Wednesday, September 26, 2012

Flipping a House?

Last week, I mentioned that one of my long-term financial goals is to get into real estate as a hobby and a secondary source of income (since I'll always work primarily in non-profit as my day job). I also mentioned that Matt had no interest in saving up our money for such an endeavor, and it seemed very, very far away since we have about a trillion other things that we need to save for first (the house we're building, a pool, an orchard, raised garden beds, a couch, a washer/dryer--the list goes on and on). 

But then someone I know (hereto referred to as My Potential Business Partner) read that post and  mentioned that they, too, have an interest in real estate. Not only does this person have an interest in real estate, they also have capital to put into such a project! We quickly brainstormed how they could put in the capital and I could put in the work. Then we could divide the profits in a way that makes sense. 

And in some bizarre way, I am over-the-moon excited about this proposition. It's bizarre because all of my interests up until this point have been distinctly non-corporate. I value community and family and wholesome food and the handmade and eco-friendliness. I've worked in non-profit my entire life (even my first job as a 16 year old was at a museum and then I taught swim lessons at the YMCA). 

But there's something incredibly exciting to me about this project--buying a house, renovating it, reselling it, and hopefully making a little profit. I know a reader already cautioned me against the negative effects of gentrification. That's definitely happening on the east side of Austin. And I know that flipping one house on the east side does impact gentrification. I'm not making any excuses about that. But I will say that a lot of young families are looking for affordable housing near the center of town, since they have been priced out of Central Austin. Since we would be flipping a house in the neighborhood where Matt and I are moving, we would essentially be creating a home for a new neighbor. 

Matt and I moved into a flipped house in Houston, and we were extremely thankful to be able to move into a historic home that had been completely updated (without having to do any of the renovations ourselves while also trying to make it a home). 

I'm excited about this idea because 1) this kind of project sounds so stimulating and exciting. I would have to do so much research and learn so many new things in order to pull it off. 2) Any extra income I'm able to earn would be able to support a second maternity leave and help us make our dream house possible.

But then I remind myself that I need to make space in my life for pregnancy. I'm already working part-time as the Director of Operations and Compliance for a new charter school. I'm also working to start my own charter school. I also recently co-authored a book that I need to spend more time publicizing. I also authored a book that's coming out in January that I need to start publicizing. I also run an e-course about preparing your mind, body, and life for pregnancy and am writing a new e-course called Purposeful Parenthood.

So, yeah, when I write that all out, I feel like it's dumb to take on anything new. 

But can I at least think through all the steps involved? Maybe that would bring me to my senses:

Phase One: Research [October, November, December]
  • Complete a table that includes the average cost per square foot, average time on market, number of rooms and bathrooms, extra features like garages, etc. for all the homes in our target area that have sold within the last six months.
  • Make a prediction about how long it would take us to sell a house and how much we could get for it, per square foot.
  • Schedule tours of renovated homes in the target area that are on in our target range.
  • Schedule tours of potential houses that we want to renovate. Complete a table that includes the cost per square foot, number of rooms and bathrooms, extra features, and a list of visible renovations that we would want to make, estimates of renovation costs, and an estimate of the resale value. 
  • Talk to friends/neighbors/colleagues to generate a list of recommended sub-contractors: flooring, kitchen renovation, bathroom renovation, landscaping, exterior painting, interior painting, roof, A/C, etc.
  • Talk to contractors to understand the general costs associated with typical renovations.
  • Read books about flipping houses, such as this one and this one.
  • Watch TV shows about flipping houses.
  • Get recommendations for a good inspector.
  • Get a quote from the inspector.
Phase Two: Purchase [January, February]
  • Once we find a house that works out well in our predictive model (potential resale price minus the cost + renovations + mortgage payments while on the market), we would put an offer on it.
  • During the 10-day option period, we would pay for an inspection. If anything major came up in the inspection (like the need for a new roof), we would get two contractors out to give us bids and then negotiate to subtract that cost from the sales price.
  • During the 10-day option period, we would get contractors out to give us bids on all the renovations we want to do (at least two different contractors per job for competitive pricing).
  • If the sales price + cost of renovations still made sense in our predictive model, then we would move forward with the purchase. If not, we would lose our option money and the cost of the inspection.
Phase Three: Renovation [March, April, May, June]
  • The sub-contractors would complete their individual projects. We would DIY small projects as feasible.
  • We would be preparing to put the house on the market: finding an MLS listing agent, securing a lockbox, making flyers, and creating a website.
Phase Four: Resale [July, August, September, November, December, January]
  • We would work to sell the house: e-mailing neighbors to ask them to spread the word and holding an open house for realtors (providing food and drinks).
I guess this idea appeals to me on many levels because 1) it seems like a lot of fun to tackle something so new and difficult 2) it's amazing to have a friend who is willing to take on all the financial risk if I do all the work 3) it seems like a potentially awesome way to raise a good chunk of change. Our non-profit salaries are not going to increase any time soon. It already feels like we are doing as much as we can to reduce our spending. This might be a way to help us work toward some of our financial goals. 

Thinking, thinking...

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Rachel said...

Assuming you have some Young House Love skills, this could be a fantastic project. I'm always amazed by these blogs, with the creativity and the sheer determination.

I don't see anything wrong with improving something for someone to live in and making money while you are doing it. It even sounds kind of fun.

Anonymous said...

It seems far more wise to me for you to build your own house first, see how much of a pain in the butt it is (and how the costs add up quickly), and then decide whether you want a side gig as a flipper. This seems interesting but not at all smart time-wise for you with your voluminous other committments and a potential pregnancy/second child. Sorry to be Debbie Downer, but...

Anonymous said...

I agree with the above comment--use the project of building your own home as an experiment and then see if the world of flipping real estate still excites you.

alyse. said...

My husband is a carpenter who has flipped 2 historic houses with his carpenter uncle. It is REALLY hard work, and they did not get the profit out of it that they should have. Right now the real estate market is a buyers market. You won't make the money you think you will or even should in this financial climate.

real estate in the real world said...

BE CAREFUL. You need to have a written agreement with your friend that details who will be responsible for what and not just how profits would be split, but how losses would be allocated; and how work loads would be allocated. You really need to be realistic about what flipping houses is like. I know. It is not a fun side project. It is another full time frustrating, difficult, and yes, sometimes quite rewarding work. Don't watch reality TV about house flipping. Its not reality. Neither is your timetable, unless you and your partner are willing to budget in at least 20% down, renovation costs, and a year's worth of mortgage payments, taxes and insurance. The longer you pay mortgage, the less profit you will see. It can be done, and it can be done profitably, but your post makes me very nervous for you.

Raina said...

I know zero about house flipping (except from reality TV years back!). It seems like possibilities really energize you, and that is awesome; probably a big part of your personality! You might not like to see opportunities pass by either. This seems like something to think long and hard about; and not just about the action items but how you feel about the work itself....Have you and your friend worked together on a project before? Any insight that could be projected to this potential project? How would you feel if the work seems to go from working with your friend to working for your friend? And, seemingly, with no paycheck in sight for a while down the road? It seems like no short-term commitment. How high stakes would the work be; would it ebb and flow? Like I said above, no clue about the actual work involved with flipping, but considerations of work attitudes, pressures involved, etc could be stuff to think about too! Thanks for sharing your thoughts and be receptive to feedback!

Maureen said...
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Maureen said...
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Maureen said...

Sounds like fun and lots of work! I definitely agree with the advice to enter into an agreement with your partner, and I would also advise you seek legal advice both with respect to house flipping and the liability that stems therefrom, tax consequences and the partnership. For example, they may advise you to create a corporate entity that holds title of the property so that your personal assets are not compromised if things go wrong. I can reach out to my network and see if there are any lawyers in your area equipped to give such advice if you'd like. Good luck!

Mismikado said...

While this seems like a fun project, I think it is way too ambitious for your current situation. Think about how long it is taking to build your own house. Unexpected things happen, and I think it is highly unlikely that you will have a whole house bought, remodeled and sold within a year.
And even if you could do that, how much personal time would it take? It already seems like you are stretching yourself too thin with your career goals and parenting. Would adding on this project take even more time away from Henry and Matt? Especially when Matt has no interest in it. Wouldn't it be better to find a project that you can do as a family that will bring you guys together?

Jennie said...

Sounds exciting! I'm not going to repeat any of the previous comments (all very well thought out advice), but I might suggest looking at the timeline you have in mind and seeing how pregnancy and caring for a newborn might fit into it. Especially if there are delays in any part of the process. And try to keep in mind your goal of creating more time in your life to prepare for pregnancy and what kinds of things you will want to have time for once you do get pregnant (that is to say, would you still have time for prenatal yoga classes or naps, etc). Best of luck with whatever you decide!! I also tend to take on a lot at once, so if you go for it I'm sure you'll have a blast doing it!

Nora said...

Please don't destroy historic homes through quick fixes and cheap IKEA cabinets in the process. Because that's the best way to make money. But not the best way to care for a home (the difference between someone with short-term interests the financial value in a property and long-term interests in fixing up a home).

Anonymous said...

I've worked in RE for over 8 yrs & I have to tell you, this is not a smart plan. Not in this economic environment. I've seen too many ppl get caught up in the what ifs & "fast easy money". It sounds like you've got a full plate anyway.

cicile said...

From what I see around me... even people with lot of skills that made most of the renovation work themselves... they have a HARD time selling the house and making profit from it (and thats considering only the cost of materials)...

Also from what I see among my friends, hiring people to work in your house is a lot of stresse. There are always things that they do wrong... You need to spend a looooot of time checking what they do (like at least once a week). It's no fun :'(

Autumn Witt Boyd said...

I know it sounds like everyone is raining on your parade. My husband was a house flipper before we got married, and it nearly bankrupted him. I'd be happy to hook you up to speak with him before you take the plunge if you'd like. He even worked in the construction field and did a lot of the manual labor himself, and it was still pretty much a disaster.

To echo a consideration several have mentioned above, but not so clearly: this will be a full time, minimum 60-hours-a-week job. Even if you hire excellent subcontractors (which is always hit or miss if this is not what you do day in and day out), you will need to be at the job site a lot of the time. Plus shopping, planning, and managing. Do you have space in your life, support at home, child care, and the real desire for a that type of project?

Anonymous said...

Flipping is hard work, for sure, but it's more realistic than building a custom, new home on one non-profit salary. The partnership is a big red flag to me, but without that, this doesn't sound like such a bad idea.

I can picture this being the kind of thing that detail-oriented and very creative person could excel in. It's what most people do when budgets are tight.

Maria said...

I don't understand the tone of this post. All "corporate" jobs are giving people what they want/need.

Everything from your Whole Foods groceries to the gas in your car has helped your life, and so you paid money for it. If corporations don't serve their customers and give them what they want, they don't make money. It's as easy as that.

I very much understand and appreciate your desire to improve public schools and help children, but that doesn't mean corporate jobs don't contribute, or even that corporations don't share your values. It is possible to improve the community and get paid, even get paid a lot, for it.

Emily said...

Just to add to the conversation: it is indeed a buyer's market, and will be for awhile. My husband and I just knocked $20,000 off the list price of our new home in an area that sounds very similar to yours: newly gentrifying, near downtown, lots of young couples with jogging strollers. We have redone some aspects ourselves, and it has been FAR more work and money than we anticipated, and we have zero desire to do it ourselves after working all day and caring for a toddler. The costs escalate before your eyes (I've been told to just add 25% off the top to any estimates you receive.) I think it would be extremely stressful to take this on unless you hired a general contractor to take care of the details, and then they take your profit!

BB said...

My mom began flipping houses within the past couple of years. She is currently in the middle of fixing up her third house. The first house she sold seemed to go great and she made a nice profit.

Then came the second house. It ended up being much worse than expected once drywall came down. She ended up spending double what planned, then the house wouldn't sell for a year. She also had problems with her partner/friend not contributing as much, and now no longer speaks to her. By the time she sold it, any profit she would have made was gone. After waiting a year, she is now on her third house. However, her boyfriend is a freelance carpenter/custom home builder and is spending almost all his time over there. It doesn't seem to be going bad, but my sister and I agree it's more of a hassle than anything.

I would just make sure you're up for the challenge.

Anonymous said...

I've been regularly checking in on your blog because I like many of the posts; you also seem pretty down-to-earth and very normal! I am prefacing these comments with that b/c I think it's normal human nature to be contradictory. This post just struck me as discordant b/c it's coming from the same person who was having a tough time when looking at existing homes on the market --- in terms of looking past bad wallpaper and trying to imagine what the space would look like if a wall or two came down, etc. Being able to visualize and see through those kinds of things seems like a huge part of effective house flipping!! Is it easier to think about when it's someone else's capital on the line? Because you wouldn't be living in it? Seems like there's lots of thinking to on lots of angles..but those are things you already know! :)

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