The Streets of Aberdeen are Paved with Gold – Story of a Real Estate Flip

Last February I listened to a talk at the Washington REIA by Lou Brown, a successful flipper and real estate educator from Georgia. Two things stuck in memory about his talk.

Lou explained that you shouldn't avoid depressed communities. Every community has teachers, firefighters, and policemen who need some place to live. He said that, "the ghetto is paved with gold". Lou came prepared with a list of the cheapest houses off the NWMLS, and these happened to be concentrated in Aberdeen. We wise and arrogant Seattleites laughed at the idea. Everybody knows Aberdeen is a backwater rotting away under the relentless precipitation and too far away. Lou argued with us. Wouldn't we drive two hours to make tens of thousands of dollars?

Well, what do you know? It appears that Lou was spot on. In June of this year a client of mine and fellow REIA member asked me to help him make some bids in Aberdeen. He wanted to bid half of list price less $2,000 on houses under $100,000. I sent him some listings and he picked out 7 houses to bid on. The most expensive was listed at $59,900 and our highest bid was $27,500. A couple sellers countered us close to their list price. A few rejected us out of hand. One countered $10,000 below list price. We countered back and forth with that seller and came within $4,000 of agreement, but then neither side would budge. And then, lo and behold, one seller signed our first offer! This house turned out to be a beat up old fixer, where the owner had moved into a nursing home, the proceeds of the sale were all going to DSHS for his care, and the son had power-of-attorney and didn't care what price they would get.

We had made all these bids without seeing the houses first, so we quickly planned a trip to

Grays Harbor county, a stay at my beach house (Bob's Pacific Beach House), and a visit to Aberdeen. We immediately liked the house. It sits in a nice neighborhood and across the street from a year round elementary school (lots of traffic for our future for-sale sign). I had been suspicious of the square footage, but it turned out to be true. The original house had been doubled in size with an addition at the back.

Some good points about the house:

• New roof
• Large size (1,895sf, 3 bedrooms, 1.75 bathrooms)
• Detached garage and carport newer than the house and in great condition
• Siding in good condition
• Upgraded wiring
• Good neighborhood and across street from a school

Items that needed work:

• Balancing of the floors and fixes to the post and block foundation
• Exterior paint
• Landscaping
• Complete interior update: paint, new flooring, kitchen remodel, bathroom remodels
• Replacement of old windows
• Possibly removal of a small addition off the dining room

We brought some local contractors through and picked up lots of tips:

• Carpet and padding can hide a lot of flaws in old flooring that hardwoods might accentuate
• The city of Aberdeen has a new regulation that a remodeled house must be raised three feet off the ground due to flooding risk. Ours appears to be just high enough.
• Some concrete posts under the house needs to be replaced with wood. Concrete performs poorly in an earthquake and would not pass inspection.
• A quick look at the electrical panel can tell you if the wiring has been updated in a century old house.
• Buyers look at roofs and windows - what is going to cost them money in future? It is important that these are updated.

One contractor estimated that he could bring the project in at $25,000 to $30,000 and finish in three weeks. The financial projections of the project are:

Costs:

• $27,500 acquisition
• $30,000 repairs
• $15,000 commissions, holding costs, financing costs
• $72,500 total costs

We found two real good comparable sales - nearby, remodeled, and of similar size. One at $99,000 was less desirable: smaller lot, no garage, and sitting next to the commercial district. Another at $109,000 was a bit bigger and looked attractive.

Our pricing strategy will be the following:

1. Start high at $129,000.
2. Drop the price every two weeks by $10,000.
3. At each price drop, add this line to the marketing description: "Huge price drop! Seller's loss is your gain!"
4. Let the price settle at $99,000, where we expected to sell all along: "Huge $30,000 price drop!" But perhaps we will get lucky and sell higher.
5. Expected profit: $99,000 resale price less $72,500 total costs equals $26,500.

Photo Album

Track the progress of our Aberdeen flip.