At the end of 2015, I bought the most expensive flip I have ever purchased by a long shot! I bought a house for $535,000, which was more than double what I had previously paid for any other flip. I have flipped over 100 homes and this was the biggest risk I had ever taken, but it had a lot of potential. I had to hold the property for a very long time and it finally sold on February 28th 2017 for $802,000. This property did not need many repairs, but it came with a an unfriendly tenant who had a very unique lease. The challenge on this property was not making repairs, but getting the tenant out and marketing a home in a market and price point I was not familiar with. I used private money to buy the property, which was very expensive, but worth it in the end. In this article I will go into all the details, include pictures and before and after videos of the property.
How did I buy this high-end fix and flip?
Most of my fix and flips I buy for well under $200,000 and many for under $100,000. I find there is more profit potential on these flips relative to the purchase price, and more market demand when they are ready to sell. This house was listed on the MLS for over a year as a REO property. The seller wanted more than $700,000 and it was listed as being occupied so I had always ignored the property. Some REO sellers will not kick out the tenants or previous owners before they sell them. That means whoever buys the property has the fun job of evicting the occupants or coming up with a cash for keys agreement to get them out.
I have bought properties that were occupied by either tenants or owner occupants, but they had a lot of profit potential and were cheap. Eventually I saw that the seller had a huge price drop down to $600,000. I looked at the property closer and realized it should be worth over $800,000 if it was vacant and fixed up. I drove by the property, saw it was in great shape on the outside and decided to bid on it. The seller used an online bid system to sell their REOs. I bid the minimum which was less than $500,000 and I was the only bidder! The seller did not accept my bid since it was below their reserve, but they countered me at $535,000 including their buyer’s premium. I accepted the counter knowing I had a few days to check out the property before I sent my earnest money in and signed the contract.
Why was this fix and flip so cheap compared to the ARV?
Once I told the seller I would accept the counter on the property I went to see it again. The house was about 40 minutes away from me and right on the edge of the territory where I flip houses. I knocked on the door and the occupant answered who said she was in the middle of a party for her children. She said she was a tenant and had a ten year lease on the property! I did not believe her, but she said she would send me the lease, and it did not end until January 2017 (at the time it was October 2015). I now knew why no one else had bid on or bought the property. However, when I talked to the tenant I could see a little bit of the interior of the home and it looked to be in great shape.
I had a big decision to make on whether I should continue with my purchase or cancel my contract and forget about the deal. I talked to my family, my team, and most people thought I was crazy to pursue it. In the end I figured the worst case scenario was the tenant stayed, and I had to hold onto the property until 2017 while she paid me rent. I figured I would still make at least $100,000 on the deal even if I had to wait her out. Best case scenario I could find a way to get the tenant out and make close to $200,000 in less than a year. I decided to go for it, but I had to figure out a way to pay for this property!
How was I able to finance a $500,000 fix and flip?
I use a mix of local banks, private money, lines of credit, and my own money to flip houses. I have 16 flips going right now and it takes a lot of cash to pay for not only the house, but carrying costs, interest, maintenance, and repairs. When I bought the high-end flip, I had around 10 flips going at once, and nowhere near enough cash to buy it outright. There were multiple problems with financing this flip:
- The local banks I use would want 25 percent down plus an appraisal. They only require an appraisal on loans over $150,000 which is another reason I like the cheaper flips.
- With my local banks I would only pay 5 percent interest, but I would have to put over $130,000 down.
- I did not even know if they would finance a flip that expensive because it was so different from my other flips.
- My local bank loans for flips have a one year term. I knew I might have to hold this property for longer than one year, and may not have to refinance after that first year.
I had another option in mind to finance this property when I got it under contract. I had borrowed private money from a local investor on a couple of other smaller deals. After I got the home under contract, I called him and told him about the deal. He was super excited and actually wanted to partner with me on it. I do not like using partners so we worked out a private financing deal. He would finance the entire purchase price for 10 percent interest and 2 points. He knew it might take longer than a year to complete the deal and he was okay with that.
What happened after I bought the high-end flip?
I bought the high-end flip despite many people telling me it was a huge mistake. I talked to the occupant again, but she was not as pleasant as the first time I met her. She had previously told me she would be happy to give me the lease, but never actually got it to me. Here are a few of the highlights of how it went:
- She gave me her number but never answered her phone or called me back.
- She gave me her email address but never responded.
- When I finally got a hold of her she would not give me the lease and said I had to talk to her friend who was a real estate agent. He had no idea what was going on or who I was.
- She did start paying rent, which was $2,200 a month.
- At one point she accused me of harassing her for calling her too many times. I think I called her three times.
Eventually I found the lease and a court case where the lease had been upheld by the Colorado courts. The lease was ten years long, had an option to purchase, and was between the occupant and her uncle. Rent was $2,200 a month, which was incredibly low for that house even when the lease was written 8 years ago. For some reason the courts upheld this lease as valid after the home went through foreclosure. In my experience and from what every lawyer I talked to said, the lease should have been thrown out for not being arms length (related parties), for low rent, and for having a ten year term.
I am starting up a new page that lists all my flips and their progress here
How did this fix and flip story get even crazier?
I can’t remember exactly when I found all this out, but some things I knew before I bought the house and some things I found out later. This may be why some people thought I was crazy for pursuing the deal. Here are the other very interesting parts of the story:
- The occupant’s husband was in prison for 9 years for committing securities fraud against seniors.
- The occupant’s father had built the home, then sold it to the occupant’s uncle, and the uncle leased it to the occupant.
- The uncle who was leasing the home to the occupant had died five years earlier, but the house never transferred ownership.
Over the next few months I asked the occupant what she wanted to move out. She had decide to talk to me once in a while and meet me at the house because the lease stipulated she had to let me inspect it (the house was in great shape). She did not want to violate the lease, because then I could evict her. I knew she wanted to move out because she told me her husband was on the East coast, and she wanted to be closer to him. At one point she told me she wanted $100,000 to move out, then she wanted $50,000 to move out. Those amounts were crazy, so I decided to talk to my lawyer about my options.
I told my lawyers the entire story and they agreed the courts should have never upheld the lease. However, the case had even been appealed and upheld again. The lawyers told me my chances of winning in court were almost zero because the previous judge had already ruled on the case. They had told me to try to settle with the occupant or wait out the lease. I really wanted to get her out, because I was scared she would destroy the house. She was almost impossible to talk to or negotiate with, so thanks to my lawyers suggestion I hired her an attorney. I offered to pay up to $1,000 of her lawyers fees for someone to represent her and get a deal done.
Eventually in August of 2016 she moved out and I had possession of the house. I agreed to pay her $20,000 plus her security deposit back and give her one months free rent. $20,000 may seem like a lot when her lease was up in January, but because of the option to purchase clause in the lease, she had another three months to stay in the home, and she may not have been easy to get out even when the lease was up.
Listing and repairing the high-end flip
Below is a video of the home when I took possession of it:
The home was in good shape but needed some work. Here are the things we decided to fix:
- Repaint some of the interior
- Replace the upstairs carpet
- Replace appliances in the basement bar
- Minor landscaping (a few landscape rocks made into a wall)
- Repair other minor items
Here is the after video when the repairs were completed:
We had the repairs completed and listed the home. I thought the house would sell for $845,000 when I bought it. We looked at comparable properties in the neighborhood and thought the home was still worth at least $845,000, much more than the burnaby condos that were listed before this one. We listed it for $879,900 because many of the sales had sold for much less than the asking price. The house did not sell and we had very few showings. I do not think it helped that we were listing it in the fall when the market is sometimes slower. We lowered the price to $864,900 30 days later and it still would not sell. We started to get feedback that the home was not as nice as buyers expected in this price range. People thought the trim was scratched up, and the windows were not in good shape.
We had the windows looked at and many of the seals were broken, so we decided to take the home off the market and make more repairs. We had the windows repaired, the trim all repainted and re-listed the home. We listed it for $864,900 in November, and still had no action, so the price was dropped to $849,900. We still did not get an offer and I was getting worried that it was not selling. In January of 2017 I lowered the price to $814,900, and we got an offer a week later for $802,000 cash. The house sold in 30 days and I was very happy!
How much did I make on this fix and flip?
I did not make as much money as I hoped to on this flip, but it was still well worth doing the deal. I had hoped to make $180,000 when I first bought it, but it took longer than expected, and it sold for less than I thought. Here are the expenses we had:
- Repairs: $30,000
- Interest paid: $66,000
- Loan points paid: $10,700
- Carrying costs (insurance, taxes) $9,500
- Lawyers fees: $2,500
- Payment to occupant: $22,500
- Closing costs: $28,000
Total expenses: $169,200
Here is other income I made on the property:
- Rent received: $17,600
- Commission made when buying: $16,050
Total income: $33,650
Total profit made on this deal:
- Selling price: $802,000
- Expenses: $169,200
- Income: $33,650
- Purchase price: $535,000
Total profit: $131,450
Would I do a high-end flip again?
I made out pretty well on this deal considering I financed the entire purchase price. However, I still had a lot of cash tied up in it since I was paying for interest, repairs, and carrying costs. I received some nice sized checks when it closed! I think there was enough room in this flip to take a chance on it. Things did not go as planned and I still made over $130,000 on it, which is the most I have ever made on a flip. Most of the opportunities I see in the high-end market do not have the profit potential this deal had. I doubt I will run into circumstances like this again and it took me a long time to sell the property. I also feel that high-end properties are more susceptible to market changes and are riskier for that reason. I would do a high-end flip again if the numbers were this good, but I am not getting my hopes up that I will find one.
For more information on my flips, and how I average over $30,000 in profit (before this deal) check out my book: Fix and Flip Your Way to Financial Freedom: Finding, Financing, Repairing and Selling Investment Properties.