Val Verde Analysis

In the beginning of June 2010 we had a wholesale investor contact us about this property in the Westchase area of Houston.  Through some networking he knew we were looking for properties in the West Houston area and thought we might be interested in this deal.  The wholesaler’s initial estimates where:

      ·      3/2/2
·      1809 Sq. Ft.
·      Built in 1969
·      Asking Price $112,000
·      Estimated Repairs $24,000
·      After Repaired Value $175,000
·      Projected Profit $39,000

From our experience most wholesalers have no idea what they are doing.  They are usually “newbies” who overestimate the value of the property and underestimate the repairs.  Combine those two issues and you have a recipe for disaster.  After doing some research on the property we determined the following:

      ·      Estimated Repairs $35,000
·      After Repaired Value $199,000
·      Projected Profit $52,000 (without holding costs)

What we found out was that most houses in the neighborhood sell for $97.56/SqFt., which would put the value of this house at $176,000… very close to the wholesaler’s estimate.  The $24,000 in repairs is also an accurate number if you were to just update the house a little with some cosmetic repairs like paint and carpet.  However, we prefer to “over-improve” our properties to sell them fast and at the upper end of the market for that particular neighborhood.

What we found in our analysis is that houses in that neighborhood that have been completely updated sell for an average of $109.96/SqFt.  Putting the ARV for the house at $199,000.  However, it would take an additional $11,000 to make the necessary improvements.  We found it cost effective to spend the additional $11,000 to make an extra $13,000.

One critical item that quite a few new investors forget to include in their analysis is the holding costs.  You have to factor in:

      ·      Taxes - $498/Mo (based on Tax Accessed Value)
·      Home Owner’s Association Dues - $0(Varies by Neighborhood)
·      Electricity - $100/Mo
·      Gas - $15/Mo
·      Water- $25/Mo
·      Lawn Care - $40/Mo
·      Mortgage/Credit Line/Investor Payments $800/Mo (Varies by Money Borrowed)

If everything goes well, and stays on budget, we projected the profit to be $52,000.  However, we did not include the holding costs above.  If you add up the above it costs us $1,478/mo to carry the project.  Our estimated holding period for the project is four months for a total holding cost of $5,912.

In addition to the holding costs you also have to factor in closing costs on both the purchase and sale of the property.  The closing costs for purchase was $1,760 (including builder’s risk insurance).  This is low due to the house being purchased for all-cash.

The projected closing costs at sale will be significantly more than purchase mainly due to realtor fees.  To sell the house quickly we always list our houses on the Multiple Listing Service (MLS).  Fortunately, Mr. Upton is a realtor and can list the house at a discount.  However, we still have to assume we will have to pay a buyer’s agent.  The normal commission to a buyer’s agent is 3% of the sales costs or, for this property, an estimated $5,970.

Also, there will be title company fees like title insurance.  This typically runs 2% of the sale price so we estimated the closing costs to be $3,980.

Our total holding and closing costs are estimated to be:

As you can see, if you do not factor in these “soft” costs your profit can completely evaporate.  Our gross profit, after factoring in soft costs, is projected to be $34,378. 

Before and After Pictures

Actual Numbers
So how did the project turn out?  We officially purchased the property on June 18, 2010.  Here is a list of improvements that were made to the house:

Exterior

• Paint
• Landscaping
• Fence Repair
• Foundation Repair

Interior

• Complete Kitchen Update
  • New Custom Cabinets
  • Large Eat-in Island
  • Custom Granite Countertops
  • Pendant Lighting
  • Recessed Lighting
  • New Stainless Under Mount 60/40 Sink
  • New Faucet
  • Stainless Steel Appliances
  • New Porcelain Tile
  • New Custom Backsplash
• Complete Master Bath Update
  • New Custom Vanity
  • Custom Granite Countertops
  • Dual Sinks
  • New Faucets
  • Enlarged Walk-in Shower
  • Re-Configured Closet
  • New Pocket Door
  • Porcelain Tile
  • Commode
  • Frameless Shower Glass
• Complete Guest Bath Update
  • New Custom Vanity
  • Custom Granite Countertops
  • New Faucets
  • Tub
  • Custom Tile Tub Surround
  • Porcelain Tile
  • Commode
• New Front and Back Door
• Replaced Damaged Interior Doors
• Opened Up Wall Between Living and Den
• Wood Floors in Living, Dining, and Den
• New Brushed Nickel Hardware
• New Brushed Nickel Light Fixtures
• Recessed Lighting in Living and Den
• Ceiling Fans
• Porcelain Tile in Utility
• Installed Custom 2" Blinds

As you can see there was quite a bit of work that went into the project.  The total cost for the repairs came out to be $40,656.  We went over budget by $5,656 or 16%.  The major cost overrun was due to installing frameless shower glass in the master bath, re-routing some plumbing under the slab in the kitchen for the island sink, and custom 2” blinds...  all of which we did not budget for. 

We put the house on the market August 23, 2010 for $205,000 and had an offer of $203,000 on the property September 14, 2010.  The house closed on October 15, 2010.  Actual costs were:
 

Taxes
Not too bad for four months work.  However, we still have to factor in taxes.  When you do a flip you essentially get double taxed.  You get taxed at your earned income rate, in this case 25% PLUS a self-employment tax which is 15.3%.  Add that up and 40.3% of the profit goes to the IRS.  After subtracting the $11,598 tax burden we net $17,182 on the project.

Conclusion
As you can see we didn’t quite hit our projected gross profit number of $35,000 mainly due to going over budget on the repairs.  Fortunately, we had enough cushion in the deal to still make a good profit.  The project turned out great and the buyer loves his new home.