Several of our buyers wanted to see this house when it was listed for sale in Table Mesa last year. We took them to see it, but also advised them to not write an offer.
On paper, 2590 Dartmouth looked great and checked a lot of boxes; freshly remodeled, excellent location, top rated schools. Ranches with basements are solid candidates for a future second story addition and they also work for a wide variety of potential buyers. De facto open space is steps away, leading directly to eye popping views on Kohler and Enchanted Mesa.
It should have been a home-run, right? Mr. Market thought otherwise.
Three price reductions and one year later, it finally sold at a substantial 11% discount from the first asking price. That almost never happens to remodeled, well priced houses in Table Mesa.
Let's talk about why.
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Right Approach, Wrong Property
2590 Dartmouth has no backyard and little potential to add a garage in the future. The house was also placed in close proximity to the south and western lot lines, and sits on a corner lot, which means it will be challenging to permit future additions. We pointed this out to our clients (usually before we even scheduled the showing).
Swipe left.
On the plus side, it had been extensively remodeled inside and out. The home was turn-key with an attractive kitchen. The bedrooms and living areas were also decent, although there were some oddities (basement toilet weirdly placed diagonally, for example). Still, none of the bling corrects the functional problems of not having a garage, backyard, or private outdoor area.
Timeline
September 1981 to September 2018 - Owned by the Oviatt Family for nearly 40 years.
September 7, 2018 - Sold to a wholesaler for $585K.
September 10, 2018 - Three days later, the wholesaler flips it to a developer for $615K. Yup, the wholesaler walked away with $30K after holding the property for three days. Fun coupons!
January 31, 2019 - Developer applies for a remodel permit with the City of Boulder and claims it will only cost $24K. City disagrees and places a value of $72K on the project. Work commences.
Note: The final cost of the remodel was probably more than $72K but we'll never know without the receipts and invoices of the developer.
May 3, 2019 - Five months after acquisition, the developer finally has the house ready. They list it for sale at $945K
May 14, 2019 - Oops, maybe it wasn't ready. The developer's contractor files for a utility permit, likely related to sewer line work. Another permit is issued for work in the right of way.
July 2, 2019 - Two months later, the asking price is reduced to $915K
July 6, 2019 - Property is under contract, offer accepted. That must have been a fun fourth of July.
July 17, 2019 - 1st buyer bails out, property is again available for sale. Given only 10 days between going under contract and the deal terminating, it was likely an inspection issue that couldn't be negotiated away.
August 17, 2019 - One month after the first deal crashes, the seller pulls the property from the market.
August 22, 2019 - A new seller's property disclosure is signed showing a radon mitigation system was installed. Nothing else material is disclosed. I sure hope this isn't what killed the deal with buyer #1. See lessons learned, below.
November 13, 2019 - Developer applies for a permit for a New Accessory Building. The contractor chosen is Complete Construction. The city file says, "Complete Construction has no employees - license says worker's comp has expired. Need to clarify with Licensing." Apparently, not quite complete.
Note: The status of this permit is currently "Revisions - Resubmit." This permit was probably for a storage shed or garage. Likely they couldn't solve the challenges posed by zoning or other regulations. The permit was never issued.
March 12, 2020 - Seven months and a lot of snow shoveling later, the property is re-listed at $875K
May 9, 2020 - Two months later, the property is once again under contract
May 27, 2020 - Property is sold for $850K with no disclosed concessions.
The Math
The following is our back of the envelope estimate:
Sale Price: $850K
Acquisition: (615K)
Remodel: ($100K*)
Transaction Costs: ($55K*)
Holding Costs: ($25K*)
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Flipper Net: $55K (pre-tax)
Was it worth it?
Doubtful. $55K is not a lot of money to deal with sub-contractors (some of whom couldn't be bothered to carry insurance or even have employees), endure a year of carrying costs, and absorb the risk of construction defects.
Let me be clear, I'm not picking on the developer. I actually admire their willingness to take on a major project. It was likely as a side hustle too, and that takes guts. The point of this post is to educate you on current market conditions and help you go in with eyes wide open when it comes to the reality of flips.
1. Who would your rather be? The wholesaler who walked away with $30K or the developer who grossed maybe $55K? Assuming you can put aside the slimy nature of wholesaling (we can't), one was clearly more profitable. And that's assuming there wasn't even more profit by offering the developer a so called hard money loan, or other high-interest rate, short-term capital.
2. Get a good buyer's agent. This home was chosen poorly. The garage issue is going to be expensive to fix, if it's even possible to fix at all. Dartmouth also becomes a busy through-fare as it approaches Broadway (it's fine higher up on the hillside). This house is not very private and lacks a backyard. All of those issues were obvious at our very first visit to the property and we pointed them out to our buyers.
3. It's critical to have a high quality team and a plan before you buy. An actionable plan speeds the time the home is being remodeled. This one took almost eight months after acquisition to bring to market. One to two months is the ideal. And then there was another phase when undisclosed work was being done (radon systems don't require ROW permits), taking the home off market again. Plus even more wasted time exploring the new accessory building.
4. Understand your risk. Flips are rare in our business activity, but we've learned something from each deal. Flippers are driven by profit and a tight timeline, which results in cut corners, cheaply chosen materials, and inexperienced sub contractors. Most flippers are also ignorant of the liability they are taking. Rarely do they adequately address risk, which leaves the buyer holding the bag when issues come up after closing. This one wasn't even acquired inside or transferred to an LLC, which means it was likely a first ride at the rodeo for the developer.
5. Pay for a pre-inspection report. It would have likely uncovered major issues with the house, allowing the developer to correct problems under their own timeline and with contractors of their choice. Buyer #1 would have also likely closed because of the increased transparency and trust of having a pre-inspection report. Not doing one was a rookie mistake.
*our ballpark estimate for the remodel, commissions, title fees, and cost of capital during the holding period. Cost of capital is notoriously difficult to estimate, but a minimum of 25% down for an investment property means about $150,000 tied up in the house (opportunity cost) plus one year of interest on the mortgage. It doesn't account for the hassle of maintaining the house for showings for a full year.
Osman Parvez is the Founder and Employing Broker of House Einstein. Originally from the Finger Lakes region of New York, he lives in Boulder with his wife and their Labrador Retriever. He has been a Realtor since 2005.Osman is the primary author of the House Einstein blog with over 1,200 published articles about Boulder real estate. His work has also appeared in many other blogs about Boulder as well as mainstream newspapers, including the Wall Street Journal and Daily Camera. For more information, click HERE.
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The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties. House Einstein strongly recommends conducting rigorous due diligence and obtaining professional advice before buying or selling real estate.
