of readers. If it were, I’m sure this post would ignite a vigorous debate between die-hard preservationists and passionate, $$-minded house flippers. Besides providing entertainment (similar debates on heavily-trafficked blogs always seem to degenerate into a cyclone of wild insults), I usually find such commentary exposes pros and cons on each side that I had not previously considered.

I suppose I’ll just have to be content playing devil’s advocate with myself until more people discover my blog and generate some raucous commentary.

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I unexpectedly was able to take the day off last Friday and spend several hours poking around my new house.  It was a mostly a reconnaissance mission since I was somewhat short on time.  However, it was still a valuable trip since I was finally able to peel away the layers of crap (wood paneling, cheap linoleum, rotting carpet, acoustic tiles, etc) that were hiding the true bones of the property.  The results were mixed.  Well, no, that’s not true at all.  Now that I think about it, the results were all bad.  Here’s a quick summary:

• Pulling down some of the ceiling tiles in the kitchen revealed an apocalyptic mess of water damage, wires, pipes and other junk hidden just above the T-bar framework supporting the current drop ceiling.  The way I see it, I have two options here: clean everything up and frame-out a new ceiling –OR- be lazy/cheap and simply put some new, nicer looking ceiling tiles in.  There are a range of nice options for new ceiling tiles, but a real, drywalled ceiling would definitely make the kitchen shine like new.  Not sure where I’ll end up on this question.
• 95% of the walls appear to be covered with the original plasterwork.  This is salvageable in a few rooms, such as the dining room and master bedroom, but the rest of the house will need new drywall – especially in areas where prior owners had glued wood paneling directly to the wall.  My dilemma here is whether I should rip out all the plaster and lathe before I drywall or just slap new sheetrock over the existing plaster.  It seems like I may be able to simply slap up some new drywall since the existing plaster is quite even, but I want to consult with a drywaller before I decide.
• The kitchen floor is covered with 3 layers of vinyl tile and a rotten sub-floor that pretty much disintegrates upon exposure to the open air.  The original wood flooring underneath all this seems to be in decent shape where I was able to peel back the upper layers, but there’s no telling how it looks in the rest of the kitchen.  The vinyl comes up pretty easily and I had planned on putting ceramic tile in the kitchen anyway, so the floor here actually wasn’t such a terrible surprise.
• Although I’m trying to leave a lot of the carpet on until the very end of the demolition process (to protect the wood floors), I couldn’t resist tearing out a really nasty rug that that was tacked to the floor upstairs in the smallest bedroom.  This revealed a large (2 foot square?) patch of wood flooring that appears to have been burnt by a space heater or small fire of some sort.  I may be able to sand it out when they refinish the floors, but the burn may have gone too deep.
• Peeling back the carpeting on the staircase revealed attractive woodwork in very good condition.  The problem is that the carpet installers used about 40 staples per stair to affix the rug and padding to the steps (no exaggeration), which makes for a very nice finish until you rip it all up and expose a ton of ragged staples and carpet nails.  I figure the stairs can be preserved if I spend a little time each day carefully prying staples and nails out of the wood, or I could just buy, cut and install new stairs.  Not sure which would be less work.

I snapped a few pictures of the demolition progress.  Check out the gallery for some terrifying shots of the destruction required to flip this house.

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While I’m sensitive to the fact that huge, warehouse-style home improvement retailers like Home Depot and Lowes have almost driven the traditional mom-and-pop hardware store into extinction, I can’t help but love the convenience and low-prices that these behemoths offer.  I went straight to the nearest big box home improvement store after the closing on Wednesday to pick up some essentials for the renovation work I hoped to start over the weekend and I could not believe how little money I spent.  Granted, I had done some research and was targeting sale and good-value products, but I filled the back of my (rental) SUV with all the demo supplies (sledgehammer, gloves, masks, ladder) I could possibly need without spending nearly as much as I anticipated.  Then I splurged a little on some power tools because you can get no payment/no interest financing for 12 months if you spend at least $300. 

So, while I’ll keep looking for bargains on tools and materials at all the area retailers, it’s hard for someone in the property flipping business to avoid the one-stop shopping convenience that these big warehouses offer.  Also, with a $7,500 credit limit and the no payment/no interest offer, I could finance nearly a quarter of my projected renovation expenses on a single credit card and not pay a dime until I have finished the project and flipped the house.  It almost seems too good to be true, so I’ll need to do a lot of comparison shopping on big-ticket items like countertops and appliances before giving my entire renovation budget to a single store.

p.s. For more in-depth and philosophical coverage of this question, check out theboxtank.

p.p.s. Big box retailers?  SUVs?  Power tools?  Debt financing?  I promise I don’t actually resemble the modern American cliché I have just described (well, not entirely).

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As I’ve vaguely touched on before, I won’t have much time to work on my newly acquired property until July.  That’s because my current Wall Street job barely allows me enough time to eat and sleep at my Manhattan apartment and it would be almost impossible to do any real work on a property in New Jersey except on weekends and holidays.  Fortunately, my last day of investment banking is June 30th and I will have all the free-time in the world to work on the house once I’ve cleaned out my desk and left the office for the last time.

However, simultaneously abandoning a lucrative banking career and taking on a mortgage and a major renovation project is not nearly as radical a transition as it may appear.  I’ve been planning to leave my current job for about a year now because I’m weary of the Wall Street lifestyle, so that move is only loosely correlated with this first project.  I have a solid network of contacts in my current industry and I’m confident I would be able to get a new finance job with relative ease if I should need to, although I hope it doesn’t come to that.  If do decide to rejoin the regular workforce in the near future, I would like to get a more relaxed position in public service or research where I could still pursue real estate investing and other activities in my free time.  Also, I feel good about the purchase price of my first property and I think it would be difficult to lose money on this project, assuming the market doesn’t crash catastrophically and that my renovation costs don’t spiral out of control.

This could all be terribly naïve, but the wheels are already in motion and time will tell how good my assumptions and planning really are.

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As of this past Wednesday, I am officially the owner of a small 3-bedroom colonial in north Jersey.  For someone who has never owned anything worth more than $2,000 in his life, the closing was not nearly as dramatic as I expected — even though I have suddenly become solely responsible for more than $300,000 of mortgage, insurance and tax obligations tied to a property that is currently in pretty sad shape.  I think the collective competence of my attorney, mortgage broker and real estate agent gave me great peace of mind at the closing table, so it was well worth the effort (and expense) of assembling a good team for this first venture.

The value of my team became even more apparent to me when the sellers’ attorney entered the room flustered, sweaty, disheveled, out-of-breath and more than half an hour late.  His glasses were falling off his face and he was desperately struggling with a loosely organized stack of papers clutched at his chest.  The scene very much resembled a bad sitcom and I had to pinch myself a couple time to make sure I wasn’t hallucinating.  And while he may very well have been an excellent attorney, he was clearly not very organized and did not spend much time reviewing the documents we were signing with his clients.  It was painfully obvious that the (elderly, kind and trusting) sellers had absolutely no idea what they were agreeing to other than the bottom line amount of the check they were leaving the office with.  This was a pleasant development from my perspective because it made the closing go quickly and without any complications, but it made me wonder how many other people buy and sell their homes with blind faith in their attorneys and brokers.  I could muse about this topic at length, but I’m trying to keep these postings a little more focused and avoid digressing too far from the nuts and bolts of my investment activities. 

Stay tuned for details on my first crack at the renovations in the weeks to come.

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I haven’t ever given much thought to the “no money down” approach to real estate investing (perhaps because I’m fortunate enough to have a decent amount of savings), but I was pleasantly surprised by how little cash I will need to close tomorrow.  After evaluating a number of different scenarios with my mortgage broker, we ended up structuring the financing for this property as a plain vanilla 30-year fixed rate mortgage with a 5% down payment.  We looked at interest-only and adjustable rate mortgages, but as an investor planning to hold the property for only a short-period of time, the traditional fixed rate structure made the most sense because it had the lowest up-front costs.  Even better, I was able to get a “seller’s concession” written into the contract where the purchase price is increased by approximately 3% and that increase is then applied toward my closing costs (which is just a convoluted way of borrowing for the out-of-pocket settlement costs).  See a breakdown of the closing costs associated with this property below.

The end result (assuming the closing coordinator doesn’t call a fourth time to change the final figures) is that I will be paying out a total of approximately $16,500 to acquire this property after the closing costs not covered by the seller’s concession and the 5% down payment are tallied up.  That comes out to only 6% of my $285,000 purchase price in cash spent to buy my first house, which is a pretty attractive figure in my opinion.  That percentage goes up a little bit if you include the cost of the property inspection, homeowner’s insurance, and flood insurance, but it’s still less than 7% of the purchase price even with this all-inclusive view.  This leaves me with a bit more cash in my pocket for the renovations and on-going expenses than I had originally budgeted for, so I’m feeling pretty good about the project so far.  They key will be reselling this property on schedule to prevent the hefty carrying costs from eating all my profit away.

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I had an encouraging discussion with my architect-of-choice this afternoon when she called to let me know that she had stopped by the property to check out the existing garage.  She also snapped some digital pictures of the property and reviewed the relevant zoning codes to see what our options are for rebuilding the existing structure.  I was extremely excited to learn of these developments because all the architects in the area seem to be buried with existing projects and I feel very fortunate that this particular architect is able to make time for my garage plans (she’s nice!).  I don’t have a fee quote from her yet, but we’re meeting tomorrow before the closing to review her ideas and talk about the details of the project.  Her thinking is that the house would be more marketable with a slightly larger garage (the existing structure is quite short) and I’m interested to pick her brain about a few other items, such as the awkward closet upstairs and the potential breakfast bar addition.

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Much has been said about the ramshackle garage on this property that needs to be torn down and replaced, but I’m just now getting around to finding an architect to draw up plans for the new structure.  Without a better alternative, I simply scrolled through the phone book (online) and looked up a few local architects with the hope that someone from the area would be familiar enough with the township rules to get the plans approved on the first try.  What I found was mostly a bunch of individual architects who seemed to already have more projects than they could ever need.  I suppose this is not out of the ordinary — especially for early summer when everyone is thinking about the projects they had on hold all winter, but it’s still a little discouraging.

I had a bit more luck when I expanded my search beyond the township where the property is located and started calling other firms in the county.  I currently have three different architects reviewing the survey of the property and preparing a quote on what it will cost me to have plans drawn up.  Actually, I’m only waiting for two of them to get back to me — one guy told me it would be $500 flat unless there is something really crazy about the project.

I’m leaning toward the last architect I spoke with because she seemed very familiar with the township regulations and she even went to college with the head of the buildings department.  She sounded very busy when I spoke to her, but I’m hoping she comes back with a reasonable quote and is able to squeeze me in because she sounds like a great asset to have on the rehabbing team.

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