A Flop of a Flip?

By Dave Fratello | October 7th, 2014

Why would you spend $200K remaking an old house?

To live in it, or to make money, of course.

But at 1345 Voorhees (3br/2ba, 1750 sq. ft.), it looks like a flip is going to flop.

If they really did spend $200K – as stated – on the substantial remodel here, they're not going to get it all back.

So instead of a profitable flip, this one's turning into something more like a charitable contribution to community improvement.

The numbers here never made sense to us.

The current owner – and would-be seller – acquired the home at full retail back in April, paying $1.200M.

After overhauling and refashioning the home, they offered it on the public market at $1.499M, claiming right there in the listing that they had paid $200K for renovations.

The stated cost of the re-do was plausible. Walls were moved. Baths upgraded. A new, open kitchen created. New flooring. It's a good update.

But if they had spent $200K, and they're going to pay a buyer's agent 2.5%, then the profit at that initial list price was basically $60K.

Do you really try to leverage $300K (the down payment plus our rough assumption of carrying costs) to make $60K?

Without quick action on the listing, they corrected the price a week later to $1.475M, and a week later, again, down to $1.450M.

And now the property's gotten a bogus re-list (actually its second in 3 weeks) and a new price: $1.439M. At that price, it clearly does not pencil out, and the description now even says, "Seller is losing $ at this price."

We'd have to guess that they had some kind of different plans, or mapped this out differently in April, and either expected a higher market value, or hoped to spend a lot less on the re-do.

We'll treat this as a cautionary tale.

Even as this market seems to be rising still, you have to get three numbers right for a flip: 1) acquisition price, 2) remodel cost and 3) market value. Get any (or all) wrong, and you may be paying a buyer to take the property.

There are cases recently where we've seen flippers absolutely rake by getting the numbers right.

Take 3112 Poinsettia, for example.

A tired, cramped and not even fully permitted home here was acquired in April 2013 by a high-end flipper for a number that now looks plainly like a steal: $1.175M. You can't even buy an undersized, poorly located lot for that kind of money today in the Tree Section.

Over the next several months, 3112 Poinsettia was transformed utterly, with an artistic, modern beach-cottage-y flair.

The resale price was a big one: $1.875M, more than $80K above asking.

That's a full $700K spread from buying to selling, more than enough for costs of sale and a major investment in the remodel, and still plenty of profit at the end of the day.

Trying to repeat the feat, in a way, another flipper has taken on 3521 Poinsettia (3br/4ba, 1700 sq. ft.). (Discussed in our Sunday open house post.)

Acquisition: $1.075M.

Asking price: $1.689M.

There's a big spread there, also – the final sale price should more than cover the remodel and deliver some profit.

And looking east, you see 1701 Voorhees.

That was a horribly tired old cottage when it sold in March this year for $975K.

Much like 1345 Voorhees and 3112 Poinsettia, this one got opened up a bunch, with nice new wood flooring, a modern kitchen and terrific new bathrooms.

The list price is $1.625M – again, a solid margin to cover costs and allow a good profit, if they can sell near that number.

Flipping looks easy and people get enthusiastic about it when the market's rising, but as we see in one of these cases, there are no sure things.

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