Putting a number on your project……..

Hi real estate flippers!

Before we get started, I wanted to comment on how the real Estate business here on Long Island has rebounded. In realty it never really went away. When COVID hit, the concern of most agents, brokers and investors was a severe drop in real estate values like in the fun days of 2008. But it never happened. There were funding issues for investors as hard money lenders stopped lending, or lended at less than 50% LTV as they were concerned about chasing the bottom. Thats an opportunity for buyers with real cash on hand. We lost two deals due to furloughs, but both houses re-sold within a week. We just closed on three sales and more due this week. We are still buying. Overall, I am happy to report it wasn’t too bad, .

We’ve covered a lot of ground (or should I say real estate…get it?) over the past few months. By now you should be the local expert in your home of everything real estate, except maybe a whole bunch of other stuff that you don’t know yet, the most important of which is putting a value on a property you want to purchase as a flip investment. Valuation is the red meat of what we do. So pull up a chair, get yet another acholoic beverage from your quarantine supply and listen closely.

A wiseman (can you name him?) once said “You make your money at the buy”. It’s one of the most important principles of RE investing, or really any business. You want to buy low and sell high (duh). In order to sell high, you need to have a very good idea where the market is and be able to predict what the value of you property is going to be in eight to twelve months after you renovate it, when you flip your investment. Not the easiest thing to do.

Aside from these values, you’re going have to have a handle on the renovation and fixed costs in order to determine the Maximum Offer (MO) you’re going to make on a property. Confused? The following equation will help you see it clearly:

MO=ARV-Renovation-Fixed Costs-profit

This equation is the heart of flipping. Its Einstein’s E=MC2 of the real estate biz! Ok, maybe it didn’t change humanity like the discovery gravity or the realization that the world isn’t flat, but you’re gonna need to know how to figure it out, so……..

Over the rest of this episode and through next time, we will dig deep into each variable. Some are sums of multiple unknowns. I will get into the meat of how to determine each piece. LETS GO HOUSEKETEERS!

Let’s begin with the beginning (profound!); MO, which stands for Maximum Offer. Any ideas what this means? hmmmm…..? This is your finished product. When finished with all your research on a property, this will be the MAXIMUM OFFER (see how that works?) that you will make on a target property. This is the figure that you don’t go above. This is the figure that (if done correctly) will enable you to fight another day (because you will not have lost money). With that in mind, MO breaks down into these componets

After Repair Value (ARV): This could also be called re-sale value. Its what you are expecting to sell the house for after you are done with renovation (hence After REPAIR Value). It’s probably the most difficult variable to determine because there is little you can do on your own. You have to have a good agent working with you, or use an appraiser who is accustomed to working in the investor sector. If you will recall in an earlier episode, I encouraged new investors to take the plunge and become an agent. That’s for two great reasons, first, you get paid commissions and 2. you can do your own market comparisons. ARV all about comps, and there is no better Comp done than by an investor who is also an agent. Like me! When I work with new agents, the first thing I teach them is how to comp. It’s the start to EVRYTHING Real Estate. Now you’re probably saying yourself, self, I can get values on Zillow. No you can’t. Zillow sucks. Enough said, Zillow doesn’t even rate an explanation. You need a great agent. A great agent will get you a good and accurate ARV. A great agent will understand the fact that you as an investor may buy multiple properties from them. Before I became an agent, I was an agent’s dream (even aside from my rugged good looks), I buy a lot of houses. So to summarize, the ARV is the value that your investment property will be worth when you are done with renovation. It is the basis of the rest of the deal. so next…….

Renovation: If you are a contractor who is trying to get into flipping, this business is made for you. If you aren’t, renovation numbers are a bitch to get your head around. I worked in project contracting for 30 years, so it wasn’t hard for me to transition to residential properties. Most investors will need a contractor to inspect the job and supply a Scope Of Work (a list of the work proposed) and obviously, a cost to do all the work. Every contractor you will deal with is different, and I have always maintained that if you had a highly detailed request for quotation on a particular house renovation, and you sent it to ten contractors for a price, you’d get 20 different quotes and Scopes Of Work. For the regular investor, you’re going to either be working with a contractor, or you re going to have to teach yourself renovation (actually less difficult than it sounds). The best and safest way to determine renovation cost is bring a contractor with you. Many contractors are also flippers and they will be able to help you work through what you actually want to accomplish in the renovation. But remember, the more you do to change the house, the longer it will take to complete and re-list it for sale, and in this business, time is money. In our business model, its a very rare occasion that we open walls or add living space. I like to get in and get out as fast as possible. When your contractor submits his quote to you, it should include a Scope Of Work (a written description of what work he will perform), his payment and commercial terms, and any exceptions he is taking to your requirements. You as the owner and investor should take his quote and attach it to the Contract that you will issue to him. Builder’s contracts can be pulled off of legal sites. We have one that we can send you as long as you sign a waiver that you understand that we have no idea what we’re doing, didn’t actually wright it ourselves, and we are the farthest thing from being attornys. The contract should state that if permits are needed, that falls under the contractors responsibilities. One more thought, extras. You WILL come across hidden damage to your flip house, especially if you’ve purchased a Zombie House that was vacant for years. No one can see everything that needs to be renovated. We add a contingency of 30% to our renovation number to help cover unforeseen costs. Trust the fact that you will invade the contingency often. This cant be helped. What can be helped is not adding stuff after the fact. Once you have your costs settled, and the deal with contractor in contract, do not decide to add anything. That may seem obvious, but you would be surprised how many flip profits disappear because the investor had a great “idea” to make the house more sellable. Stick to you initial plan!

So boys and girls, we will break here. There was a lot of stuff presented and there will be a pop quiz on all this. Next time we will continue to dig down on the rest of the formula.

Starting this episode, we will be including before and after pictures completed projects. The following was on Cornwallis Lane in Setauket. It was in good conditions and we only renovated the kitchen, baths and did the floors and painted the walls. This was purchased for $415,000 and sold for $635,000. A good project that sold in 24 hours!