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Why the Majority of People Fail Miserably At House Flipping

by Danny Johnson on October 12, 2012 · 40 comments

  
flipping houses

The Usual Diagnosis

Most people would start a post on this topic by describing how people are overwhelmed with the amount of information available on learning how to flip houses. Making heads or tails of where to start is a challenge in and of itself. Each time you think you’ve cracked the code, you realize that you’ve just discovered 20 more questions that need to be answered.

I will agree that “analysis paralysis” is one of the biggest road blocks for new investors, but I want to take a different approach here and talk about people that break through the fog and finally find a way to get started…only to end up quitting after putting in a lot of hard work.

The reason so many fail after taking some action is because they don’t fully understand that this is all just a numbers game. No, I mean REALLY BELIEVE that . . . this is a just a numbers game.

Great! You’ve Made It. Now The Hard Part.

Ok. Let’s assume you’ve figured out where to start. Incidentally, you’re probably looking for some good deals. You’ve determined that this is the best way to making progress. Every successful real estate investment starts with a great deal.

You’re contacting Realtors and marketing directly to motivated sellers and sending yellow letters to owners of vacant houses in order to find that coveted first deal. You can just taste it. Images from “Flip Men” and “Flip This House” of dilapidated, trash heaps of property are dancing in your head. The pile of money at the end of the rainbow is not far from those dancing images either. Your motivation to get that deal is at its peak.

You’ve done your homework. You know how a short sale works, or at least you know of it. You know that there is a possibility to wholesale your first deal ‘As-Is’ and make a quick couple grand. You’re privy to the knowledge that rehabbing is where the money is at and that you can really make the big bucks doing that. Oh, but lease options and owner financing are fantastic for long term investment and building to financial freedom. Rentals are perfect for tax reasons, so we like those too. Oh man, what about buying ‘subject to’? We could do that also. The possibilities are endless! (I even feel myself reverting back to the analysis paralysis just writing this.)

Stop the presses! You’ve got a lead from a real estate agent. This must be promising as it’s a REO (Real Estate Owned by the bank). According to the agent, it just needs paint and carpet and it was just listed. The price is a ridiculous (the agent’s word, but I gets it’s true from either perspective) $70,000 and, “it should sell for over $80,000 fixed up,” the agent informs you. Hmmmmm. I don’t know about you, but the hamsters in my head are working overtime. I really want to make this work so that I can continue to get deals from this agent. Boy is this dangerous.

How Can I Turn This Into A Deal?

Well, according to the 70% rule that we all know so well, the purchase price should be 70% of the after repair value of house, minus repairs. So, 70% of $80,000 is $56,000. Darn, this probably won’t work for a wholesale or rehab as the numbers just don’t work even before figuring in the repair costs. From what we’ve read, banks won’t typically take more than about 10% off the list price when a listing is new.

You might start thinking through all of those strategies that we mentioned earlier. Surely one of those will work for this situation. Maybe so, but I’d venture to say not likely!.

We simply may not know enough about the approach that could work as a remote possibility to try and do this as a first deal. Signing it up and trying to put together something that is beyond our ability is a great way to grow, but an even better way to fail. We’ve got to be cautious here. There’s a lot at stake.

Your approach is not clearly defined.

The problem here is that a lot of newer investors don’t have their approach clearly defined. Their exit strategy has not been limited to one or two strategies that fits their situation best. Doing a deal to just do a deal can quickly result in disaster.

But, if we know what type of deal we are looking for, our temptation to do that very, very marginal deal presented by the agent will not entice us to purchase the property. We can quickly dismiss it and begin to work at finding another opportunity. A profitable opportunity.

Looking for this first profitable opportunity can be very frustrating in the beginning. For most investors, the first deal takes the longest to find by far. The second one usually takes less than half the time to find than the first one and often can only be a couple of weeks later. The third, fourth, fifth, etc. are soon to follow. Even so, trying to attain that first one has caused so much frustration and lost faith that most people just throw their arms up and decide to go back to their old, comfortable (or not so comfortable) life.

Other People Just Got Lucky – I tried, but it didn’t work.

The bigger problem is that you just don’t have enough opportunities coming to your attention.

Make your own luck.

Commit to being persistent and continue your marketing. Let the snowball effect of your marketing reach take hold. Often, the result of marketing is not realized until months down the road as all that you do to get your marketing message and name out there start to build and grow.

“Yeah. I know. It’s a numbers game.”

You’ve probably heard many times before that this really is just a numbers game. But do you really focus on this while planning and working towards your goal? Do you keep your head up knowing that it just takes one great deal to make up for months worth of hard work and persistence? That not giving up can allow you to drastically change your life, if not for the deal, for the habit it creates?

Proof Of This Numbers Game – Reason To Stick With It

For 34 weeks, I documented everything I did to market to motivated sellers and discussed every single lead that came in along with the numbers. The results were 495 leads resulting in 11 deals. There were stretches of a lot of leads that were all duds, but I didn’t give up. Things built up and just kept going. So many people have told me how the project has really driven the point home that just sending out 50 letters and only getting 1 call does not mean what you are doing isn’t working — this really is just a numbers game and if I can do it, so can you. Give it a chance to work.

Photo: Ed Kohler

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{ 40 comments… read them below or add one }

Sharon Vornholt October 12, 2012 at 9:43 am

Danny -

I don’t think new investors get this concept in the beginning. They are just too busy trying to get their first deal, without really making sure it’s a really good deal. Learning to walk away from marginal deals is something real estate investors need to learn pretty quickly. Knowing that it’s just a numbers game, helps all of us keep going when things don’t move as quickly as we would like them to.

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Danny Johnson October 12, 2012 at 1:06 pm

Well said, Sharon. Learning to walk away can be difficult to do (heck I still have trouble a lot of times) but really is best. A good thing I try to remember is that sometimes sellers will come back and agree to your price. That will never happen if you agree to the higher price to just make the deal.

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larry Arth October 12, 2012 at 9:45 am

Danny:
This is definitely a great and true article. We are in the such a dynamic time to invest and knowing most people are so interested in acquiring investments and making it big they tend to do it backwards if at all. They just dive in and start buying without doing the numbers. They may get burnt and then give up. People who take heed to your advise will be positioned better than 97% of all investors (or wanna bee investors) out there.

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Danny Johnson October 12, 2012 at 1:10 pm

Couldn’t agree more. I’ve always try to remember that it is not how many houses you flip that matters, it’s how much profit you make for the time spent.

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Brian Gibbons October 12, 2012 at 10:38 am

Hi Danny,

I love this article soooo much! I coach real estate investors in only lease purchase flipping, and we look for “skinny deals, 0 – 20% equity, pretty houses, good school districts.” We get our leads primarily from expired listings and listed houses, but sometimes from wholesalers that are not making money and they have low equity leads we can buy.

The numbers of wholesaling are just as you demonstrate. And you need tenacity and blowing them out to 1000 houses to get 20 deals.

GREAT article.

Brian Gibbons

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Danny Johnson October 12, 2012 at 1:12 pm

Thanks, Brian. Absolutely. I sure wish we could send out 20 letters and land a sweet deal. Life would be a lot easier. :)

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Alison October 12, 2012 at 11:07 am

Thanks Danny. I followed the Flipping Junkie for some time and you are a straight-shooter who documented the good, the bad, and the ugly as you went. Thanks.

Question: How many marketing pieces etc did you send out to get the 495 leads?

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Danny Johnson October 12, 2012 at 1:15 pm

Hey Alison

I’m glad you enjoy the blog. It is back up if you didn’t know. :)

The 495 leads came from a variety of sources (website, bandit signs, letters, etc.). The numbers are broken down on the blog. If you want to see the total, check out the post for the 34th week.

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Brandon Turner October 12, 2012 at 12:16 pm

Yeah, good stuff Danny! Thanks for the article!

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Danny Johnson October 12, 2012 at 1:16 pm

No problem. Glad you liked it.

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Dale Osborn October 12, 2012 at 12:35 pm

A little stubbornness or persistence pays off in any real estate investing.

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Danny Johnson October 12, 2012 at 1:18 pm

So true. I’m glad that it gets easier though as your marketing builds up and you get more experienced at quickly sifting through the leads.

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Gary Parker October 12, 2012 at 3:58 pm

Always enjoy your articles Danny. I primarily use direct mail for marketing and have been doing so for a year now. I have seen my fair share of leads lost due to too skinny of a deal and these are by seasoned investors. They simply offer more than I would. I have done three deals with great margin rather than 15 deals with $10k in them this year from direct mail. However, I do think that as one’s experience grows it is easier to do deals that are a little skinnier. Or one can just increase their marketing to grab more great deals.

My next marketing tool will be to develop a web site and all that goes along with that. Everyone has a web site, but to make it productive is another story.

Anyway, as always I always enjoy your blog and articles.

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Danny Johnson October 12, 2012 at 9:32 pm

Thanks, Gary.

I agree with you about being able to do deals with slightly smaller margins if certain things showed solid promise. For instance if you can find solid comps that show short Days on Market consistently. Competition has gotten pretty fierce here in San Antonio so this has crossed my mind from time to time. Increasing marketing to locate more leads would definitely be a better option if we’re able.

Good luck with the website. You hit the nail on the head with your statement about that.

Congrats on your completed deals.

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Abdul Rasheed October 12, 2012 at 5:33 pm

Awesome article, I stumbled upon it and i am so thankful. I am new into wholesaling and yet to start to look for that first deal. This article is so useful to me and I learnt a lot. I am going to look to find out what else you wrote. Keep it up!

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Danny Johnson October 12, 2012 at 9:33 pm

Hey Abdul,

Thanks for the comment. Glad you are educating yourself first. You will save a lot of time and money learning from others experiences first.

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Daniel Fisher October 13, 2012 at 4:00 am

Thanks Danny. Another great article from you.

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Danny Johnson October 13, 2012 at 8:23 am

Thank you, Daniel.

I look forward to writing many more.

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Rene October 14, 2012 at 4:38 am

Hi Danny,

I am just at the beginning of a hopefully long real estate story and i really liked your post.

As i said, i am really new to this. You mentioned this:

“ So, 70% of $80,000 is $56,000. Darn, this probably won’t work for a wholesale or rehab as the numbers just don’t work even before figuring in the repair costs.“

Can you go into a but more detail why the numbers don’t work out here?

Thanks

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Danny Johnson October 14, 2012 at 9:39 am

Hey Rene.

Many investors use 70% of the future resale value of the property (what the property should sell for based on a price determined by looking at what comparable houses sold for in close proximity to this house within the last several months), minus the cost of repairs that are required to get the house in good enough condition for sale, as a rule of thumb for what to pay for a property. So, if the house should sell for $80,000 after it has been fixed up, you would want to buy it for 70% of that number which would be $56,000 and then subtract the cost of the repairs needed. So if the house needed $10,000 in repairs, you would not want to pay any more than $46,000 for it ($56,000 – $10,000). I had mentioned that it probably wouldn’t work because the asking price was $70,000, which is $14,000 too much. The example used a bank owned, listed property that was just put on the market. Banks will not typically (this definitely does not mean never) accept an offer that far below asking price for a property in this price range right off the bat. Hope this clarified it a little.

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Bryan Jaskolka October 14, 2012 at 6:38 am

What a great post! Thanks so much! I see so many people buying homes to flip, thinking it’s a simple matter of painting it and then accepting the highest offer. You need to make sure it’s a good deal. Such simpel advice. And so true.

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Danny Johnson October 14, 2012 at 9:40 am

Thanks, Bryan. Don’t we all wish it were that easy. Maybe just on television.

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erik saengerhausen October 14, 2012 at 3:42 pm

Good Stuff Sir

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Danny Johnson October 15, 2012 at 3:30 pm

Thanks, Erik. Glad you found this also. Only have 5 more things to find.

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Lucky Larson October 14, 2012 at 8:17 pm

Great stuff Danny! I use a slightly different numbers game but the same basic premise. I flipped my last several homes in San Diego coastal areas. No bandit signs or Internet or mailings. I just make those 70% (minus renovation cost) offers on MLS listed REO homes. I pick older listings that have fallen out of escrow at least once and offer cash and a quick closing (2-weeks). Banks like to see that, along with proof of funds with offers, but rarely are able to close in less than 30 days as banks have a lot of red tape. I use my own cash and sometimes hard money at 2 pts and 12% APR. Purchase prices are 250k to 350k and sales prices are 400-550k after renov. I make 10-15 offers to get one deal. Each flip can take 5-6 months from offer to sale but the net returns are good. This is not an easy way for beginners and part-timers to invest but just wanted to share because many areas of the US don’t even have nasty REOs under 200k but your ratios still work.

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Danny Johnson October 15, 2012 at 3:39 pm

Hey Lucky. I like your name and your comment. :)

REOs can be an awesome source of deals as you suggest. 10-15 offers to get a deal is pretty good for REOs. I’ve always heard you couldn’t find deals with the right numbers in california. ;)

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Philip Wade October 14, 2012 at 10:04 pm

Useful information. Without really being sure it’s a really great cope, they are just too active trying to get their first cope.

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Danny Johnson October 15, 2012 at 3:40 pm

Thanks, Philip. Never heard of a deal being called a ‘cope’. Interesting.

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Michael October 14, 2012 at 11:56 pm

Great advise Danny,
I’m new to the whole real estate industry and am currently working on wholesales.
I am yet to to a deal I’m here in Houston and I do feel there’s protential here. I’m
Not going to give up I try my best in keeping myself motivated, at times I do lose hope but
Its articles like urs that give me hope …..thanks Danny keep ppl like me believing and
Knowing that this is possible.

Thanks ..

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Danny Johnson October 15, 2012 at 3:43 pm

I’m glad to hear that the article was inspiring for you. You’ve seen that with enough persistence and consistency, you can land a great deal. Hold out for the right one so that you can be celebrating success and building on it instead of regretting a mistake and quitting. There are tons of opportunities in Houston. Great market from what I hear.

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James Mikel October 15, 2012 at 6:32 am

More on Lender owned properties. We have purchased numerous properties auctioned on auction.com which come from a variety of lenders. My observation is that while the Lenders in most instances will not discount a property more than 10% initially, it is no reason to write off the property. As example, a Florida house we were interested in, owned by CITI, was listed for $79,000 and as you suggest in your article the numbers didn’t make sense. Three months later the property was auctioned bringing in a high bid of $22,000. Here is a point for your readers. Do not continue to bid to get above the reserve if you are the highest bidder on auction.com. What I mean by this is, if you are the highest bidder and the auction listing says reserve not met, do not up your bid. On our first auction.com property we bid an additional $5,000 though we were the top bid-trying to get above the reserve. We didn’t make it and at auction end and the “RESERVE NOT MET” was still glaring at us. Yet, 15 minutes later we were informed that our bid was accepted. Since then this has happended every single time, we don’t meet the reserve at auction end but they accept the offer. In my gut, I believe the reserve is never met as it creates additional revenue for them just like it did in my experience.

Another Point. I have noticed in the last year that a larger percentage of REO properties are being auctioned without offering title insurance or warranty of title. This is going to hamper the auction prices as these properties also carry no right of inspection. My belief is that the Lenders are going the quit claim road in an effort to reduce liability in the event of a court action finding fault in their securitization of the loan which resulted in the foreclosure. This kind of thing is definately gaining traction in Florida whereby the forelcosing entity is dinged for wrongful assignment and securitization of loans. The Florida General Attorney negotiated a 25 Billion dollar settlement with the 5 largest loan servicers, a few months ago. I believe the servicers are now worried about additional cases of libility for items not protected under the settlement. What are your thoughts?

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Danny Johnson October 15, 2012 at 3:47 pm

Thanks for the input, James. Have to agree with your advice on trying to meet the reserve even though I’ve never bought from an auction. This goes along the lines of having your max offer and not paying any more than that, but at the same time you don’t want to be paying your max if you don’t have to.

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Bruce May October 16, 2012 at 2:40 pm

Danny, that was a good article. I found myself remembering the Realtor who told me about a “good deal” that I purchased a few years ago. When it was all said and done I made a $7,000 profit, not enough in my opinion for the risk and time I invested, but it’s better than a $7,000 loss.

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Danny Johnson October 16, 2012 at 3:37 pm

Thanks, Bruce.

Glad to hear that it was in the black instead of in the red. I’ve paid to do a deal before and it wasn’t pleasant.

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Jennifer Kellam October 22, 2012 at 10:43 pm

Great article. Most of my leads come from the internet & I find them easier to negotiate with. I’m still fairly new & I learn a lot from your site. Thanks for sharing.

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Danny Johnson October 23, 2012 at 8:56 am

Thank you.

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Michael October 27, 2012 at 12:02 pm

Great Article Danny!
I agree with you on this and see too many “newbie” investors want a deal so bad they try to make the numbers work. Their original ARV is $200,000 & cost of repairs is $40,000 but the bank won’t accept their offer of $100,000. Now what? They start getting emotionally involved & do things like well maybe I can sell the house for $210,000 & maybe I can shave the rehab costs to $30,000. Ok great I have a deal at $120,000 then reality. The repairs go to $50,000 or higher and now they can’t sell the house because the price is too high & they continue to pay the hard money loan of $1500 a month…..Panic sets in and now they are a desperate seller and not a motivated seller. Lucky if they break even and like you said they are out not to do another deal ever again.

Your are so right, it is just a numbers game & that is how you have to treat it. Take the emotion out!

Great Article, keep them coming!

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Danny Johnson October 28, 2012 at 8:43 am

Thanks, Mike.

Taking the emotion out can be very difficult for a lot of people, especially when they are just starting out and REALLY STRUGGLING to get that first deal. We’ve all been there.

So true.

I’m really enjoying your articles as well.

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Joe White October 31, 2012 at 11:13 am

Great article!
I have a client, finally approaching settlement, that just barely survived his 1st attempt at flipping. He didn’t know his numbers…..he didn’t even know how much he would have to put into the property or how much it would sell for once finished.

Unfortunately, he only was able to 80% finish the property…so no stove, paint, ect, which prohibited my (his real estate agent) ability to sell his property to most anyone needing a mortgage.

I was able to sell his property, but he only made a very small amount over his costs!

Moving forward, he is planning on trying again – this time relying upon me (his agent) to get him as precise numbers as possible.

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Danny Johnson October 31, 2012 at 12:21 pm

Hey Joe.

Wow. He’s lucky he didn’t lose big on that one not knowing his numbers.

The biggest thing gained here is the education.

The next one should be a lot more rewarding as long as he is able to focus on the numbers alone.

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