My House Flipping Experience: The Bid

by Joe Plemon on May 17, 2010

The House We Will Be Flipping

When our son Jonathan approached us with the prospect of flipping a house, I listened. As part of his duties with his current employer, Jonathan has earned his boss some decent income by overseeing the purchase and resale of two houses in our community.

In this post and upcoming posts, I plan to chronicle the process, the strategy and the results of our current house flipping experience. I probably won’t reveal any dollar amounts until all is done, and even then I will wait and see. But this is a new adventure for me, so come along.

Our House Flipping Discussion

Jonathan, “I have a proposal for you to think about. I know about an estate auction that includes a house on North Acre Lane in Jonesboro. I am not in a position to do it alone. Are you interested in partnering with me to try to flip this house?"

Me, “Sure, I am interested, but your mom and I will need to talk this over before I can give you an answer. This is interesting timing because Janice and I have recently been talking about some real estate investments. I’ll have to get back with you.”

Jonathan, “Sounds good to me."

I then spoke to Janice, who was immediately interested. I might mention that Janice, our design expert, is an integral part of this team. She is visually artistic, with the ability to “see" how the project will look before we start. She is also good at checking and comparing prices. Janice did the design (including scale drawings complete with wiring, lighting, appliances, etc.) of the remodeling in Jonathan’s most recent house and each time we decided to remodel our home.

Figuring our Bid

Jonathan set up a meeting for the auctioneer to let us into the house. We measured, looked, talked, looked and talked some more. This house is a single level, 1100 SF with three bedrooms, single bath, kitchen and living room (see photo above). Built in the 1950s, it is solid but dated. We agreed that we could do cosmetic work to most of the house (new flooring and replace the dark paneling with drywall), but the bath and kitchen need upgrading. We plan to replace the kitchen cabinets, add a dishwasher, remove most of the wall between the kitchen and living room and add an island to the kitchen. The bathroom layout is awkward, with the toilet in a corner near the hot water heater, so we plan to move the toilet, replace the fiberglass tub/shower with a new tub, add a shower, and install twin pedestal bathroom sinks.

Janice went to work making the drawings and checking prices. The three of us then met for several hours to tabulate our remodeling budget and figure our bid. Jonathan’s market price research matched the number I had come up with by the seat of my pants. We took 70% of our anticipated sale price, then subtracted our remodeling budget to arrive at our bid price. We agreed that we would not bid over that price under any circumstances.

The Auction

This was new to me, but not to Jonathan. Knowing that the house would be auctioned first (before the rest of the estate), I arrived an hour early just to get a feel for the process. Because this was an estate auction, I shouldn’t have been surprised by the crowd, but I was. I had to park a block away.

Jonathan arrived fifteen minutes before the auction began. We learned that a 5% buyer’s fee would be added to the bid, so we adjusted our maximum bid accordingly. The auctioneer patiently explained the bidding rules in a very normal voice and then launched the bidding with typical auctioneer hyper-jibberish. Others were bidding, but Jonathan refrained, causing me to squirm. “What", I wondered, “if the auctioneer ends this auction before we ever bid?" I elbowed him, but he smiled and told me not to worry. When the price got within about $10,000 of our maximum bid, Jonathan bid. Several others backed out and suddenly it was us and one other bidder. Our opponent deliberated considerably when it was his turn; Jonathan simply bid when it was our turn. Finally, the other bidder dropped out. We were the winners – at $2,000 less than our maximum bid.

Jonathan!" I exclaimed. “I thought you were going to let someone else get it before without bidding! Why did you wait?"

Dad, I knew that the auctioneer wouldn’t end the auction without the ‘Going once! Going twice! Sold!’ routine. So I waited just to keep the other bidders on their toes."

We paid the earnest money, signed the papers and were on our way to becoming a flip house owner.

As we wait to close on the house, here are my thoughts: good and not so good:

The good

We should make some money.

We realize that most remodeling projects end up costing more than budgeted, but we built considerable margin in our budget to allow for contingencies. We also figured the market price lower than what we think it should bring. One more bonus: the house, inside the city limits, has a HUGE back yard that is accessible from another street. The house proper sits on a city lot of 0.27 acres and the “back yard” has a separate survey of 0.67 acres. We could therefore sell the back lot separately from the house and perhaps maximize our investment. Because we did not figure this possibility into our bid, we are optimistic that it will give us some added cushion.

Doing a project with my son.

Jonathan has a real desire to buy and flip houses. This partnership should help him on the path of realizing his dreams while cultivating some great together time.

The not so good

My summer is booked.

Jonathan works a day job, so we plan to work a few hours nearly every evening to put the project on a fast track.

Doing a project with my son.

What if it doesn’t go as planned? What if we work really hard and then have trouble selling the house? What if we don’t agree on a sales price when those negotiations start? What if we have misunderstandings about each other’s responsibilities? Doing a project with my son could be a great thing, and I am confident it will be. But, being the realist I am, I also realize that it could backfire.

Readers: Please share your thoughts. This is my first house flip, so I want you to be brutally honest. What have I done right so far? What could I have done better? Any tips (or questions) as we move forward? Thank you!

{ 22 comments… read them below or add one }

Everyday Tips May 17, 2010 at 9:36 am

Great post! I do not have any advice for you as I have never flipped a house. However, I am fascinated by the whole process and will live vicariously through you.

House prices are such a bargain right now that I also have been tempted to take on flipping. But, I am just not ready yet. I will follow your progress though and cheer you on!

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Evan May 17, 2010 at 10:53 am

Good for you Joe!

I don’t know anyone that didn’t get burned in flipping, but that is also because of the nation wide drop in home prices.

I wish you luck and think it is awesome that you are facilitating your son’s dream

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joeplemon May 17, 2010 at 12:57 pm

@Everyday Tips,
One reason I decided on this series was to encourage people to live vicariously through my experience. Hopefully, you can learn on my dime. Thanks for reading…and cheering me on.

@Evan,
Thanks for the encouragement. Hopefully, we won’t see much more decline in home prices and maybe even some rebound. 🙂

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Peter May 18, 2010 at 6:12 pm

Good luck Joe, I look forward to reading more about our flip. I’ve always been fascinated by those tv shows where people go in, remodel the house and flip it 60 days later for a profit. I’ve never thought I’d have the nerve to do something like this, but it’ll be fun to see you as you go through it!

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Roshawn @ Watson Inc May 18, 2010 at 11:01 pm

As I mentioned, it sounds like a fascinating journey. It is so good that you have a design person on your team. I would presume that will easy the creative burden.

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joeplemon May 19, 2010 at 10:31 am

@Peter,
I too have watched those TV shows, but I do not think they are realistic. Have they ever shown one where the buyer got burnt? I doubt it. Anyway, I am trying to be realistic with this investment. Hope you enjoy the ride!

@ Roshawn,
Yes we do have a great design person: my wife. Actually my son is also very talented at visualizing how a project will look. My part is crunching numbers and doing basic remodeling. We will need to hire out some specialty work, especially plumbing, so we will see if we budgeted properly. I will share as much disclosure as is OK with my wife and son. 🙂

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Ryan @ Planting Dollars May 19, 2010 at 3:21 pm

Sounds like an exciting opportunity and something to build your relationship with your son in the process. I look forward to hearing more about it. Do you plan on incorporating video perhaps?

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joeplemon May 19, 2010 at 4:37 pm

Ryan,
Great idea with the video. Something to think about. At any rate, I will make periodic posts. We will be closing on the house this Friday, so things should get rolling after that.

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Jason @ One Money Design May 19, 2010 at 8:36 pm

Joe, I’m enjoying this series and looking forward to the next one. Good luck with everything. I have a shelf full of real estate books. About 5 years ago I was very close to getting into real estate investing, but realized it wasn’t the right time for me yet because I hadn’t completed some of the initial stages on the Crown Money Map. Sounds like you’re on the right track. I’m definitely interested in these types of investments some day.

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joeplemon May 19, 2010 at 9:40 pm

Jason,
Glad you are enjoying the series so far. I am enjoying writing it. I am sure we will have some unexpected adventures, good and bad. I plan to report them all.

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Funny about Money May 22, 2010 at 2:19 pm

It will be interesting to see how this plays out.

My son & I went in on a house — as it develops, according to our credit-union mortgage officer, quite few parents are doing this with financially responsible, 30s-ish kids, just to get them into the real estate market and out of slummy rentals. We thought we were getting a smokin’ deal–neighbors expressed their ire that the seller had dumped the house at the price we got. We figured we’d hold the house about five to ten years (max), by which time he expected to have earned an MBA and with any luck have found a wife, setting him up nicely to move on.

How could we miss? Let me count the ways… The house is now worth about $85,000 less than we paid for it, despite its prime location. There appears to be little likelihood that its value will return to what we paid for it, to say nothing of what we paid plus what we put into fix-up. We now estimate that if real estate values ever turn around here (so far, not likely!), it will be at least 15 years before the house’s value rises to what we owe on it, a figure that is significantly less than the purchase price.

Meanwhile, with everybody and his little brother — including me! — laid off their jobs and 8 million jobs disappeared from the national economy, my son delayed his plans for graduate school, feeling it would be foolish to quit a job as he watched his friends graduate with MBAs into long-term unemployment. Out of work myself, I’m having to use my retirement savings to make my part of the mortgage payments. To spare me from this, he has increased his share far above what he promised to pay; because ours is a right-to-work state, salaries are quite low here, and so the increased amount represents a significant hardship for him. He has had to keep a roommate whom he has come to dislike roundly, a gent whose habit of sleeping all day and staying awake all night makes it difficult for him to bring eligible young women around, thereby delaying his plans to find a wife.

I would never invest in real estate as a money-making proposition again. IMHO, one buys a house to put a roof over one’s head, and one tries to pay off the mortgage as fast as possible to evade as much interest gouge as possible. After the house is paid for, one does the best one can never to deal with mortgage lenders or real estate agents again.

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joeplemon May 22, 2010 at 2:45 pm

Funny,
Wow! I can see why you would never invest in real estate again. How many things could go wrong simultaneously?

Could all of those happen to me? Well … I don’t have to worry about making payments because I bought with cash. And I needn’t worry about losing my job because I am retired with a pension. But my son has both of those risks which is why he wanted me to partner with him. In our little Southern Illinois town, real estate prices have not fluctuated much over the past several years. We never had the big balloon prices nor the dramatic drops. Still, I realize that we could lose money on this deal. I promise full disclosure as I write this series.

I wish you the best in dealing with your investment, your employment and your son’s future. It sounds to me like you have raised a son who has great character – offering to pay more than his share in spite of financial hardship and even taking on a nocturnal roommate in order to do so. You must be proud of him.

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Money Funk May 22, 2010 at 3:05 pm

Looks like a great house to flip! And what a great auctioneering experience with your son.

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joeplemon May 22, 2010 at 3:51 pm

Money Funk,
We also think it is a great house to flip. We are cautiously optimistic, but time will tell. And yes, the auctioneering experience was … well … an experience! Jonathan was proud of himself – probably more than he should have been – but I have to admit that he handled it well. Better than dad, who was pretty clueless. 🙂

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Squirrelers May 24, 2010 at 12:25 pm

Interesting topic and post. I look forward to checking back to see how this process goes. It would be interesting to find out your takeaways from this experience with your son when all said and done.

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joeplemon May 24, 2010 at 3:34 pm

Squirrelers,

As I have already promised, I will give full disclosure (with my son’s permission), but I hope to share the things I did right and what I could have done better in this series. Thanks for reading!

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Roshawn @ Watson Inc May 25, 2010 at 6:36 am

@Joe

I certainly can sense the excitment, but I’m always curious about these types of endeavors if there is even a small sense of fear involved? It’s easy to fear the unknown as you expand your limits. I just included this post in my weekly round up.

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joeplemon May 25, 2010 at 8:24 am

Roshawn,
Thanks for including this post in your roundup!
About the fear…sure, there is always some fear. I mentioned a couple of things that I was concerned about in the post, especially the possibility that this endeavor with our son might back fire.

However, this being said, I think we have taken several safeguards.
1. We did not borrow any money.
2. Our investment, even if we lost it all, will not affect our lives or my retirement. I draw a retirement pension that is more than adequate for our life style.
3. We think we were conservative in our bid. Of course we will find out as we spend money on the house and as we market it.
4. Jonathan has done this before (twice for his current employer and once on his own house). He has done well each time.
5. The housing market in Southern Illinois has stayed relatively stable, so we have very little concern about the real estate market falling.

As I have mentioned before, I promise full disclosure (with my son’s permission) and will share the things we did right and the things we did wrong. Our goal is to keep whatever we gross from the sale of this house in a fund to be ready to buy or bid on other properties as they come available.

We will see.

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John September 8, 2010 at 12:25 pm

Joe,

I see you last posted in may, what is the status on the house flip venture?

-John

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joeplemon September 8, 2010 at 9:31 pm

John,
I have had three updates so far. They are House Flip Update 1
and House Flip Update 2
and House Flip Update 3

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Chris September 27, 2010 at 11:33 am

I am studying how to buy homes that are in pre foreclosure in order to get a good price to start with. Have you ever found a house this way?

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joeplemon September 28, 2010 at 7:59 am

Chris,
This is our first house flip venture, so “no”, we haven’t bought a pre foreclosure house. I am open to the idea, but have no experience to share. Great question.

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