Fliperati

Good news, Fliperati readers: I received a full asking price offer on my very first real estate investment (my flip!) this weekend.  Now, everybody remain calm.  Seriously.  Please stay in your seats and do not get up until the captain has turned off the Fasten Seatbelt sign.  We all know that getting a good offer is just the beginning of what is oftentimes a very arduous closing process, and this deal definitely looks like it will have its challenges. 

***The alternate opening sentence of this post was: While the vast majority of lease-option transactions end without the property changing hands, it looks like I might have the pleasure of closing on the sale with my lease-option tenants before they even move in.*** 

That’s right – the couple that set me running around last week working on a rent-to-own deal has apparently secured a mortgage co-signer (the wife’s sister) and can now purchase the house outright.  They are clearly completely infatuated with the property (they contacted me daily last week to check-in) and will be very motivated to make the deal work, but there are obviously a lot of hurdles ahead.  They said they will need until the end of this week to get the mortgage approval ready, so I’m not even touching the contract until they can demonstrate that they will actually be able to get financing.  The good news is that they do not have a realtor and are instead relying on their attorney to walk them through the process.  He seems quite competent and I’m optimistic that the sale process will go smoothly even without realtors frenetically working both sides of the deal to make sure it closes.  Even if I have to micro-manage the process, it will be well worth it to save more than $10,000 by dodging payment of a broker’s commission. 

Beyond the financing, I’m a little concerned that they will try to nickel-and-dime me with the home inspection.  The buyers have repeatedly mentioned that the sale is contingent upon a satisfactory inspection and that their $5,000 earnest money deposit is fully refundable if they back out of the deal because of something the inspector finds.  I have been countering these comments by stating that I am still getting several calls per day about the property and will continue to show it until the deal closes.  This has also motivated me to get off my lazy post-renovation butt and take care of the stupid little things around the house that an inspector might make a fuss about.  It’s a little easier to spend time/money on the house now that there’s a possible payday in sight.  Keep your fingers crossed for me…

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So, as part of a somewhat whimsical effort to expand the universe of potential buyers for my first flip, I posted a Lease-Option / Rent-to-Own advertisement on craigslist a few weeks ago and, for whatever reason, I’ve received a number of serious inquiries about this purchase method over the past few days.  Just this afternoon I had a very long discussion with a woman who is quite passionate about the property and I’m suddenly very concerned that I may have to quickly educate myself about this strategy to avoid missing out on a good thing.  I understand the basics, but I’m not even remotely prepared to process a serious applicant and fine tune the example price/terms I advertised on craigslist.  Fortunately, my attorney is well-versed in lease-option transactions and would be able to work through all the legal issues with me.  I’m more concerned about issues such as tenant screening and the financials behind the deal (how big an option payment should I request?  what portion of the monthly rent should be applicable to the final purchase price?  how much will insurance cost me?  what implications does this have for my current mortgage?  will I need to refinance?  what do I look for in a lease-option tenant?).

Any thoughts from Fliperati readers or other bloggers are welcome.  Shaun?  Steve?  FiveMZNYC?  Trisha?  Have any of you ever used a lease-option strategy to sell a property?

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My property was enjoying one or two realtor showings per day over the past week and a half while I was out of town visiting family.  I was very pleased to find a healthy stack of business cards on the counter when I went to check on the house and get the boiler fired up for the first time this season.  I started calling all the agents who brought clients to the property to get some feedback and find out if there was anything I could do to encourage a sale.  Disappointingly, the vast majority of the realtors said they could not specifically recall showing my house and, consequently, could not provide any details about how their clients reacted to it.  This was not encouraging because it indicated that the house was not making much of an impression on prospective buyers or their realtors.

One agent, however, was quite happy to hear from me and she quickly shared the news that my property was tied for first place with another home that her clients were interested in.  A married couple had apparently taken quite a shine to my house and were in the latter half of a two-day “thinking about it” period.  The wife was particularly enamored with the kitchen (yes!) and the husband liked the entire property except for the basement stairs, which he described as much too narrow for regular access to the finished basement.  This must have been a very serious concern on his part because the realtor said it could be the tipping point in their evaluation of the two properties they were choosing between.  I quickly offered the services of my contractor in evaluating options for widening the stairs (seemed like it would be a fairly simple job to open up the wall enclosing the basement stairs and putting a railing in) and I even said I could arrange to have the upgrade completed before closing if they put a strong offer on the table.

Well, they did come back with an offer, but it was definitely not a strong one in my opinion.  Their offer price was $25,000 below my (fair by any standard) asking price and made no mention of the basement stairs.  In presenting the details of the offer, their agent told me they were extremely well-qualified in terms of their income, credit scores and cash available for down payment (more than 20%) and they would close quickly without asking for any seller concessions.  That’s all well and good, but it did not impress me enough to warrant taking a loss on this flip (I didn’t agonize over the numbers, but a rough calculation showed the broker’s commission at this price level putting me into negative territory).  I hope I don’t come to regret this dismissal because I have a feeling these people won’t be coming back to renegotiate, especially if there really is another house that they are equally fond of.  I have a healthy number of showings scheduled for this week – many of which are with unrepresented buyers (read: no realtor commission to pay), but I may be struck with remorse for my lack of tact with this offer (I didn’t even bother presenting a counter-offer) if all my upcoming appointments turn out to be duds.

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That’s right – I’ve gotten a significantly larger number of inquiries about my flip house since I replaced the lackluster yard sign from the flat fee broker with a simple red “For Sale by Owner” sign.  The addition of a “<-- House for Sale” arrow on the corner probably had an impact as well.  While I was averaging 0 – 1 calls per day before the sign change, I received two calls yesterday and seven calls today under the new signage!  Unfortunately, four of today’s callers were only interested in two-family properties (they all remarked that the house looks big from the outside, which I find peculiar because it looks very modest-sized to me), but the other three sounded very interested and will be viewing the property within the next week.  I’m keeping my fingers crossed that this new pace of interest keeps up, but I’m guessing things will slow down again when all the regular local drivers get used to the new signs.

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I spent most of yesterday at my investment property taking care of odds and ends.  I have been trying to dream up new ways to attract more prospective buyers and I thought changing the sign in the front yard might generate renewed interest.  I got the old sign from my flat fee listing agent and I never really liked it but was too caught up in getting everything else ready to do anything about it.  Now that I have a bit more time on my hands I decided to replace it with a large, simple “For Sale by Owner” sign in red and white lettering.  Many of the buyers who have come through my house so far seemed to equate my lack of realtor representation with the potential for a good deal, so I’m abandoning my fear that a FSBO sign will deter realtors from bringing their clients to my house and advertising my independence with a new sign.  The flyer tube has MLS printouts inside, so buyers with agents can quickly see that my property is in “the system” and I’m committed to paying a 3% commission if they submit an offer through their broker.  I’ve gotten almost zero traffic from the local realtor community, so it’s not like I have much to lose anyway (sniff sniff).  Part of me wonders if I’ve somehow been blackballed for listing with a flat fee broker?  The other part of me just assumes that the majority of local realtors don’t have any buyer clients right now because the market is so slow.

Regardless of the FSBO question, I would probably be replacing the sign now anyway.  While I am generally happy with the service provided by the flat fee listing agent, the sign they provided (for a $25 fee!) was a piece of crap.  The only good part about it was the sturdy metal frame.  The sign itself was unclear and much too busy for media that is geared toward getting inquiries from passing motorists.  Also, it only listed the phone number and website of the listing agent, which meant that prospective buyers would have to go through a middleman to get in touch with me.  I doctored the sign by carefully covering the listing agent’s contact info with my own phone number and marketing website, leaving only the company logo exposed.  I liked this solution at first because it advertised what looked to be a traditional listing marketed by a lesser-known realty (which would hopefully prevent local agents from ignoring it) while leading people to contact me directly.  However, the sign wasn’t very tidy and I think the new one will catch more attention with its clean, bold lettering.

I also put a permanent “ß House for Sale” sign up on the corner, hoping to drive a bit more traffic down my sleepy residential street (sorry neighbors).  I feel like a nerd on prom night waiting by the phone all the time and am looking to try anything to make it ring.

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Remember a while back when I said I wanted to assemble a list of good REI blogs and post all the links here on Fliperati?  Well, I haven’t forgotten about that list but I have decided that it doesn’t make much sense to duplicate the work that several other blogs have already done very well.  On the broadest end of the spectrum, I have to highlight 500 real estate blogs to watch as assembled by Pittsburgh Homes Daily and the comprehensive directory of real estate blogs that resides on Real Estate Blogs (now that’s and idiot-proof site name).  For a more refined selection of tasty real estate nuggets available on the web, check out BiggerPockets.com’s list of the Top 35 Real Estate Blogs.  I must warn you that Fliperati was somehow included on this list, but please don’t let that discourage you from checking out the other blogs highlighted – I promise they’re all quite good and worth a look.  My thanks to BiggerPockets.com for continuing to neglect correction of what was surely a simple editorial oversight when they added Fliperati.

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Having done my best to extract as much information as possible from all the buyers who have walked through my flip, I have gained a great deal of insight into what I could have done differently to make this project more successful.  My initial thinking is that, while I understood the local real estate market in terms of what comparable properties are worth, I did not have a true understanding of what the majority of local buyers look for in a house beyond the number of bedrooms and bathrooms.  Although I did have a vague sense of what a typical buyer in this area would minimally expect, I still fell into the trap that victimizes many new investors: their own personal tastes and preferences. 

Under the heavy influence of my friends, my family and my own perfectionist tendencies, I think I spent way too much money flipping this house.  While I was able to turn a run-down, ugly property into a sparkling new home with luxury finishes on a renovation budget of only $42,000 (which is pretty small by New Jersey standards considering all the work that was done), I could have probably gotten a much better ROI on a $10,000 budget.  I have come to believe this because I’ve noticed that the majority of people who have looked at the house are 1^st time homebuyers who are really stretching their finances to purchase a house (oftentimes looking to move from nearby rental units) and space and affordability are more important to them than high-quality finishes and complimentary wall/trim colors.  Although this town is definitely an up-and-coming place to live and about one out of every eight potential buyers have come from the more affluent, discriminating background that I was targeting when I renovated this house, the vast majority of serious inquires have come from people with very practical, no-frills housing needs.

It’s amazing to watch one type of buyer come into the house and rave about how beautiful everything is while another type of buyer (more commonly) is entirely nonplused.  Granted, some of these buyers could be hiding their true feelings behind poker faces in an attempt to bolster their bargaining position if they decide to make an offer, but for the most part you can just tell that they genuinely have no emotional response to the property.  I must admit that this boggles my mind to a certain degree, but I suppose that just demonstrates how I didn’t totally understand the local market.  

For example, one of the most serious potential buyers (she turned every faucet on and opened/closed every window in the house) told me that the first thing she would do is enclose the porch if she ended up buying the place.  She said something about grilling sweet potatoes out there in the winter (???!??!!?).  She also seemed entirely ambivalent about all the lifestyle upgrades in the house, from the automatic icemaker in the bottom-mount freezer to the Silestone vanity-top with a 10-year warranty against stains, chips and cracks.  This makes me think that I will have a hard time getting these amenities to command the premium that I had hoped for.  I still think I could sell it to the type of person who would really appreciate all the details in the house, but it will take much longer to get enough of those people through the house to find “the one.”

In my defense, the neighbor across the street a few doors down has made similar upgrades to her home and it is really beautiful too, so it’s not like my property is a total anomaly.  Also, I consulted with other neighbors over the course of the renovation and they all seem to appreciate everything that has been done.  One neighbor often jokes that she would like to swap houses, and I think there is more than a grain of truth in her statement.  Unfortunately, house-swapping with her isn’t going to generate any profit for me, so I must press on and try to get this property sold.

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Similar to the plight of Seattle Eric, it seems the timing on completion of my flip couldn’t have been worse.  Since officially listing the house almost two weeks ago I have received only two calls from brokers wanting to show my property to their clients, in spite of the fact that I’ve dropped flyers off at almost every local real estate office and e-mailed every real estate agent I could find an address for.  I’m advertising that I will pay a full buyer’s broker commission but it doesn’t seem like any of the agents have clients that are interested in my property. 

After visiting so many real estate offices, I must say that I’m not terribly surprised with the result so far.  The mood in almost every office was pretty glum.  Many of them felt more like a funeral parlor than a realty and I would not have been surprised to see a casket in the reception area.  Several agents I spoke with flat out proclaimed that “there just aren’t any buyers right now.”  I had heard rumors of many real estate agents and mortgage brokers getting out of the business because they haven’t been able to make any money and I don’t find that too hard to believe at this point.

I don’t want to be chasing the market downward, so I sucked up my pride and made a $20,000 asking price reduction yesterday.  Even though I was already priced very close to the lowest of the three CMAs I got (which was itself $20k lower than the first two), it was obvious that something was deterring people from calling.  Lack of marketing certainly wasn’t the problem.  I don’t know where else I could have promoted this house without buying television and radio airtime.  My marketing strategy included:

• 10,000 postcards given out with customer receipts by cashiers at the local supermarket
• Print advertising in the “For Sale” and “Open House” section of the largest area newspaper
• A dedicated website with its own online marketing campaign to generate traffic, which has been getting 20 – 50 unique visitors per day
• Advertising on a multitude of “For Sale By Owner” websites
• Craigslist ads on both the New Jersey and New York (NJ subgroup) sites
• Signage in the front yard of the property
• Flyers distributed to all the local realtor offices
• Flyers left by the cash register at local businesses where I am friends with the owners (the hardware store, the diner, the convenience store)
• Individual e-mails sent to any area agent I could find an address for (more than 300 people by the time I quit sending them)
• Online advertisements with the local newspapers and the NYTimes
• Word-of-mouth promotion from 10 of my nearest neighbors and two of my contractors

The price reduction seems to have helped generate renewed interest (at least temporarily) as I have already gotten two calls since making the adjustment.  I think the property is very aggressively positioned now — especially considering all the amenities.  I hope potential buyers agree!

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Click on the photos tab in the upper left corner for more pictures of the completed renovations.  I’ve had a good amount of traffic through the property over the past week and am still working hard to get the word out, but I don’t have any offers on the table yet.  There were a few buyers that I’m optimistic about, but I’m trying not to get my hopes up too much…

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I know I’ve been neglecting the blog lately, but it was pretty hectic leading up to the open house as I was running around trying to market the property on my own and finish up all the small items that needed fixing before showing to potential buyers.  The open house went well, but it wasn’t the explosion of buyer interest that I had fantasized about and I’m going to continue working hard to get the word out about this property.  In the meantime, here are some of the first before and after pictures so you can get a sense of the final result.  Overall I’m very please with how all the renovations turned out and now I just need someone to fall in love with the house and take it off my hands…

Front of the House Before 

Front of the House After

First Floor Before

First Floor After

I’ll post a ton more before and after pictures soon.  I plan on doing an “Anatomy of a Flip” series where I summarize the changes made in each room and the approximate cost of the renovations.  Hopefully I’ll snag a serious buyer soon and will have more time for blogging…

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