Flop, a Charleston South Carolina real estate story of flipping for fun and profit or was it a loss?
Many of you will remember the story, a tale of flipping real estate that likely will result in a flop. The Charleston South Carolina real estate market is fine despite the current housing slowdown. However, the objective should be buying smart and selling smarter. I didn't think this investor had a chance to profit.
It's finally sold and here's the end of the story. Final price $309,900. How did they really do?
Back in November, I introduced this home with a prediction that the risk/reward was unlikely to result in a positive outcome for the flipper who bought this house and immediately turned around and put it back on the market.
At that time, I wrote, "you are now at break even at the very best and if it doesn't sell within days (it won't), the carrying costs of owning the house have got to put you in a negative position very shortly."
In March, I updated the story. I wrote, "At best, an ill conceived purchase and at worst, a big money loser and my question still is, why did they do it?"
At the end of April after another price reduction, I wrote, "More like a flopper, in this case, a shark; except that this shark has no teeth and instead of being a flipper turning a profit, this shark is now being eaten by some other sea creature called the Charleston real estate market."
While writing about a new attempt at flipping in Mount Pleasant, the house had just gone under contract and I wrote, "The flip / flop house in my neighborhood finally went under contract after 5 months on the market. List price was eventually reduced from $329,900 to $309,900. The price paid back in November was $295,000. At $309,900, there isn't much margin with 5 months of carrying costs, real estate commission and closing costs to be considered. Was it even a full price offer? I doubt it but I'll keep you updated."
And here we are today. To my surprise, the sales price was the revised list price of $309,900. There is never an indication as to whether any closing costs were paid by the seller in the transaction but, if I was representing the buyer, I would have either offered less or asked for some closing costs. Of course, I wasn't but I recently listed and sold several homes in the same neighborhood and having the seller pay some of the buyers closing costs as part of the transaction is very common today.
So without really knowing, there is a gross profit of $14,900, the difference from purchase price in November 06 to the sales price in June 07. I do know that they paid a selling agent commission of 2.5% which totals $7750. The listing agent might have been working at a discount because the listing agent received a nice commission for the purchase so unless he/she was working for free (unlikely), let's be real conservative and say it was only 1.5% for another $4650. Total commission, $12,400. Remember, there is only $14,900 separating this deal from profit or loss.
Now the house was in the possession of the seller for 7 months and there are carrying costs including taxes, insurance and monthly payments. Taxes would likely be $200 to $250 a month, using $225 times 7 months equals another $1575. Insurance at $100 per month, another $700. What was the monthly payment. Well, using the most exotic interest only mortgage product available, you still have to think $1000 per month would be required. That is $7000. Should I add the HOA fees for another $225 for a half year, probably, because they are due and required. When selling a property, you must pay $3.70 per thousand in tax or another $1147. Deed preparation by the attorney $200 minimum. Let's forget about the miscellaneous and see where the seller is.
$12,400 + 1575 + $700 + $7000 + $225 + $1147 + $200 = $23,247 or an estimated loss of $8347 in only 7 months. Not good and it could be worse if my conservative estimates understate the real costs incurred.
What's a person to do if they want to invest in real estate for fun and profit?
As I've said on many occasions, taking possession and title to a property does not automatically increase the value. Don't think it does, can or might. Well actually, since the seller got $14,900 more than they paid just 7 months ago in today's difficult Charleston South Carolina real estate market, it actually did go up in value, just not enough to cover the expenses involved.
So the next question you have to ask yourself is what is the risk/reward of the transaction, not best case scenario but worst case scenario because erring on the side of caution is always advised.
An excellent idea is to add value to the property. It doesn't have to be run down and it need not be a distress sale but both of those are good places to start. Make sure the planned improvements will not greatly exceed comparable homes in the neighborhood. Location is important and make sure the home to be will fit the location.
Don't watch the television shows on house flips or any infomercials in the middle of the night as inspiration. Some are for entertainment, others are scams.
Finally, make certain that there is enough spread between the purchase price and the sales price less the costs of improvements, selling and carrying costs leaving enough margin to make a profit, not insure a loss which is what we have seen in this and a few other examples.
I hope you enjoyed this tale, we'll bring you others as we see them.