In this episode, we analyze a case study of a fix-and-flip that wont sell after rehab. We discuss the various options available to the owner, identify strategy considerations, and extract a couple of lessons learned along the way.
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Transcript
What's going on everyone? Welcome to another episode of the remote investor. I'm Michael Albaum. And today I'm joined by my co host, Pierre Carrillo. And Pierre, we got an interesting episode. Today, we're gonna be diving into one of your friends AMA, give us the scoop. What's going on?
Yep, I have a friend asking for a friend,
a friend, longtime listener, first time caller. Yeah.
So he bought this property in Chicago for 190. He's put a little over 100,000 in renovations, he bought it as a fix and flip. And now he's trying to sell it, no one wants to buy it. He's done a couple of price cuts and still no bites. So he didn't ever consider the option of renting it out. He had only conceived of it as a fix and flip. So I thought, hey, let's pull this up as a case study. Let's see if there is another option rather than selling that can turn this alligator into a profit maker again. All
right, sweet. And for everyone listening who might not be familiar with term alligator is basically a property that you got to feed every single month. It's not cash flowing. It's cash flow negative. So we bought it for 190. It's a four bed two bath 14 140 Square feets, he put over 100k into it. Do you know that he buy this thing all cash? Or does he have debt on it?
Let's run the scenario. Both ways. Okay, perfect. Yeah. So
anybody listening is can find themselves in either scenario. So your buddies in this thing for 290 Let's just call it an even 300 To make things easy. So now it's listed at 315. You said he's already done a couple of price cuts. So judging by the pictures, it looks like he went in and kind of did everything right. The kitchen looks like a brand new kitchen looks like new floors throughout looks like clearly new paint throughout the trim looks nice. Stainless steel appliances. I mean, it's a clean look and property. Three bed two bath basem*nt looks really nice and clean. Put in a mitt looks like mini splits. Alright, so your buddy listed the property, no bites. So what does he do now? So he got into it as a fixin flip. So the first thing that comes to mind is he could just sell this thing at a bit of a loss and move on. Like if he's not wanting to be in the property anymore. It might be an expensive lesson learned. But if he's able to get out of this thing for about what he put into it, he's lost the time, but he's gained the experience. So that I would say is option one, that's probably going to be our least our least fun option, or bill. Yeah, yeah, yeah. But bottom of the stack rank in terms of the options? Do you know? Is your friend able to sell this themselves? Are they having an agent that they're working with? who's expecting some commission from the sale? Or
their agent? Is their property manager who's kind of facilitated the whole deal for them? They have one person who's doing everything their local representative there.
Okay. And do you know, PR, did their budget? Did their rehab go over budget? Or were they budgeting for about 100,000 in renovations,
they went a little over what they had expected and renovations. Okay,
so it sounds like they missed the mark on their ARV, or after repair value. Which basically means once the property is completed, and all the work is done, what's the value going to be. And so for any rehabbers out there, any flippers out there, if you are planning on on flipping and rehabbing properties, you have to make sure that you are really specific and really accurate on what your value is going to be after you do that rehab or after the repairs, because you don't want to find yourself in this situation where you're trying to sell the property and you can't get the value out of it. And that's always, I think, a big risk and rehabbing or flipping. You could do your ARV Calix, when you buy the property, or frankly, you should do it before you buy the property. If you're in the flip, or you're in the deal for six months, the market could change in that timeframe. And so there's a really big exposure to the time that you're in the deal. So quick flippers tend to have the most success because they're into a deal and out of a deal. So their numbers are accurate, because they have a tight time window. The longer you're in a deal, the bigger the exposure is to getting your numbers wrong. So a second option here for your buddy is consider renting it out. So I would encourage them to go pull rental comps in the area for a freshly rehabbed three, two in this particular neighborhood and just see what it rents for. Because I did that really quickly
with him in person when he told me about it. And I think we got around 21 2200 a month.
21 2200 a month. Okay, perfect. So, again, we're in the deal for about 300 grand. it rents for 2122 This is just
using one of those like rough online rent. Yeah,
no, I think that's perfect. Yeah, I think that's perfect, real rough and dirty. We're south of the 1% rule. Now, the 1% rule basically says if you can rent a property for about one percent of what you bought it for on a monthly basis. So if you buy a house for 100 grand, and then you rent it for 1000 bucks, you should be able to cashflow that with a mortgage. So if your buddy doesn't have a mortgage on this thing, he owns it free and clear. I mean, he's in it for 300, he could be getting 2122 a month, those numbers could be okay, he might be able to live by and put some money in his pocket every single month, from a cash on cash return perspective, it's probably going to be pretty light. Right? So let's just do some some real quick math here. So if he's in it, if he can rent it for 2200, let's say, I'm going to use the 50% rule, which basically says we're going to take 50% of the income and throw it out the window to expenses to operational expenses. That's not the mortgage. So that's your property taxes, your insurance, your maintenance repairs, your turn any turn costs, you have your management fees. So let's divide that by two. So that means he's bringing in he's left with $1,100 a month. And if there's no mortgage, that's his, quote, unquote, cashflow. So if we multiply that number by 12, that's $13,200 a year in cash flow. Now he spent 300,000 to get 13,000 in cash flow. So if we divide our 13,200 by 300 grand, that's a 4.4% return. Now, that's a cash on cash return of 4.4%. So if anybody listening to this is like, Oh, my God isn't like an amazing return. Well, this type of deal would work well for you. If you're sitting here thinking, yeah, 4.4% is not so great of a return. Yeah, maybe maybe this type of deal isn't going to work for you. But so that's another option, right is just if there's no debt on this thing, rent it out, collect your 2200 bucks a month, pay your expenses. And all the while, you could consider either selling it as an investment property, or selling it to an owner occupant. But that's a much tougher sell because there's a tenant in place, especially if you have a year long lease, nobody is going to buy a property as an owner occupant who wants to wait to move in for a year, because they're not even gonna be able to finance it with an occupant loan. So it's definitely becoming an investment property at that point in time. So option three, is if he's got a mortgage on the place, well, really, it's the same option. It's right, it's rent the unit out. But if he's got a mortgage on it, he needs to evaluate, okay, what is his monthly mortgage payment. So principal and interest depending assuming if it's a fully amortized loan, assuming he's paying principal and interest every single month, if it's a flipping loan or renovation loan, it might be an interest only loan, let's say it's like a real traditional rehab loan, that's interest only. So he borrowed 300 grand at 10%, which is 30 grand a year. And so if we divide that by 12, his monthly payments $2,500 a month, for just the interest part. If it's principal and interest, it's probably going to be a little bit bigger. So that means he has a $2,500 mortgage expense, plus our 50% operating expense, if we're assuming roughly 50% of the income, which is 1100 bucks, right, that's why we said half the income is so that means in combined, he's got a $3,600 expense for owning this property on a monthly basis. So if he's can rent it out for 22, that means he's going to be negative cashflow. 1300 1400 bucks a month, depending on how long he's willing to stomach that for, if he doesn't want to sell this thing for a loss, that that's kind of the burn rate that your your buddy is looking at. So another option. And this one, I'm kind of a big fan of because it takes care of a couple of different it solves a couple of different problems is the rent to own model. And so people listening, you might not be familiar with rent to own. But basically, it's kind of like what the name implies, it's you are renting the house out to somebody that has the intention to buy it at the end of their lease. And so this is a really good option for owners and also for buyers. So there are a lot of people out there who have 1099 income or self employed income that haven't done their job for two years or haven't owned their business for two years. And unless you have two years of self employed ployment on your tax returns, a lot of banks aren't going to give you a loan. So you're not gonna be able to go buy a house. And so these people might have really stable jobs, really strong income earners, but because they don't have the tax return documentation to showcase that over the last couple of years. They're gonna have a difficult time qualifying for a mortgage. And so these could be a this could be a great potential person to sell this property to someone who isn't going to qualify for additional loan. And so the way they typically work is they're typically going to pay a monthly amount. A portion of that is going to go towards the typical rent And then another portion of that is going to go towards essentially building up equity or building up a down payment, such so at the end of their lease term or the end of the agreement, this tenant buyer can go to a bank and say, Hey, I've already paid for my down payment, I just need you to come in and finance the deal for me. So hopefully, by the end of that timeframe, whatever the lease term is, 12 months, 24 months, 36 months, that tenant buyer is now able to go to a bank and get a traditional mortgage. So there's, that's, that's another option. The other way to put this together is to sell it to a tenant, or a buyer with seller financing, he could sell it, but he plays the bank, for one of these would be buyers, that is having difficulty getting a mortgage,
which let's remove that loan away from the private lender to hold on to it as a seller financer for 30 years or Yeah,
so seller financing, we typically don't see the seller holding the note for the full duration, like a typical 30 year note is because the seller is typically going to be charging a higher interest rate than a traditional bank would. So if your buddy is if your buddy has a private note, I would definitely encourage your friend to talk to whoever the note is held with. And and, and see if they can maybe work with them. Because maybe your buddy could could sell this thing at 12% interest, and then make a little spread on the difference between what he's paying, and what he's charging someone for that private note, the seller financing works really well when the property is owned, free and clear. So but if it's not, if it's seller financing, assuming if it's a private note, maybe it's a friend or a family, or even a hard money lender, if they're willing to work with your buddy, I'm sure they are going to be happy to still collect their 10% or whatever the interest rate is on their note. So they get paid, your buddy is making a spread on the delta. And now a tenant or buyer gets to live in the property and become a property owner. So it is kind of a win win win. But it all just depends on how flexible people are. And then the other thing is, it really just depends on on the affordability factor. So what I mean by that is if this property isn't moving at 315, or whatever it's currently listed, I think it was 315. And interest rates for owner occupants are like 7%, seven and a half percent. It might be challenging for your buddy to sell this thing at 315 to somebody with seller financing at 12% or 10%, or whatever that number is. Because if it's not moving at 315, it's my guess is an affordability issue. So that those two more options for him to contemplate for him to think about just explore. A two more options are renting it out either on a short term or midterm basis. And this basically involves furnishing the property, which if your buddy listening to this, he's probably like there's a 0% chance I'm putting more money into this house. But as an option, encourage, encourage him to run the numbers and basically see, hey, is there a midterm market for this or short term market in Chicago, what I love to do a strategy that I've integrated big time into my portfolio is mid furnished mid term rentals to medical professionals. So if this property is anywhere near a hospital, or a clinic, or some kind of medical facility, there are a lot of travel medical professionals that come to these different facilities and do rotations there for whether you know, 12 weeks or six months or a year, what have you. So renting it out on not a nightly short term basis, but do it on a month to month basis. With some of these folks, the rents you're able to get are way stronger than if you're doing a traditional monthly rental, a because it's furnished and be because it's on a shorter term contract. See, because he's traveling medical professionals often get a stipend from their employer. So they're like, Yeah, I don't really care what the price is, I'm happy to pay it because it just kind of a pass through expense to, to whoever the the medical facility is. So that's a great option to consider. And a resource that I like using is furnish finder. So we can your buddy can go online right now, type go to furnish finder.com punch in the address or punch in the neighborhood in which the property is located in and see all the other furnish finders that are there, the size, what they're charging pictures, that sort of thing. Maybe this is this is a niche market that your your buddy can play in, if there's not a whole lot of existing inventory in there. Or if frankly, if the existing inventory just sucks. I see that all the time, like people taking pictures with their flip phones and posting them to their furnish finders. It's a lot of mom and pop operators. So if your buddy can come in and be professional and really make listings pop, and the numbers work, it can be really interesting. Then the other of course is doing traditional short term like Airbnb or VRBO. Seeing if there's a market for that in this particular neighborhood, could be a real good way to boost the monthly returns to get himself out of his alligator position. And then he can decide whether he wants to operate it as a short term rental and collect cash flow from that, whether he wants to market it and sell it as a short term rental to somebody who wants to operate a short term rental business. That's another way to get out of this. If he doesn't want to be in the rental game. I think I'm tapped out. And then how does how does that sound?
All of them sound like a bit of work, frankly.
Yeah, for sure. Like they're all a bit of work. Getting this thing sold at the price that he wanted to is, is the easy the easy button. But it sounds like again, there was either a miss in the evaluation on the front end, or the markets changed since he's been in the deal. So
he's wanted to do that. And he's had the person that he's working with there locally, and they haven't sold it in, you know, it's been months now. Should you consider given them the boot and gone with someone else?
Yeah, that's always, it's always such a good question, Pierre. And it's tough, it's really tough to categorize and drill down into, is this a personnel issue? And maybe a marketing issue? Or is this a market issue, and it's price wrong, or there's something physically with a property, that's the reason why it's not moving? Can't hurt to try changing? Who's listing it? Put it out there to you know, reach out to a couple other agents. Give them basically how to make them compete for your business. Say, Okay, this is this is the property I'm looking to sell. I'm interviewing a bunch of other agents, how would you market it? What are you going to do for me? What do you think it would go for? What's your plan to market the property? And see, see where he gets good, warm and fuzzies? Because when you said that it was the same, the same person that's been involved from the start. This is the agent that sold him the property. This is the agent the handle the rehab, and this is the agent that's now trying to sell the property. Is that right? Yes. Something tells me that that agent missed the ball, right like that. At the end of the day, the buck stops with your buddy, the buck stops with the share of the property, right? Absolutely. Yeah, I've been in a similar situation and I I pulled the ripcord rip the band aid off whatever expression we want to use here and changed and changed agents ended up being that it still took a long time with this new agent, but it was just a better personality fit. And I was so ticked at the agent that sold me the property. It was very similar. And he told me the property he owned it was actually his he owned the property. He's like, Michael, I got this great deal. It only needs five grand in rehab. I'll sell it to you for this ARV is this you'll be and you'll be out no problem. Well, the ARV wasn't that and the rehab wasn't that either. So shame on him for telling me that misleading me. But shame on me for going along with your whole. So this is this is a prime example of hey, trust, but verify. You got to run all your own numbers as well. Don't don't take what people are telling you always as fact go verify it for yourself. But so that's just even if he had difficulty selling it with a using a different agent, it might feel a little better to not have to give the commission to the person that he's already kind of frustrated with throughout the whole process. You know, it's funny, I was just chatting with a friend here locally that does some some house flipping and some investing. And a rehab went so sideways on them, like oh, the contract with is that and I'm like so the reality is it can happen to anyone, it can happen anywhere. The fact that it's remote does add a layer, a degree of complication. But it's something that can't be overcome. People have been doing it for a long time. So I just think it's important to understand and recognize the risks associated with with making that decision and making that investment. But I would argue that those same risks are involved with with flipping locally or doing rehabs locally. So I I don't think we can put poo I don't think the remote aspect is the reason this one went sideways. I'll put it that way. Hopefully this was helpful to your buddy. Hopefully this was helpful to everybody listening. If you have a property like this, we would love to hear from you. We'd love to analyze it. Kind of do an AMA style and and talk through what some different options are. Because every deal is different. Every property is different. Everyone's situation is different. So if you've got a specific situation that you'd like us to walk through and help you answer, we would love to do that.
Leave a comment under this video here. Tell us what your situation is. And we'll
take up the case. If it's worth it. Yeah, that was a good one. Yeah, even if it's not a good one, but leave us a comment. We'll try to do our best to help answer it if not on a show. We'll leave you a comment back. Thanks, everyone for hanging out with us. Really appreciate it. We look forward to see you on the next one. Happy investing.
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