Wednesday, June 24, 2015

The Purchase Transaction and the Importance of Working with the Right Realator

So, as you can probably assume, the profitability of a flip is often determined in the purchasing phase of the project.  Of course, the scope and quality of the renovation is an important element, but you have to assess the upside potential of the entire project in order to guide decisions you make on the scope of work. 

On a tight budget by, Southern California standards, we needed to be very careful in choosing the property and estimating high on the renovation costs,  we also needed to be conservative with the expected sale price.  To check our math and review possible scenarios we started by creating a spreadsheet and included the purchase price, and closing costs on the front end, from there we added other known costs such as HOA fees and Property tax.  We then created scenarios at various price points and renovation costs.  For this project we made a chart that included the actual front end costs and 4 scenarios, each of which had columns of selling prices at 25K intervals,. The closing costs on the sale were estimated based upon the potential selling price. We then chose various renovation budgets to plug into the charts to calculate the maximum we could spend on renovations at each price point.  We also created a chart that pulled the costs from a spreadsheet with a running actual total allowing us to monitor the bottom line with each purchase. 

Our shopping process took quite awhile, and our realtor never got frustrated or pushed us to choose a property.  He understood that we couldn't just "pick one" or we could end up with a property that would not be a profitable flip.  He even insisted we pull out of one of the first properties that we had an accepted offer on.  He worked very hard to get us an accepted offer on that property in a multiple offer situation.  The project seemed too good to be true: a townhouse on trendy Abbot Kinney Blvd, in Venice

We had such big plans for the place.  Our realtor was also excited about our planned renovations and thought we had a huge upside potential.  However, his excitement faded when we got the CC& Rs to review - 70% of the units were inhabited by renters.  The HOA financials and the way the board was run were bad signs, but 50%+ occupancy by renters and the fact that more than 1/2 of the units were owned by the same 2 individuals made the property "unwarrantable"  meaning no bank would lend on it, thereby limiting us to an all cash buyer.

We loved the property and already had our drawings and plans close to completion when we reached the day to remove our contingencies.  We wanted the property, and had hope that someone could find a lender, or, maybe, we'd get a cash buyer.  Our realtor insisted that this was not the property for us & I think he even said we might as well take our money to Vegas, because, sure, we could get lucky with a buyer, but it would be just that - luck - and a long shot.  So, sadly, on the last day to remove contingencies we canceled our escrow. 

We then spent several more months shopping. I'm sure many realtors would have felt we really wanted that property and that their job was done and they could collect thier paycheck.  But that's why Bill is so great - he didn't let us make an emotional decision, even though it would have been the easiest course for him - he insisted we make the right decision - to walk away from a risky project. But Bill stuck with us and after many more shopping trips we came upon the Playa Del Rey area and property we finally purchased!  And Bill, again, used all of his expertise to get us the property we wanted in a multiple offer situation, and it was not by coming in with a crazy over asking bid - he did it by assessing the property and making educated decisions as to how we could make the offer more attractive to the sellers. We actually got the property for below asking and Bill also got us a few credits for repairs!

One of the ways he made our offer attractive, was to not add needless contingencies such as loan, appraisal and inspection (and it saved us time and money because as the buyer we would pay for the appraisal and the inspection.)  Now, that is not something our realtor would have suggested if we were financing the purchase or if we were not doing a major renovation on a condo.  Additionally, knowing this unit was owned by siblings, living out of the area who's father had passed away, Bill put in a request that the furniture be included in the sale. This was attractive to the sellers because it removed a logistical problem for them, but for us it was an added bonus - the furniture is all high quality  and Mid-century modern!  Now, with a little reuppolstery and some editing we have great pieces for staging! 

Keep reading our blog - in the next post we will get into the "fun stuff" of floor plans and design.  In other upcoming posts we will show you how to utilize what you have in fixtures and furniture that can be used as is, moved to a better location, or transformed!
And, we will show you how to turn high quality but possibly dated or worn furniture into like new pieces, by yourself and on a budget!

1 comment:

  1. Thank you! I appreciate your comments on the quality of my work. Finding the right place wasn't easy, but it was definitely pleasurable working with you two! Having a qualified REALTOR on your team can make all the difference and you understood that from the beginning. Since I have remodeled 8 of my own homes, I have some knowledge of what to expect before and during the remodel. Luckily for me (and you), you listened to my recommendations and we held out until this wonderful home presented itself. I am very excited to watch your remodel unfold. Your plans for the space are perfect and I can’t wait to see its completion! Big hugs to both of you! Bill Cooper