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We’ve been waiting for the foreclosure in Davidson’s La Costa Oaks to make it to market, and it’s going to happen this week.  As predicted, the list price will be around $900,000 (they’re still working on the price).

Is there a potential for flipping this?

We just saw the guy in Encinitas Ranch purchase a 3,416 sf foreclosure for $925,000 and turned it around in 30 days and sold it for close to his full price of $1,147,760 (with a back-up offer standing by).

Could we do the same?

After all, there hasn’t been a Davidson resale close under $1,000,000, and the lowest was this same floor plan that listed for $989,000 in July - and it sold the first week, closing over list at $1,007,000.

The last sale in Davidson was a 4,000 sf Plan Two that I just sold a few doors down for $1,150,000 that had all the bells and whistles.  The buyers and I knew about this foreclosure, and felt their house was well worth the extra expense.  But we might be the only ones, because we investigated thoroughly.  A casual buyer just looking at basic stats might think the foreclosure with improvements could be worth $1,050,000 or more.

Forget the fact that the opening bid at the trustee sale was $839,393, and nobody picked it up.  If this could be bought around $900,000, could you make money on a flip?

$1,080,000  Flip sales price

$  900,000   Buy price

$ 180,000  Potential gross profit

You make all your money on the buy side -  YOU HAVE TO BUY THEM RIGHT!

To buy this for $900,000 would mean that you edged in front of other buyers and nabbed it before a bidding war broke out.  Tough to do on an REO property, because the banks take their time responding.  But if you want to take a shot at it, I have the idea that might work.  But first, let’s see if it’s worth it.

The house, built in 2005,  has never been landscaped.  Can you spend $20,000 or so and make it look like $100,000 invested?  You can tell in the picture above that you might be able to get away with sprinklers and sod for the front yard, how about the back?  From the street you can see the houses above, but once in the backyard they are mostly out of the line of sight.  But with 3-4 large palms on the slope, a good-sized grass area, and a decent concrete patio you might be OK.  Admittedly, you have to either know a landscaper who owed you a big favor, or a good realtor with connections!

Front Yard = $5,000

Back Yard = $20,000

Speaking of realtors, how much are closing costs?

Purchase side = $6,000

Sell side = $50,000

Closing costs = $56,000

That’s a hurdle – heck I’m practically a partner with you!

But if we assume that I can sharpen my pencil on the fees, will this work as a flipper?  These homes came with granite slab counters and other upgrades, will that be enough? 

Specifically, you have to nail the flooring – 18-inch diagonal travertine in entry and kitchen is preferred, plus upper-grade carpet.

Did we get lucky that the owner already did those upgrades?  Nope, this is the same guy who tried to spec the house on Keeneland, and lost both to foreclosure.  He cheaped out here, and only did 12-inch standard ceramic tile flooring (strike one), but he did include plantation shutters, but they are a red-ish color (strike two). 

Being able to identify the deal-killers is the critical difference between flipping and flopping these days.  If someone tries to flip this without changing the flooring, they’ll need a lot of luck.  I’d figure $8 to $10 per square foot for travertine installation, and if you do most of the downstairs, that’ll be around $15,000 to $25,000.  To have new carpet help the sale, you need to spend at least $30/yard, and let’s play it safe and say $38/yard.

Travertine = $20,000

Carpet = $10,000

You can figure that there will be other stuff too, plus the cost of sitting.

Miscellaneous = $5,000

Carrying costs = $5,000

Final tally

$1,080,000 Flip sales price

$  121,000   Costs

$  900,000  Buy price

$   59,000  Net profit (before taxes)

How could you do better?  Sell it yourself would be an option, but in this market buyers want to deduct the commission off what they offer.  It might be better to work with an agent who can cut you a deal, and one who works to find the buyers themselves.  The buyer’s agent commission here is figured at 2.5% ($27,000).

Also consider that virtually all buyers have access to what price you paid for the house.  If they think that you are making a killing (you’re not, but it looks it), they either will shy away or lowball you.  The guy on Heritage got very lucky to dodge this bullet.

It is much more likely that there will be multiple offers in the first week, and this will probably go to a owner-occupant in the low $900,000s. 

But keep an eye out for ones that already have the upgrades installed.  I’ve noticed that some of the REOs were fixed up pretty nice – some of the owners who refinanced out hundreds of thousands of dollars did put some of it back into the house.

I don’t think it’s worth the risk to make $59,000 – my rule of thumb is that there has to be an easy 10% profit, due to all the things that could go wrong.

Posted on Monday, April 28th, 2008 at 2:02 PM in Thinking of Buying? | 11 Comments » |  Print You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.