Creativity Part 1 | Contractors
Hey, guys. Welcome to the House Flipping School whiteboard. This week, I want to talk about being creative, because in real estate, there are many ways you can be creative to make a deal happen. I think it was Brandon Turner at BiggerPockets . . . BiggerPockets is a great site; you should make sure to go check it out some time.
Brandon wrote a blog post talking about 100 different ways to make a real estate deal, or to make money in real estate. There's probably many more than that. This week, I want to talk about one particular deal, a deal that I almost didn't do, but ended up doing because I got a little creative and I thought outside the box a little bit. You heard me talk about this a few times, about partnering up. There's many different ways to partner up, but in this particular deal that I'm going to talk about, it's about partnering up with a contractor.
Let me explain: We had a deal here, it was actually in Wareham, Massachusetts, where we had an opportunity to purchase a property, and quite honestly, the property price was going to be more than what we wanted to spend. Typically, if I couldn't get this house for around $70,000 to $75,000, it's a deal that I would not have done. Even though I don't do many partnerships anymore, a friend of mine who is actually a contractor, well we were talking one day and he was looking to do a deal with me.
I said, "You know something? I got this deal that just doesn't make sense in my model. What I mean by that is, by the time I purchased the property at the best price I could get it at, which was $81,000, and if I were to spend upwards of $50,000 or more to rehab it, the numbers were just not going to work."
In talking to him, we created a partnership, basically, where we were going to split the profits 50/50. The reason why this worked is he was going to go in and do a lot of the hands-on stuff; cutting back on the labor portion of the job, and he was also going to manage the project. He was going to manage the plumbers, the electricians, the roofers, whoever else was going to come in on the job. He was going to negotiate all those contracts with those individual contractors.
In doing so, we were able to cut our rehab costs down to $34,000, where typically, that would have been $50,000, $55,000 or more, thus, making the profit-margin on this job slim. Not that we wouldn't make any money, but any time we get under $20,000, it's not something that we particularly want to do. In doing that, let me just explain to you how the numbers work so you can understand.
We ended up buying this property for $81,000. Like I said earlier, typically, we would want to buy that house in around the $70,000 to $75,000 range, which we figure out using our 70% formula that you heard me talk about before. Because we were able to create a partnership with the contractor on this deal, and keep our construction costs way down, the deal now actually made sense financially.
Let me explain: In the end, we projected our sale price of between $175,000 and $180,000. I put up here $180,000, but there was actually some money that went back to the buyers that are covered in soft costs. For all intents and purposes, the numbers still work out the same. If we take the $180,000 sale price - $34,000 cost of repairs, and then $20,000 which are soft costs, which you remember are interest on any money that comes into the deal, real estate commissions, holding costs, and so forth.
I did round these numbers off to zeros, just to make the math a little easier for you. Then we take out our purchase price of $81,000, you can see we made $45,000 on that deal. That gets split in half, so we made about $22,000 each on this deal. Me, as the investor that put this thing together, well one of the nice things was I didn't have to do anything on that project. Basically, I just showed up to bring coffee once in a while, say hello, and give him a hard time. It was great.
The one thing you want to remember, if you go into a deal like that . . .
This is a contractor that I happen to know. We're friends, and we've done business together in the past. You really want to make sure you line yourself up with a good contractor, a contractor that can get the job done in the time that he says he's going to get it done, and get it done for the cost that he says he's going to get it done in. You really can't have any excuses. If you go into a partnership deal like that, and that $34,000 goes to $55,000, then you're going to not really make as much money as you anticipated.
The whole idea in this example is being creative; creating opportunity in real estate. This is just one way to do that. Next time you're considering a deal and you think it can't be done, think outside the box a little bit. If the numbers get thin, why don't you try this? Talk to a couple of contractors that you may be doing business with already. Maybe one of them is slow and needs some work, and you present this opportunity to them, then you can see how this could work out for the both of you.
I really hope that this lesson helped you and can show you a way of working a deal that you might not traditionally get into. Don't always immediately say no. Think outside the box a little bit, and remember, be creative.
Thanks. This is Mike, with House Flipping School. See you soon.