Throughout my 18 years of selling residential real estate in NYC, I’ve had the pleasure of working with over 100 investors in the process of “flipping” properties. I’ve seen very successful ventures where the investor realized returns of over 300%. In other cases, investors broke even, and in two instances, a client lost capital. Some of these deals happened quickly, while others took several years.
This week, I was brought into the tail end of a “flip” process, in the midst of it going wrong, in order to see if I could help salvage the investment. It seems the seller will lose a little money, and if lucky, break even.
My goal is to make my sphere of influence and friends aware of this investment and how it failed. This way, I can help ensure that similar mistakes and errors do not happen to others moving forward. I will not disclose the investor’s name or the property’s real address, and I’ll keep the story simple:
Let’s use the address: 100 Main Street, Apartment #1. David bought this property for $1,200,000 on March 31, 2014 – a 1,500 SF condo with outdoor space on 110th Street near Central Park. Renovated, the apartment is worth $2,200,000. David spent $400,000 renovating the apartment and built the unit up to impeccable standards that have never been seen in the area to date. He decided to put the unit on the market for $2,500,000 instead of $2,200,000 because it was “so well done”. But because of the high price tag, the unit sat for about eight months. Finally the price was dropped to $2,200,000, but because it is now a stale listing, it is only seeing offers of below $2,000,000. This is why David is breaking even. Here is a cost chart below:
Purchase Price $1,200,000 Renovation $400,000 Closing Costs on Purchase $38,000 Sales Closing Costs $190,000 Carry Costs (Debt Coverage) $98,000 Taxes and CC Costs $27,000 Utilities $7,000 Total $1,960,000
Offer to Purchase $1,950,000 Net Return -$10,000
What would a better approach have been? Don’t spend the $400,000 for a grade A+ renovation; spend $300,000 instead for an A- job. Don't kill your chances in the market asking $2,500,000; start by asking $2,200,000. If that were done, this apartment would have received offers at about $2,150,000 in its first month on the market. The numbers would look something like this:
Purchase Price $1,200,000 Renovation $300,000 Closing Costs on Purchase $38,000 Sales Closing Costs $205,000 Carry Costs (Debt Coverage) $35,000 Taxes and CC Costs $12,000 Utilities $2,000 Total $1,782,000
Offer to Purchase $2,150,000 Net Return $368,000
For this deal, the equity costs to the investor would have been about $440,000, which would have yielded an 83.6% return in less than 12 months. I consider anything over 35% a win. But now, the investor is looking at locking up $440,000 of equity and maybe breaking even in a 19 month span.
Investors are always telling me they would make a great return if they found the right property. The property is important, but a smart investor can make a good return on almost any acquisition, while a poor investor loses money on a winner.