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.
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:
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!