Flip or flop

When I made my 8 lists posts, one of the lists included long term goals.  On it, I included my dream of wanting to renovate or "flip" a house.  October 2014 saw the beginning of this project.  I bought a distressed (short sale/foreclosed) townhome in Minnetonka.  3 bedrooms, 3 bathrooms, 2 car garage, about 2,200 square feet.

The home was originally listed for $210K.  After a few weeks on the market with probably a lot of feedback about the not so great condition, they lowered the price to $190K.  I went to look at it late August at this price point.  It has a nice layout and is in a nice neighborhood with big rooms, high ceilings, and lots of storage space.  The homeowners had done some DIY remodeling, so the place looked pretty nice in the pictures, but up close, in person the material was cheap and the workmanship a bit shoddy.  A lot of things they had done would need to be redone to really look good.  

Given that this was a bank owned deal and that we were coming into fall in Minnesota, which is kind of the end of the moving season for most people as it sucks to move in below 0 weather with lots of snow (trust me: I have moved in February before and it blew).  I figured why not make a low-ball offer...the worst they could say was "no".  Maybe "F%$# no".  Either way, my feelings wouldn't be hurt.

This is my first venture into rehabing a home for a profit (or rehabing any home at all actually), but this is what my logic was on creating my pricing:  

• Earlier in the summer of 2014, a unit across the street was sold for $270K in just 16 days on the market.  It had been completely redone with a gorgeous kitchen and other upgrades.  Another unit with less updating was still on the market in a similar price range.  As of this posting, that house dropped in price to $265K, received an offer, and is scheduled to close later in November.  Good news for me!  Two comps above $265K, with the second one being not nearly as upgraded as the one at $270K.
• I decided to be conservative and assume if I remodeled everything that I could reasonably get $250K for it.  At a sale price of $250K, closing costs would be around $1,275, and realtor fees (just for the buyer's agent since I'd represent myself as a seller for "free") would be around $6,750 (2.7% is the norm).  My net sale price after expenses turns into $241,975.  
• If you sell a property for a gain, it is not taxable up to $250K for an individual ($500K for a married couple) as long as you've lived in it as your primary residence for at least 2 of the last 5 years.  Otherwise, the gain is taxable somewhere between 0-20% based on your income bracket.  This can get a lot more complicated, and I'm happy to dig into it if you want to chat, but for this scenario I'm planning to live there for 2 years so we can skip taking taxable gains out of my calculations.
• I estimate I'll need to put about $30K into the house to make it worth $250K.  After deducting that cost, I'm left with $211,975.  If I paid $190K for the house, that would only be a profit of about $22K.  I don't mean only because that is a good chunk of money, but it is a lot of work over 2 years for not a ton of profit and ties up a lot of capital (downpayment, moving expenses and the $30K renovation cost).  Plus, there is always something that goes wrong and ends up costing more, so it's conservative to assume (I don't know how much exactly), but assume that $30K will end up being more.  
• So I decided to put in an offer of $170K to give me extra cushion and a more worthwhile potential profit of $41,975. 

After negotiations, I ended up agreeing to a purchase price of $173,500.  A nice 8.7% discount from the listing price, and a potential profit of $38K.  Now I just need to keep costs in line and hope that I can get a better price than $250K when it comes time to sell!  

More posts to come on work that we are doing, progress updates, and totals on what was spent on materials and labor.  Doing that because they always show those numbers on the rehab shows, and I think they are so ridiculously low most of the time.  If you get a bunch of stuff donated for your show for free advertising or discounts from being a big contractor, you shouldn't lead the average viewer to believe they can flip a home for next to no money out of pocket.  Maybe if you use the cheapest stuff you can find, but I think it's hard to sell a a house for over $250K when you don't use at least moderate quality materials.  IMO.