House #11 28710 Eastern Rosette – Best House Flip So Far

May 2014

This property was a fun one. We sent out about 500 letters over the last few months, and one of the calls we received was for 28710 Eastern Rosette. It was our traditional three-bedroom, two-bath house in an older neighborhood, but one with desirable schools. It was built in 1993, and the kitchen/bathrooms had not been updated minus a few appliance upgrades.

How We Found This House We Could Flip

The people that owned the property were a lovely retired couple who had moved somewhere close but were letting their adult son live in the house. The owners contacted us through our yellow letters, and they wanted to speak to us directly as they wanted to know what kind of people would offer them cash for their house. Remember our criteria for properties? This deal is precisely the kind of property we are looking for as it was non-owner occupied, probable high equity, about 1500 sqft, and three-bedroom/two baths. The most liquid house ever!

Pics

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Negotiations

When we arrived, we learned that the son wasn’t paying rent anymore. The parents/owners needed to find another solution because they had no desire to be landlords to people they didn’t know. The house was in good shape, although the finishes were simple and older. Their pain point was that they had a second property and no income from it. They wanted to sell. We also learned they did not have a mortgage on the property. At least, the place did have newer carpet and solid floors in the kitchen and living room.

We chatted with them for about 15 minutes, walked the property, taking careful note of the quality of finishes and age of primary systems, and then we got down to business. We followed our first rule of negotiation and did not offer a price first. Instead, we asked them what they thought the house was worth.  There are two schools of thought on this tactic. Some argue you should always state your position first as it sets the stage and provides an anchor so that you don’t get too far off from your desired price. The opposite tactic states that letting the other party start with their price will show their cards first and provide you with the upper hand. As we are usually dealing with less sophisticated negotiators, we prefer the latter approach as it often yields a better deal for us in the end. If their price is too high, we then explain all the reasons why and try to bring them back down to earth.

How We Negotiate on a New Rental Property

We start with a fair retail price, subtract commissions, and then all the expenses of getting the house ready to sell, new floors, new paint, HVAC, roof, the list goes on and on. Add in the fact that we are paying cash, and we do it quickly, and with no inspections, then we can usually get to a very reasonable offer after we lay that all out on paper. However, in this case, none of that had to happen as the couple looked at us sheepishly and muttered, “Would you take it for $85,000?” Immediately D and I looked and each other, and inside we were jumping for joy, but we instead shook our heads and asked if we could think about it for a minute as it seemed a little “tight.” The house was easily worth 120,000 and needed no work whatsoever, so we sat there for a minute, shocked at what had just happened, and then when they returned, we shook hands and had a deal.

Financing

We financed this with our newfound local bank with 20% down. Very smooth transaction compared to the Fannie loans we had done or even the interest-only loans that also go through Fannie underwriting. Even though the rate is a bit higher and it’s only a 5-year rate fix, the process is so much faster and easier than conventional financing.

HUD closing statement

Listed for Sale

We had to do it. We still need cash in a significant way to fund our deals, so we decided to sell this gem. Luckily, we had nothing to get it ready, and we got it for so cheap it made sense to sell. We listed it for $120,000 and sold it within the week. We sold to a real estate investor and profited about $27,000. This amount is enough cash to fund the down payment on our next deal completely. We had to look at the break-even point. We always said that if we can get more than five years’ worth of cash flow now, then we should sell. Projected cash flow on this house was going to be about $284. Assuming it was never vacant (big IF) after 60 months, it would yield about $17,000. Well, we just sold it for a $27,000 profit. BOOM! It’s always sad to give up one of our money-making factories, but I think we made the right choice.

Let’s Do the Numbers

Net Worth Update

Another 20k added here after taking into account cash flows from other houses the sale of this property. On to the next one!

Read House #10