Wednesday, September 20, 2006

To Flip or to Hold?

To flip or to hold, that is the question my dear Watson. A house came on the market in early June for a very good price. The house was in Mastic, NY and the listed price was $189,900 for a 3 bedroom ranch on a nicely landscaped piece of property. Based on the price I figured the house would need extensive renovations or that the bedrooms would all be miniscule. I called the listing agent and found out that the house was in relatively good condition and the bedrooms were nice sized. Normally I have a hard time believing listing agents however this agent was also the owner/contract vendee of the house. Being that I would be driving from my office in Baldwin, I didn't relish the thought of a wasted trip out to Mastic in the hard, driving rain. It pays to ask the right questions upfront, afterall gas is not cheap anymore, is it? I made it to Mastic in under an hour and proceeded to look the house over very quickly and take a quick tour of the outside while swatting pesky mosquitos that had decided that I appeared to be a tasty treat. Other investor types also were there looking at the house so I knew if I liked it I would need to move very fast. I went back to my home office and plugged in the numbers. $3500 for new siding; $1500 for an interior paint job; $500 to spackle and patch up some holes; $500 for new moulding around the doors where it was missing; $1000 for a new front porch deck; $1000 for new carpet; $5000 real estate commission to the selling agent; $1500 for short term homeowners insurance; $2000 for real estate taxes, water and electric; closing costs to buy and resell $5000. By the time I was done with all of my calculations I had figured out that the total cost of my proposed project would be $211,500 if I had given the seller his asking price. I also figured out that the selling price of the newly renovated house should be $229,000 and depending on how many buyers actually made offers, I might have to settle for $225,000. My overall profit on this project would have been $13,500 which certainly is nothing to sneeze at. I also thought about a PLAN B which is something I always have. Plan B involved finding a government subsidized (Section 8) tenant and rent the house out to cover the mortgage payment. After carefully thinking it all over I decided to make an offer of $185,000 with the provision that I could close very quickly (let's face it, I am a mortgage broker also). The seller accepted and we closed within 3 weeks. It took me just 2 weeks to get the house completely renovated and ultimately I decided to test the waters to see if I could get a very fast rental which I was successful at. My thought was that whatever happened first, the flip or the rental would be what was supposed to happen. My tenant has been in the home now for 2 months and I have no regrets. Flipping seems sexy but holding can be far more profitable in the long term.

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