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Saturday, December 22, 2012

Choosing to Turn Down a House Flipping Deal

house flipping deal
The floor here is sunk about 6 inches.

I had high hopes that this post was going to be about announcing House #11 but unfortunately this will not be it. However, that is sort of a good thing...

After the sale of House #10 I have been looking for my next investment and sending out offers like crazy!

I had already commented on how much the inventory of foreclosed/bank owned properties had gone down in Atlanta. So a lot of the properties I am finding in my area of interest that would make good candidates are being bought by people willing to pay a lot more than I am.

So...back on Wednesday we finally put a house under contract. This house had gone under contract about four times before. Bank was asking $130,000, I was offering $95,000. 

When I see contracts fall through on a house it's usually a good thing since that means the bank is getting tired and becomes more willing to let it go for a lower price. So sure enough after the house came back on the market for the fourth time I submitted my offer again.

After some back and forth we finally agreed on a price of $112, 500 thinking the house might need about $40,000 in repairs and could be resold around $200,000. Giving me the potential of a $30,000 profit or so.

The good and bad part is that after doing a thorough inspection I discovered that the repairs needed are more serious than I initially thought. Think structural repairs...yikes!

kitchen structural damage
Neat picture hah? The orange circle on the left shows area of the floor that is sunk about 2 inches. Plus that whole area is an addition that was not built correctly. Will probably require teardown and rebuild.

The house has seen significant settlement on one side and along with water damage has caused some hefty structural damage on one side of the house. There are diagonal cracks in the drywall along many windows and doors which is a telltale sign of structural problems.

evaluating house flip deal
Not only this but it has a huge back deck that is two stories high and is falling apart between rot and the structural settlement. So it really calls for a teardown of the deck and rebuild from scratch.

To add to this all of the windows in the house are bad, it has drainage and water damage problems in the front, it has no backyard and both of the HVAC units are done.

The biggest problem is that all of these are the things that can be seen. What about all the things that cannot be seen???

The point is...all of this is fixable of course, for the right amount of money...therefore what I thought could be a $40,000 repair job could easily turn into $80...$100...

So now the contract price of $112,500 is nowhere near good enough. So I am getting out of this contract faster than you can say REO...

The point of the whole story is to show you three of the lessons I have learned in this business:

  1. Always have an "escape clause" on your contracts
  2. Consult with someone that knows more than you or that can give you a qualified second opinion. I inspected the house with one of my general contractors and he alerted me to several issues I had overseen.
  3. Don't try to make a good deal out of something that is not.
At the end of the day as much as I am looking forward to finding my next investment it still holds true that no deal is better than a bad deal!

QUESTION: What do you think, should I have gone through with it?

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