We closed on the sale of The Sunglasses House today!
As you might recall, this house has been under contract since renovation began; my project manager (who is my brother) and his fiancee decided they wanted to buy the house, and spent the better part of the past three months customizing the house for their liking.
The deal from the beginning was that we’d sell the house for just $10K over our cost, so they had a fixed budget with which to do whatever renovations and remodeling they wanted to do. Their budget was about $68,500, and they used every penny. In the end, our profit was $10,013.12…we can use the extra $13 to buy them a house-warming present… 🙂
Anyway, here are all the relevant statistics and financial breakdown for this one…
Timelines
The total holding time on this house was 114 days. We had hoped to close quickly after the 90 day FHA mark, but there were some snags with the loan, and it got pushed out a couple weeks.
Here are the key timeline milestones:
- Purchase Offer Date: 5/15/2009
- Purchase Closing Date: 6/24/2009
- Rehab Completion Date: 9/8/2009
- Sale Listing Date: 7/8/2009
- First Sale Contract Date: 7/8/2009
- Final Sale Contract Date: 7/8/2009
- Sale Closing Date: 10/16/2009
Financials
Like I mentioned, our goal was to make a $10K profit on this house. We pretty much nailed that number, which is great. While I feel a little bad making any profit off my brother/employee, I think everyone feels this was a great deal all-around. He got to devote about 2 months specifically towards customizing his house (we didn’t do much else during this time period for a number of reasons), he ultimately purchased the house about $15-20K below market value, and the company made a profit on the resale.
Here is the breakdown of financials for this project:
There will be a few more transactions around this house — insurance overpayment refund, final utility bills, etc — but I expect that we’ll be within $50 one way or the other of this final profit amount.
While it doesn’t really matter to us for this project, our ROI was about 22%, and annualized it worked out to about 72%.
Final Statistics
Here are just some of the final statistics that I’ve been tracking for all my projects, and that summarize the success/failure of each project pretty well:
- From Offer to Purchase Time: 40 Days
- Rehab Time: 85 Days
- Selling Days on Market: 0 Days
- Selling Close Time: 100 Days
- Total Hold Time (Close to Close): 114 Days
- Total Profit: $10,013.12
- Return on Investment (ROI): 22.43%
- Annualized ROI: 71.82%
Just want to make sure I understand your breakdown. If you didn’t earn a commision on the buy/sell side you would have made basically zero??? Now that is helping family!!!
Mike –
Yup…and that was our original basis for the $10K…we said we’d basically just keep the commission, and then we rounded up…
And not just helping family…also helping an awesome employee who has worked his butt off this past year! 🙂
Scott,
A couple of questions. As a general rule, do you always go with 10k as an earnest deposit? That is the check you give the agent when you make your offer, correct?
Second, Can you explain the financing that you used on this house a bit for me. Did you go with a conventional mortgage and a rehab loan? If so, can you touch on the details of getting a rehab loan.
Thanks so much. Keep warm.
Hi Chris –
Earnest money (EM) is the amount you put down as a deposit, and typically banks are looking for a minimum of $500-1000. I’ll generally start at about $2-5K with my initial offer. If it comes down to additional negotiation, I will often raise my EM deposit as part of my negotiations, because it ultimately doesn’t impact the final price (important to me) and it makes the bank more comfortable (important to them). If I can raise my EM without raising my offer too much, I’m happy to do so. In the case of this house, $10K was about a third of the total price, so with that sized EM, the bank was okay giving me a great purchase price.
As for financing, I get rehab loans from a local bank in my area. They finance the purchase price plus the rehab costs, and I just put down 20% of the total. So, if I wanted to buy a $40K house and do $40K of rehab, the total price would be $80K. I’d put down $16K and the bank would finance the other $64K.
If you want to find a rehab lender, start by visiting all the very small, local banks in your area. The banks that literally have only 1-3 branches. They make their own lending decisions (as opposed to having a big corporate office that sets the guidelines), so if they like you and your business plan, they will lend to you.
Hope that helps!
J Scott – I’m glad you guys got this deal done!
You guys hitting any offers yet? The market is pretty dead out this way.
Steve –
We’re pretty dead here too. Not much hitting the market in terms of REOs, and what is hitting the market is seeing a lot of competition from owner occupants and desperate investors.
Hopefully things will get better towards the tax credit deadline next month…
J Scott, great site. I was wondering, 24K to buy the house and 64K for rehab. Are those ratios (for purchase price & rehab costs) the norm in your market?
Your target profit on this project was 10k. Now I’m not a tax expert nor do I play one on tv, but given that you are flipping this property the IRS would consider you a “dealer”. If I’m not mistaken any profit you make from this deal would be considered ordinary income. With that being said, how much would you actually net from this deal after taxes?
Jose –
Purchasing houses in the $30-60K range and doing $30-60K rehabs is pretty typical for our business. We’ve found that for the properties that require very little rehab, there is a lot of competition from other investors (and owner occupants), and it’s difficult to get great deals. But, with the houses that require a lot of work, we can generally buy the properties for very cheap.
Since we have a great crew of contractors, it really doesn’t matter to us if the rehab is $5K or $50K — the amount of work for us is about the same either way.
Plus, we really like seeing our houses transformed, so doing the big renovations gives us a nice big sense of accomplishment… 🙂
Jose –
Yes, the $10K profit on this one would be considered ordinary income, and would be taxed at whatever rate we (my wife and I) personally would be taxed, since the income flows through to us (our business is taxed like an S-Corporation, where the income flows through to the owners).
Given the deductions we have, I imagine that we’ll lose about 25% of the income to taxes. But, in general, the taxes could be anywhere from 0% – 45%, depending on the person’s individual tax situation.