Our Digital Shoebox: Flip This House

Our Leila Court Property in PA

I just watched about 4 episodes of house flipping on TLC, which got me all energized and finally ready to write an entry about our Leila Court property. But first a word about that show. In short, I think that show can be seriously hazardous to one's financial well-being. IMHO, it's totally misleading in terms of how it makes flipping houses seem like a get-rich-quick scheme that's easier than switching to GEICO ("even a caveman...").

In all, it just paints a picture that, simply put, ain't very realistic. Case in point, there was a couple who bought a house to flip and at the end of the episode, we're left with big smiles and a graphic that says they profited about $80,000 (sale price - purchase price - repairs). However, the credits on the episode started to roll without anyone pointing out the following:

Given that the house sold for about $475,000; you'd have to factor in your realtor fees (3% buyer / 3% seller in many places). That 80K then drops by $28,000 to $51,000. OK... now lets talk taxes. This being a short term investment, it'll be taxed at their usual income tax rate. Lets say 28%. So the previous number of $51,000 now gets cut by almost two-thirds to about $36,700. Ouch. What happened to my 80 grand?

OH! Did I mention that the initial repair schedule was only 3 weeks? Well, it took about FOURTEEN weeks to get it all done. Also factor in an additional month on the market, plus another month for closing. So what's that? Four months including repairs? Lets figure they may have to carry the mortgage on the home for 3 of those 4 months until closing. So now we're down to about $28,000. Hmmm... but what about the utilities that they'd have to pay during the (a) repair process (b) selling time and (c) closing month? At 3000 square feet and with your fair share of power tools sucking up juice all day; I'm guessing that the utility bills by themselves will be a BEAST! And if they had to borrow money for the repairs, how about the interest on that loan? ... wait. Did we ever factor in closing costs from the initial purchase loan?

Okay, so all of that aside (ha!) assuming they sell, they'll eventually get back to the closing table. Now the question is, will they have to offer a sellers assist? Will they have to honor a "requested repair list" from the buyers? What did they overlook that will come out once an inspection is done? And the cherry on top: $475,000 was the price that the realtor / appraisal gave BEFORE the house went on the market. $475,000 can turn to $460,000 in a heartbeat if the market ain't right or the original comp numbers were off by just 2 or 3%.

Compound that with the 49 other factors I don't even know about since I've never completed a flip; and the moral of the story is that with most flips, there's a very thin line between a potential (imaginary?) $80,000 profit and having to pawn your sneakers to buy dinner from the dollar menu.

And with that oh-so-cheery and optimistic prelude completed, I'm happy to announce that repairs are scheduled to begin on our Leila Court property tomorrow. So far, the first 3 major expenses [purchase price, closing costs, repair estimate] have come in a combined $6000 *under* expectation; so we at least have reason to still be optimistic.

As for the house itself, I think it's going to be quite nice once it's done. With a $118K purchase price, a fantastic $600 in closing costs, and $20K in repairs; we're hoping to turn it around within 3 to 6 weeks and smack it back on the market for as close to $175K as we can get. It should help that the house has plenty of curb appeal and offers a product that simply isn't available at this price & location (5 bedrooms under 200K). But factor in all of the insanity that I mentioned in the previous paragraphs (because this is real life, not a tv show); and it's obvious that our first foray into "flipping houses" won't exactly be a big splash in the water. But it'll be a learning experience, and should yield us at least a few dollars. And every little bit helps when it comes to diaper money.

And in case you missed it, yes, I did mention that it'll take an estimated 20,000 borrowed dollars to get this property turned around. The very thing that will be our ace in the hole at selling time (5 bedrooms, 4 baths, 3000 square feet of living space) is the same thing that's killing us is at the front end of the deal. All of that space sends the price of full-house tasks like flooring and painting spiralling out of control. And overall, the current condition is straight-up disastrous in there. It took us going thru three different general contractors and a 1/2 bottle of Tylenol before the 3rd handyman panned out as someone we were satisfied with in all 3 dimensions: price, time line, and professionalism... heavy emphasis on the latter.

Last but not least, for those who like to count every marble and turn every stone, here's the initial list of expected repairs:

Overall Repairs
Replace all flooring in house (carpet, tiles, linoleum)
Paint entire house (walls and ceilings)
Cleaning / Replacement of some heating baseboards.
Install GFI Electrical Outlets.
Replace / Repair / Paint / doors and trimming around all doorways
Replace door stoppers throughout home

Kitchen
New stove, dishwasher, and refrigerator
Repair kitchen walls (new trimming, etc)
Refrigerator moved to original location (is currently next to stove)
Cabinets relocated to accommodate moving fridge
Repairs in laundry room (Walls and exhaust system)
Replace the ugliest light fixtures I have ever seen

Main floor
Chimney sweep
Replace missing window

Main floor ½ bath
Remove unfinished panelling and Redo walls

Full Bath
Repair toilet leak
Tile floor
Install new sink

Main floor bedroom #1
Tear down current false walls, reframe door entrance & hallway
Add a 3x2 closet

Master Bed & Bath
Patch hole in ceiling
Replace sink
Repair / Replace tub fixtures
Repair / Replace closet door
Tile floor

Basement
Replace two broken windows
Plaster / Paint area
Repair / Replace doors
Check water heater and pray that it won't need replacing
Get basement heating system (can't remember the type) checked and repaired if necessary