Takeaways From My 1st Out-of-State Flip
At the beginning of the year, I announced all my financial goals for 2021, one of which was to start an out-of-state flipping business. By the end of January, I had already closed on my very first flip in the Dallas metro area! If you follow me on Instagram, you would have learned that I’m already done with the rehab, roughly 2 months later. So now that my property is listed for sale and I’m starting to think about completing my very 1st out-of-state house flip, I thought I’d share my experience, from start to (almost) finish.
My house-flipping strategy
Before I dive into my experience, I first want to describe my house-flipping process and some of the common terminology used:
Find a hard money lender. Then get pre-approved and familiarize yourself with loan fees and terms. The hard money lender I went with was referred to me by a wholesaler (and realtor) who actually sold me my 1st flip. The hard money loan had a 6-month term and a 10.99% annual interest rate! Holy moly. They also had a 2% origination fee, so 2% of the loan amount was basically an upfront cost to do business with them.
Find a property and make an offer. Look for distressed properties that don’t need structural changes. Cosmetic changes are the most straightforward rehab projects and can reduce your overall costs and time holding the property (and therefore, the hard money loan).
Obtain rehab estimates. Look for licensed contractors with a proven track record of delivering high-quality product on time! Get quotes from multiple contractors and negotiate with them. Your hard money lender will require this estimate before you close on the purchase of a home.
Apply for a hard money loan. Submit the rehab estimates to your lender since they will likely reduce how much they will lend you by this amount, dollar-for-dollar. This means you basically have to pay for the rehab out-of-pocket. However, your lender will allow you to make “draws” to reimburse you for rehab costs as line items from your rehab estimate get completed over time. But each draw request will cost a few hundred dollars since your lender will send an inspector to your home to verify each line item is actually done. So you need to strike a balance of paying for the rehab with your own cash vs getting reimbursed by your lender via draw requests. Otherwise, those fees will destroy your profits!
Close on your purchase. Be sure to set up all your utilities so the lights stay on! If your property is in a hot area, you may want to schedule your sprinklers for a couple times a week. Get your lockbox on the door so the many people who need access to your property can do so.
Rehab. Your contractor will need to hit certain milestones of your project. Once they complete a certain amount of items in your agreement with them, they will likely request additional payment. As you progress through the job, you can make a draw request from your hard money lender if you want/need to get reimbursed and have more cash on hand.
Sell. This is the fun part (for me, anyway)! Find a realtor to sell your property. Be sure they know the local market and have a strong history for being a professional selling agent. Depending on the agent and market, you may be able to get an agent to sell your home for under 3% commission, which can really save you thousands of dollars!
How my 1st out-of-state flip went
Largely due to the COVID-19 pandemic, I decided not to hop on a plane to Texas to see and inspect the home. But I decided to dive in the deep end and purchase the home anyway. The estimated numbers looked solid and the rehab project looked mostly straightforward. I figured the worst case would be I take a large business loss and learn a lot from the whole process.
The numbers
Here are my projected numbers from before I purchased it vs my actual numbers after completion:
| Category | Projected Cost | Actual Cost |
|---|---|---|
| Purchase price | $485K | $485K |
| Down payment | $86,849 | $86,849 |
| Closing costs | $12,107 | $12,107 |
| Rehab estimate | $53,500 | $59,402 |
| Mortgage | $3,646/mo | $3,646/mo |
| ARV (after repair value) | $635K | $649,900 |
| Selling costs (~6% of ARV) | $38,100 | $38,994 |
| Profit | $42,506 | $43,459 |
| ROI | 21.1% | 25.7% |
As you can see in the table above, my projected vs actual costs weren’t that far off. My rehab costs ended up being about $6K more than expected, which was not fun. But my property did experience the highly unusual Texan storm in February 2021 that crippled the state’s infrastructure and damaged countless homes. My home had a couple of pipe breakages and, therefore, plumbing and paint jobs to restore the property back to its original condition.
Lastly, as I anticipated, the early months of the year are usually the best for sellers. This year was no different, especially with such low inventory in the Dallas metro coupled with historically low interest rates. Therefore, my ARV of $635K rose about $15K to $649,900 in just a 2-month time period!
Lessons learned
I dove into this 1st flip head first. I knew very little about my contractor and trusted my wholesaler’s referral. Their price certainly fit my budget, but close to when the rehab was completed, it became clear to me that my contractor was not meeting my standard for a partner I can trust and work with over the years. He was not easily reachable, put in the bare minimum product and effort into my home, and was not very detail-oriented.
Admittedly, I was expecting a turnkey approach to stay as hands-off as possible, especially being out-of-state and never having seen the property in-person. But clearly, I put too much trust in my contractor and didn’t set high enough expectations up front. Lesson learned, and it cost me several thousands of dollars and a bit of stress trying to fix last minute items to get the property listed on the MLS as quickly as possible. Thankfully, my realtor (who I’ve been working with on other real estate transactions for a while now) was able to tidy up loose ends for me! I think I will be trying out a new contractor for my future flips. I’ll also be sure to set proper expectations of the project up front and get it all in writing!
Final thoughts
Finding the right partners is everything. I primarily interacted with my general contractor and selling agent throughout the process. Because I am out-of-state, I need a strong team on the ground to keep me in the loop and reach out to me ASAP should anything urgent arise (which they did, like pipes bursting). If I can’t trust one of my partners, they need to go. It’s as simple as that when it comes to business.
In the end, a $43,459 profit and 25.7% ROI in just 3 months is incredible, and I’m grateful my very 1st house flip was a success story! As I mentioned in a previous article, I’m aiming to flip 4 out-of-state properties this year to start a flipping business. So this win will certainly give me a confidence boost and motivation to keep building out my flipping business!
