As of this morning, The Second Chance House is officially sold!
Between schedules running over, losing marketing time due to the holidays, and having the first offer fall through after 2 months under contract, we’ve been holding this property for a long time — over 200 days. But, in the end, we received a full-price offer with few concessions or contingencies, and were able to close in about three weeks.
It’s been a while since we had a sales closing, and I have been looking forward to doing a final financial analysis on this deal. While I knew it would be profitable, I didn’t know to what degree.
Here is the run-down, with the final set of statistics at the bottom…
Timelines
As mentioned above, the total hold time on this property was much longer than expected. I was hoping for four months, and it’s been closer to seven. The rehab was scheduled to complete in about eight weeks, and took closer to twelve. We finished in mid-December, but let the property sit for a couple weeks until the holidays were past.
We got the first offer within a couple weeks, which tied up the property for two months until the buyers finally had to be cut loose. We put the house back on the market and got a full-price offer in less than 36 hours, and closed three weeks later.
Here are the key milestones from this project:
- Purchase Offer Date: 8/5/2008
- Purchase Closing Date: 9/19/2008
- Rehab Completion Date: 12/22/2008
- Sale Listing Date: 1/2/2009
- Sale Contract Date: 3/22/2009
- Sale Closing Date: 4/13/2009
We’ve learned a lot about rehab scheduling since this project completed, and hopefully will never make some of those same mistakes again…
Financials
This is the largest profit we’ve made on rehab to-date, so for that reason alone, I’m very happy with the financial results of this project. All told, our total profit after all fees, commissions, rehab costs and other expenses was over $35,000.
We had originally budgeted $36K for this rehab, and actually came in a few dollars under budget as of the time it was put on the market. With the two contracts we had on the property came some requests for additional work from the buyers, which we — for the most part — provided.
The additional work included getting a survey done, adding more insulation in the attic, putting a vapor barrier in the crawl space, building a handrail on the front steps, and some other minor fixes. The total costs of this additional work was about $2K, bring the total renovation budget to just about $38K.
Here is the breakdown of financials for this project:
While these numbers don’t reflect the final holding costs — the final utility bills have not been received — the final results should be within about $100 one way or the other.
Had the first contract we had on the house gone through, we likely would have seen a profit of about $23,000. Instead we made more than $35,000, so the two months we lost with the first buyers was actually a good turn of events from a financial perspective.
In terms of ROI, my total investment into this property (Purchase Costs, Rehab Costs, Holding Costs) was $20,238.16; this puts my ROI at just over 175%, and adjusted for the time this project took, my annualized ROI is over 310%.
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: 45 Days
- Rehab Time: 88 Days
- Selling Days on Market: 79 Days
- Selling Close Time: 22 Days
- Total Hold Time (Close to Close): 206 Days
- Total Profit: $35,447.67
- Return on Investment (ROI): 175.15%
- Annualized ROI: 310.34%
Congratulations man — You definitely have a system down! I think your way of doing things is working out very well. I noticed that your labor cost was astronomically high compared to anything that I pay. I’m comparing that $25k to $8100 that I just paid in labor on the most expensive flip I have ever done to date… But who gives a shit when you’re still making $35k a pop and not having to hardly lift a finger?
Nice one,
– Hakrjak
Hey Hak –
I’m definitely lifting a finger…many fingers, many lifts… 🙂
Hopefully I’ll get to the point where I’m not working as hard, but currently, it’s taking a good number of hours.
The reason my labor costs are so high on this one is that most of the work was hired out to a GC ($20K worth). Had I subbed out the work myself, some of that definitely would have been split into the materials category.
Congrats and great writeup!
I know you said that the final holding costs are not in yet (I imagine you would be waiting for the final HUD-1 if it has not come in yet), but it looks like the insurance costs are under reported for a 7 month hold period and the seller’s (your) prorated portion of the property tax is missing for the same period. Was insurance and Taxes escrowed and eventually netted out through the pay off of the loan?
Did I miss something in the calcs?
Again,
Great work – you are really moving well in this biz.
Hey Sam,
All the taxes and insurance is in there. The taxes on this place were under $400 for the year (no idea why so low, probably because the place was a dump for several years). Taxes in my county are paid in August/September, so I paid prorated taxes on the HUD when I bought, and then paid prorated taxes on the HUD when I sold (there’s a line-item for the taxes at sale above). I didn’t write any property tax checks myself.
As for insurance, it was $350 per year, but there was a mix-up at one point and it wasn’t paid for a couple months. The $115 covers my total insurance cost for this property.
The only thing unaccounted for above is final utility bills, which should come in around $100, so my profit is actually about $100 less that what is stated.
Maybe my math is wrong but isn’t the ROI 75%? How do you calculate ROI and annualized ROI? Thanks.
JC –
ROI is calculated as:
ROI = Profit / Total Cash Investment
The profit on this flip is $35,447. The total investment made was my Purchase Costs + my Rehab Costs + my Holding Costs = $20,238. My Selling Costs and Commission Costs aren’t counted as part of my investment as they are — for the most part — only outlaid at the very end of the project.
So,
ROI = $35,447 / $20,238 = 1.75 = 175%
Does that make sense?
Thanks. Now how do you calculate annualized ROI? I understand why you want to know the ROI but why do you need to know annualized ROI? Thank you.
JC –
Annualized ROI is a method of comparing the returns of different investments that are held for different periods of time.
For example, let’s say you could do a bunch of deals that each lasted exactly 6 months and each had an ROI of 50%. Or, instead, you could do another bunch of deals that each lasted 1 month and each had an ROI of 15%. Which one is better? Certainly, 50% is better than 15%, but if you take time into account, that may not be the case. Annualized ROI takes the time into account, and in effect “normalizes” the data so you can compare it.
To get the Annualized ROI, here’s the formula:
ANNUALIZED ROI = (365 / (# Days of the Investment) * ROI)
So, in the first example (50% over 6 months), the Annualized ROI would be:
365 / 180 * 50% = 100%
In the second example (15% over 1 month), the Annualized ROI would be:
365 / 31 * 15% = 176%
Clearly, if you had to choose from a bunch of the first investments or a bunch of the second investments, the second set of investments is the better choice. Also, if you actually did both of these deals, you’d probably be happier about the second.
Does that make sense?
Hi,
How big was this (square footage) property?
Sal
Sal –
This was a pretty small house — probably about 1300-1400 square feet.
Actually, depending on your method of calculation, your annualized return was even better than you calculated. You are neglecting to consider the effects of compounding. Your example of a deal that takes 6 months and earns 50% would allow you to re-invest your profits mid-year, which produces 1.50*1.50=2.25, or a 125% annualized return. For someone like me, I would not be interested in re-investing all of my profit immediately (meaning doing either more or bigger deals) because I have no experience. I’d be taking things slower and using the profits to build my bankroll to reduce my risk, but I know you do a much higher volume of deals that I’d be able to do. The math for annualized return with compounding is fairly simple. You simply take your return (including the original investment) and raise it to the power of 365/(days invested), then subtract out 1 for the initial investment. In your case, it would be [($35,447 + $20,238) / $20,238]^(365/206) – 1 = 5.01, or a 501% annual return. This formula is more useful for other investments where scaling is easier, but I thought it was worth mentioning.
Also, I found your website via the Spex thread on 2+2. Thanks for your contributions there, and thanks for sharing your experience here. I’m considering using some of my gambling bankroll to try a flip project sometime in the next year. I had no interest before primarily because I work full time and don’t have the time to adequately manage a flip. However, my dad has recently retired, and he has construction experience. In the last couple of years, he completely remodelled his house (which he built 20 years ago) after it suffered storm damage and associated water damage, and he is just about done doing a good basic cosmetic rehab on a house my sister recently bought. We’ve discussed splitting deals 50/50, with him serving as a GC/project manager and me finding the deals and putting up the money. Is this a pretty standard arrangement?
Hey DB,
While I talk about a simple “annualized ROI” calculation in my blog analysis, I actually use a more complex internal rate of return (IRR) calculation for my personal statistics. IRR assumes compounding of accrued funds, so — as you point out — it’s more accurate than an annualized ROI calculation. Here is an article I wrote about doing IRR calculations:
http://www.biggerpockets.com/renewsblog/2010/09/02/introduction-to-internal-rate-of-return-irr/
Hello,
great blog, I just bought your book. Regarding selling days on market, is it possible to market and sell the property before it gets done? Is this something you do now? Or even have a buyer already lined up prior to even putting it up on the market. I imagine, these are some things you do now…
Ari –
Yes, it’s possible. But, unless your buyer has a good eye for how things are going to look — or unless he’s seen other properties you’ve done — you may be hurting yourself by trying to sell prior to finishing. First, without letting other buyer’s see it, you don’t know for certain you’re getting top dollar. Second, the buyer may think he is entitled to make design/color decisions if he puts it under contract prior to it being finished.
For those reasons, I prefer to wait until the property is 100% complete before I start showing it and accept an offer.