Updated: Jul 20, 2020
This blog is written by Jen Josey, Real Estate Investor and REIGN Coach. She is not a professional writer and writes like she talks so put your red pen away. Jen is extremely opinionated but reserves the right to change her opinion at anytime because, well, that's the way she rolls. She may also use colorful language so don't be offended. Jen does not claim to be an expert, she is just sharing her personal thoughts and adding a perspective on investor topics that may benefit her readers. Jen also finds it strange to write in third person. Enjoy!
Yep...that's what I said...
Our investment business recently completed a flip in FIVE days. Other investors are blown away at our turn around time but we have established some simple systems to follow. Let me share with you five factors that we use when flipping properties in five days.
1. Type of Property
We love condos and towhnhomes that are built in the 80's and 90's with an after repair value (ARV) around $200k. These homes generally only need a fresh coat of paint along with updates like flooring, countertops and appliances. Those few renovations provide high returns. We also don't have to worry about the exterior. It is standard for the Home Owners Association of a neighborhood to take care of all the landscaping, roof, siding and common areas. You do, however, have to be careful of high HOA dues. Every few years, an HOA will enforce an assesment where home owners are required to pay an additional fee to cover a new roof, repaving of a parking lot, pool repair, etc.
Can you flip a single family home in five days? Sure...why not? It really just depends on the scope of work needed. Maybe the only thing the exterior needs is a roof and some minor landscaping. A roof can be replaced in two, maybe three days and landscapers can be done in an afternoon. The roofers and landscapers can be working the same time as your painters or flooring folks, no reason to have only one trade on site at a time.
I send a letter to the entire complex / neighborhood stating we are looking to purchase homes in that neighborhood. The letter explains that we will buy homes as-is and pay all closing costs. We end the letter with, "If you're not interested now but are considering a move in the future, please hold on to the enclosed business card." I send a follow up letter (or post card) every 6 months or so. The townhome we just got under contract last week is with a woman that had been holding on to our card for months!
Condos and townhomes are typically transitional housing. Many people who buy them are either first time home buyers, divorcees, investors, newer residents to an area, retirees, etc. The average length a person lives in one is only 4 years. When I send that letter, I am sometimes the only letter they receive. Many investors pay buckets of money for lists (ie: probate, pre-foreclosure, vacant properties, absentee owners) so those recipients are getting flooded with mailers because many investors are buying the same lists. My strategy of marketing entire neighborhoods may take a little longer to get results but I'm not competing with another investor and getting into a bidding war.
None of these condos and townhomes would have a quick turn around without an awesome team of contractors. When you do multiple properties like this, you are providing a higher volume of work which can help you negotiate your labor costs down. Those contractors also become loyal to your business because of the consistent job opportunities. When you work with the same team of contractors over and over again, you do not waste time with collecting bids because you will know exactly with each contractor charges per square foot. For example, if you have a 1200 square foot townhome and your painter charges $2.25 a square foot (including trim), I know I'm paying them $2700. Of course there are times where you need popcorn ceilings scraped or wall paper removed so you simply budget a little more than normal.
Early on, I learned that contractors do better when they know the schedule for all trades. On every project of this type, I print off a calendar for the week so they know who's working each day. My painter loves to go before flooring because that saves time in taping down floor coverings. He can see that the flooring is going in on a certain day so he knows to be out before them. The flooring guys can see that the counter tops are going in on one day so they know to do the kitchen and bathrooms opposite those times.
When your project is organized and you know your contractors, the project manages itself. Once we close on a property, our contractors are typically starting within the hour. The only time we spend on site is when we do the initial evaluation, put a lock box on the door and then go in to take photos of the finished work prior to listing it.
4. Tighter Profit Margins
A quick flip like this will most likely provide a smaller ROI or return on investment compared to other projects. Many other investors poo poo this idea but we have incorporated some protections to make sure we always come out in the green. Investors will get hung up on the percentage of earnings as opposed to just the profit number. First of all...time is money and when you can make a $10,000 profit in 7 - 10 days, I will take that All. Day. Long.
Second, and most important, do your due diligence. Always get an inspection if you can gain access prior to closing. When you get the property under contract, if the inspector comes back with a large ticket item, you have every right to renegotiate the offer price. Chances are, the homeowner is aware of the situation so there won't be too much backlash. A large ticket item we missed a few times were windows. When you have an inspector in there and they uncover that 4 of the 12 windows don't open, that's a $300 price tag per window. You can go back to the homeowner prior to closing and tell them you need to lower the offer price by $1200 and since they lived there, they kinda knew it was coming...
If you are purchasing a property from a wholesaler, there are times you may not be able to get an inspection prior to closing. In this case, it's important to include a larger contingency for any of those big ticket items that would suck all the profit out of the deal.
Smaller projects like these require less money but more lenders. If you do two or three of these a month, you must grow your list of lenders. We use the same hard money lender for first position but are always looking for new private money lenders for second position, aka gap funding. Depending on the amount borrowed in first position, that second position can be as small as $20,000. There are a lot more private money lenders new to investing that actually prefer that loan amount. A seasoned private money lender may also request a three month guarantee if they see your timeline is so short. It makes it worth while for them to lend on such a quick project if they know they will receive a minimum of three months interest despite it closing in six weeks.
Even during the pandemic, an ARV around the $200k price point FLIES off the market which allows for a much shorter hold time. To keep your finances in control, be careful not to OVER renovating a property like this. You do not need to remove any walls. You do not need to add top of the line appliances. Instead of replacing the cabinets, save money by painting them. Deep clean the bath tubs instead of replacing the tile surround. Paint the kitchen instead of adding a tile back splash. Buyers in this price point want clean and new but still affordable.
While we also do larger renovations, you can see why we love these smaller projects sprinkled here and there. The risk is lower, we keep our contractors happy, marketing is simple, we grow our lender list and the profits keep adding up!
To read more blogs by Jen Josey, please visit www.REIGNmastermind.com.