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Deal Analysis: Flip This House Mistakes Aplenty
Even the pros get some of it wrong, and on a recent episode of A&E's Flip This House, the Richard C. Davis-led Trademark Properties team got nearly all of it wrong. Trademark proved that even some investors don't win on every deal.
The episode, "Attack of the Garden Gnomes," shows two different houses being remodeled, and the one on Shore Drive clearly had mistakes in all aspects of the deal.
The Buying side is where money is first made or lost. On the Shore Drive property, the Trademark team paid $83,000 for a home with an After Repaired Value (ARV) $101,000.
Assuming the home had needed NO REPAIRS, Trademark paid well-above the Maximum Allowable Offer (MAO), a real estate investing standard. A quick turn of a property needing as little work as the Shore Drive home might justify paying over MAO, but 12% over MAO deals are not hard to find.
And foreclosure properties are particularly bad bets to make when paying more than MAO. Rarely has the new owner of a foreclosure property seen the inside of it before having already paid for it.
REMODELING RUN AMOK
An original budget of $5,000 for a paint and carpet job quickly grew by 84%.
Some basic remodeling management blunders contributed to the budget overrun.
Clearly, no written scope of work was given to the contractor. The contractor did what the contractor wanted and assumed he would be paid for all work. Problematically, the contractor wanted to do more work (tearing up floors, demolishing walls, etc.) than the Trademark wanted (or needed, in our opinion). When Mr. Davis saw the problem, he did his best to be forceful to have the problem corrected.
But the contractor did not heed Mr. Davis' words. And Mr. Davis did not utter the magic ones: "You will not be paid for this work, but keep doing it if you want to do it for free."
RESULTS NOT YET IN
The selling side is a little tougher to judge with the house having not yet sold as of the completion of the taping of the show. But we can intuit that Trademark made a mistake when raising the price of the home - a pretty basic mistake for a team as advanced as Trademark.
Trademark practices the Inventory Turns Method of Investing. Houses can sell for below ARV as long as they sell quickly. One of the 10 (really only eight) tips from Trademark is to take the first decent offer received on a home. Sell it, make something and do it again. Just do it quickly.
On the Shore Drive home, Mr. Davis told the audience that the cost overrun of the repairs caused him to raise the price of the home. A sophisticated business approach such as Inventory Turns cannot succeed alongside a failure to understand a basic concept such as Sunk Costs.
The cost to remodel (especially wastefully) does not affect the price at which the home will sell. And, sell quickly.
Mr. Davis raised the listing price of the home. And the house has not yet sold.
We can still do a profit estimation with a few assumptions.
Purchase Price: $83,000
Repairs: $9,200
Taxes/Utilities/Ins: $1,000
BASIS $93,200
List Price: $101,000
Sales Costs: $5,050 (5% and we consider this overly generous)
NET SALES PRICE $95,950
Therefore, assuming that Trademark used cash only, and did not pay interest (something we believe to be untrue from a Mr. Davis statement during the show), we figure the most Tradmark could make on the deal is $2,750. For a staff of 5 people, that is not a lot of money to share. In actuality, calculating in soft costs and financing costs, Trademark will have been lucky to break even.
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