Think You Want To Flip Homes? Watch The Deed: Chicago
Think You Want To Flip Homes? Watch The Deed: Chicago
About a year ago I was approached by a TV producer who wanted to know if I had any clients that were trying to flip a home in Chicago but were in deep trouble on their project and needed help. The premise of the show was that their savior was going to parachute in with financial and project help to save the hapless investor.
I didn't really have any candidates for them but, frankly, even if I did I think I would have advised my clients to think long and hard about getting involved because I've seen how the subjects of these shows are depicted. I have watched The Profit (CNBC) and also read a Web posting from one of their subjects who described the experience as a real hatchet job. At the end of the day these shows are all about entertainment and ratings.
I now know that the show I received an inquiry from must have been The Deed: Chicago (also CNBC), which premiered last week and will be the only real estate TV show I will watch. I can relate much better to a show about Chicago real estate than I can to a show that features some really good looking 23 year kid selling $60 MM homes in LA from his Porsche (I swear there's no resentment there).
This show is a perfect example of why I don't personally flip houses, although a few of my agents have done so very successfully. And if you have any visions of making a quick buck flipping homes in the Chicago area you should watch this show also because you can learn from someone else's mistakes and money.
Episode 1: 3730 N Claremont
This first episode gave away enough information that it was trivial to figure out which house it was. The flipper is actually a real estate agent that has been successful doing smaller flips in the past. She bought this North Center 2 flat, of which I've featured a before photo at the top of this post, as a short sale in 2015 for $630K with visions of converting it into a $1.8 MM home. The sales history is highly unusual in that it went off and back on the market at least a couple of times and each time it came back it immediately came back under contract. It did sell above the list price of $575K, suggesting that there were multiple bids.
The plan called for blowing out the back of the house and extending it to create an additional 1000 sq ft of space and of course doing a gut rehab with high end finishes. It also looks like she had to add in rooftop access and a deck. They didn't mention this on the show but by comparing the external before photo above to the after photo below it's pretty obvious that there was substantial work done to the front of the home. The front porch was completely rebuilt without the porch roof and the doorway completely rebuilt as an archway with limestone trim. In fact, substantial limestone trim was inserted throughout the facade in keeping with the character of other expensive homes in the neighborhood - or maybe she completely rebricked the facade.
The flipper clearly had incredible vision for this home as you can clearly see in the finished product: 3730 N Claremont. The only thing is that when you start to make substantial structural changes like this it gets really expensive really quickly.
Unfortunately, the biggest problem was that this flipper had a really bad team. It sounds like the contractor ran off to another country with a chunk of her money and her "partner", who didn't have any skin in the game but was supposed to manage the contractor, was disengaged. At the point where we join the story the HVAC and the electric work needs to be redone and they need to stop water from coming into the basement also. However, in checking the inspection history on the house I see that the electrical and HVAC work "partially passed" so it's not clear if the problem was fairly small or if the city inspector was half asleep or if partial pass means you need to substantially rework things.
Then she brings in another friend to help finish the project while the show is being filmed and he disengages. Finally the show's hero brings in his own team to get the job done. And this is really what successful flipping comes down to - having the right team in place.
The math on this is really ugly. On the TV show they show her acquisition cost as $685K, which must include her holding costs since I found $630K. Nevertheless, those holding costs are real. The original plan called for her to put $787K into the renovation, bringing her total investment to $1,472,000, which I see as another problem. I got the impression that her financial resources weren't that great so this was a huge investment for her - probably several times her net worth.
With the original target sales price of $1.8 MM this would have given her a $328K profit. However, as you can see from the link above it's currently listed for only $1.625 MM. Furthermore, either because the costs were underestimated or because her contractor ran off with a bunch of her money and did shoddy work that had to be redone she actually ended up with $1.7 MM invested. So she got hit on both ends and will probably end up losing over $100K after closing costs, which is a substantial portion of what she made on all her previous flips. True to form the TV show does try to make her look dumb but they are mildly sympathetic.
One of the more interesting parts of the show is when she discusses the sales plan with the show's hero who wants to list the home through his brokerage. As he explains it she wants his 300 agents out on the street trying to sell this home. OK. Back up a second. This is one of those real estate myths that agents tell in order to get listings. It doesn't work that way. Those 300 agents don't care about this listing or any other listing their brokerage has - unless it's their own listing - nor should they. They should be single-mindedly focused on what their buyers are looking for. If they promote their own brokerage's listings over others then they are not working in their buyers' best interests.
Ultimately they agreed that she would come to work for his brokerage and handle the listing with only a 30% split for her to reflect the extra work that he's doing since they had to axe her second project manager and she's incapable of managing the project.
The finished product is beautiful but the house has now been on the market for over 2 months, which isn't too unusual for a home in this price range. However, if you click on my North Center link above you'll see that, as in many of the more upscale neighborhoods, single family home inventory is skyrocketing so she's facing a headwind. I also think her listing has a couple of flaws: 1) It's a 5000 sq ft home but that's not mentioned in the listing and 2) They've got a rooftop deck, which is a key selling feature of homes like this, but there are no good photos of it.
One other thing I noticed that was not addressed in the show is that the house faces the back of Bell School and I can't help but wonder if that's an issue. Check out the view from the front of the house in the photo below. Not exactly a pretty picture but then again another 5000 square foot home sold just a couple of doors down 2 years ago for $1.95 MM, albeit with even nicer finishes. However, that shows that someone was willing to spend that much for a home facing the back of the school.