Missed Flip Opportunity or Prudent Caution?

A couple of months ago I made an offer on a home to flip. I’m not actively looking for homes to flip in Austin, and I don’t help buyers locate flip opportunities, but when I come across a candidate property that I like, I’ll make a run at at. All of my attempts the past several years have fallen short. This is mainly because I have a formula for evaluating flip candidate properties, and I stick to it. The result is, my offer is never accepted because someone else is always willing to pay more.

On the most recent lost project, which is a few blocks from where I live, I stopped in yesterday to meet the buyer, who turns out to be a contractor, and take a look at what’s being done. I was impressed with the work and the approach being taken. I had a couple of assumptions before I even stopped in.

Knowing that the home sold for $30K more than I offered, and that my numbers are fairly accurate estimates, I assumed the eventual buyer 1) was a hands-on contractor with better remodel cost points than I can achieve (not doing any of the work myself) and 2) used a higher more optimistic ARV (After Repair Value) than I did.

I was right on both accounts. I plugged in $225K as a resale value after repairs and, sure enough, the contractor thinks he can sell it for $250K.

Let’s look at my basic math:

Let’s go through the numbers above.

First, we start with the after repair value (“Finished Value” on the chart above. I went with $225K. I think $250K is a possibility, but with the market somewhat fickle, I felt like $225K was a solid number I could have full confidence in using. I want the home to sell in less than 30 days. Next, after consultation with my rehab guy, we concluded that $35 per sqft would be the cost of a complete redo, including roof, windows and all interior elements (which is what the current owner is in fact also doing). The house is 1400 square feet, so we round it to $50,000.

Next, we factor in “Silent Costs” of 11%. I won’t go into the details of how I get 11%, but it’s an accurate amount to use and includes the loan costs, carrying costs, utilities, mistakes, surprises and cost overruns, selling costs and commissions, etc. The 11% is multiplied against the ARV to get $24,750.

So we start with $225K, subtract $50K and $24,750. I want a profit of about 8%, around $18K, so that takes me down roughly to the offer price of $132K. That was my offer, cash as-is, no option period.

The home received 6 offers and sold for $162K. When asked by the listing agent to make “best and final offer”, I stuck with my $132K. The thought entered my mind that I could change my ARV to $250K and be able to offer a higher amount, and maybe squeeze my repair and holding costs a bit, but the thought soon left. Over-estimating ARV and underestimating remodel and carrying costs are the biggest mistakes flippers make. I’m not going to slip down that slippery slope and start rationalizing and redoing my math. I’m not desperate to flip a home on thin and flimsy numbers that require luck to make sense.

So, for buyers like me, for whom homes to flip and/or rehab were easy to come by in the 1990s in Austin, I just can’t compete against the buyers who are willing to pay more. A bit further down the street from this home is a failed flip attempt from a year ago. That flipper did a lousy, terrible job on the work, did nothing with the curb appeal, and eventually rented the house. It’s still rented now. That’s what happens, or worse, when flip buyers become overzealous and use overly optimistic numbers.

This particular buyer/contractor, on the house I missed, seems very experienced and knowledgeable and has done many flips prior to this one. He has an efficient system, is a home builder himself, and is operating on a completely different cost structure than I can achieve contracting everything out to outside people. If fortune smiles down and the market gives him $250K on the back end, I think he’ll do fine. I’m not sure the market will bring $250K, but it won’t shock me if it does.

So, should I have bid more, used a smaller number for my rehab and holding costs and a bigger number for my ARV estimate, and possibly paid $165K for the house and maybe cut some corners on the rehabs to save money? Hell no. It ain’t gonna happen, no way. I’ll stick with my losing formula.