How to Make a Million Bucks in a Few Months
By: Spencer Rascoff, Zillow COO | December 6, 2006
Back in September, I wrote a blog post about a neighbor’s house that had been inhabited by a squatter and then went up for sale. As I predicted at the time, it was snatched up quickly and pretty much torn down to the studs. What I hadn’t predicted was how quickly it would be rebuilt.
The house was bought on 10/13/06 by Blueline Developers for $745K, and they’ve had workers there around the clock. This weekend I was jarred out of bed at 7 a.m. by hammering as they put on the roof of what looks to be a beautiful new house.
The house right next door to it has basically the same footprint and is in great condition; it sold for $1.4M in May 2006. So it looks like if Blueline plays their cards right, they might double their money in just a few months. Actually, it’s even better than that. Assuming that they only put 10% down and assuming that the construction costs were about $400K, they might turn $75K into more than a significant profit in less than six months.
I think I should become a real estate developer.
Update: Please see the comments for some important, well, math. And beware that math errors are prone to occur when you blog on too little sleep (as I originally did in this post).
- Stumble it!
- Categories: Real Estate, Real Estate Industry, Real Estate Oddities
Comments
10 Comments so far
Enjoy this post? Subscribe to the Zillow Blog feed or get updates via e-mail
Peter Davis on December 6, 2006 10:04 am
Your math isn’t making sense to me. Purchase price, $745K, and $400K in develoment costs, they’d have to sell for $2,145,000 to pull a million off the sale. When you say the house next door, with the same footprint, sold at $1.4M, it doesn’t sound like they’d sell this house over $2M.
Did you forget that they’d have to pay off the financing upon the sale, not just the $75K (10%) down that you estimated?
Roderick Prince on December 6, 2006 10:08 am
Your math doesn’t add up here…
They paid 745k and then you assume they spent 400k on construction costs for a total of 1,145k. Your similar house sold for 1,400k thereby making their “profit” 355k not a million… still a great investment.
Spencer on December 6, 2006 10:23 am
Yes yes you’re correct - my bad!
Forgot about paying back that original loan…
Purchase price: $745,000
Cash down: 10%->$74,500
Borrowed: 90%->$670,500
Terms of loan: 6%
Total interest expense over 4 month holding period = .06*%670,500*(4/12)= $13,410
Construction costs = $400,000
So total cash in = down payment + interest on loan + construction costs = $74,500 + $13,410 + $400,000 = $487,910
Assume a sale price of $1.4M, which is then used to pay down the original loan. So net proceeds = $1.4M - $670,500 = $729,500
Profit = Net Proceeds - Cash In = $729,500 - $487,910 = $241,590.
Peter Davis on December 6, 2006 11:11 am
Yep, still a nice profit, not quite the million, but nice indeed.
Peter Davis on December 9, 2006 6:33 pm
So, how about sending me a free Zillow t-shirt or something for correcting your math.
Spencer on December 10, 2006 5:10 pm
Definitely –
send me your mailing address (don’t post it here) — my email is my first name at zillow dot com.
Teardowns.com on February 11, 2008 6:01 pm
It is also important to consider real estate commissions on the sale, costs for any site work, permits, plans, and/or soft costs. The profits do get eaten up.
avorob on February 12, 2008 8:16 am
…. and the cost of carry when the house is being rebuild and especially when it is on the market for 6 months and not selling. What I learned - there is no guarantee in real estate. Although, some people still have a mindset “you can’t loose money in real estate” Also, I don’t think you can get a construction loan nowadays @ 6.00% rate with a 10% down. I’d say it would be more like 7.00% and 20% down.
James on February 24, 2009 2:42 pm
One year and a couple of short sales later and Blueline appears to be on their way to Chapter 7(and not Chapter 11).
Purchase price: $754,000 (1825 41st)
Cash down: 20%->$150,800
Borrowed: 80%->$603,500
Terms of loan: 7% (interest only)
Total interest expense over 16 month holding period = $56,299
Construction costs = $567,210 (conservative at $185/sf)
Agent Commission (4%) = $44,000 (assuming $1.1m sale)
Excise Tax (1%) = $11,825
Total Project Cost = $754,000 + $567,210 + $44,000 + $11,825 = $1,377,035
Actual Short Sale Price = $1,100,000
Estimated Loss = $277,035
I hope they saved their money because home flipping is DEAD! You know it is dead, dead when houses/lots next door in Madison Park sit on the market at $625k, which is $125k less than their previous house/lots. Why isn’t Blueline Developers snatching those up…not even a $125k can off set the $277k loss
Note that his dramatically underestimates the actual loss because the interest payments are based on the purchase loan of $603,500 and not the actual average outstanding balance of the acquisition and construction loan, which would be interest on an addiitional (approximately): $603,500+((.8*$567,210)/2) = $226,884
yvonnelingerfelt on April 30, 2009 10:16 pm
I am excited about home values in my neighborhood.