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The Worst Real Estate Deal I’ve Ever Done (And How You Can Avoid the Same Mess)

by Brandon Turner on December 26, 2013 · 26 comments

  
Worst Deal Real Estate

Stupid. Stupid. Stupid.

The house was formerly a duplex and I decided it would make more sense to turn it into a big single family home and try to flip it.

After all, the TV shows made it look so easy.

I’m a frickin’ genius, right?

I started work on it (yes, physically) and myself and a few friends spent the next nine months remodeling this monster of a home. Hardwood floors, granite counters, open concept, new windows, new drywall, new doors… pretty much everything was re-done.

And it was beautiful.

I put it on the market at $170,000 and waited for the offers to roll in.

But they didn’t.

Month after month I waited, dropping the price slowly until I was at my break-even point. It finally sold after almost 52 weeks on the market, and I ended up clearing nothing. After two whole years, I had nothing to show. My Hard Money Lender made a lot of money. My friends (who I paid as we worked on it) made a nice profit – but I made nothing.

I’m thankful it wasn’t worse- I didn’t lose any money. However, I lost almost a year of my life physically working on this home.

And you know what?

All this could have been avoided had I simply been smart.

This brings me to my #1 tip today for avoiding the mistakes I’ve made and find more success in 2014.

Are you ready for it?

Here it is:

Sign up for a BiggerPockets Pro.

“What?” A commercial?  What is this… Little Orphan Annie and the Ovaltine Decoder Pen?

Well, sorta. But hang on – I have a point here.

Are you still with me?

Good, cause this is important.

There are a lot of reasons why you should upgrade to BiggerPockets Pro – but there is one reason above all else why I think that becoming a BiggerPockets Pro will help you take your real estate game up to a whole new level in 2013: it will help you do smarter math. 

Seriously.

Bad Math = Bad Deals

Smarter Math = Good Deals

More Good Deals = More Success.

See?

Let me explain further, and show you a tool that you should be using every single day in your real estate endeavors.

How to Avoid the Real Estate Mess I Made

Let me go back to the story about the terrible investment I did.  I DID the math before I started – but I didn’t do all of it.  I used my spreadsheet and I looked at how much it would cost me to buy the property, how much I would put into it, and how much I could sell it for.  I even remembered to account for the extra costs like Realtor fees and more.

However, I forgot to include a lot of numbers.

For example, had I used the BiggerPockets House Flipping Calculator, I would have realized that it was going to cost me almost $1200 per month just to hold onto the property. Had I entered in “24 months” into the House Flipping Calculator, I would have quickly realized that my numbers were WAY off and I was destined for failure. Had a accounted for going 20% over budget, like the calculator will demonstrate for you, I would have realized how thin the deal really was.

Additionally, I screwed up in an even bigger way.

Did you notice I said this property use to be a duplex?

In fact, the property was almost completely RENT READY, just needing a little bit of paint and carpet to make it ready to rent, for a total of $1545 per month.

I bought the home for $40,000 – and it was in a GREAT location with an amazing view of my entire town. However, for some reason I got the bright idea that flipping this home and turning it into a single family was the best solution.

Stupid. Stupid. Stupid.

Had I used the Rental Property Calculator from BiggerPockets- I would have been blown away with the cash flow potential. Just take a look at what the potential, as a rental, could have been:

Screen Shot 2013-12-26 at 1.36.17 PM

Not only would this have been a “3% rule” deal and produced a 71% cash on cash return on investment – I would have cleared almost $1,000 per month in cash flow after setting aside reserves! Ah!

Do you see now why I feel so strongly that if only I had used the BiggerPockets Calculators, as well as asking for feedback in the BiggerPockets deal analysis forum, I would have been so much better off? Instead of making no money, I could have had a cash flow positive rental, in a great neighborhood, with maybe two weeks of work.

It hurts just to think about it.

However, after this deal, I began to look at ALL the numbers, and began to tweak my excel spreadsheet to incorporate all of this. Over the next few years, I tweaked and changed my spreadsheet until it was perfect… and then we turned that spreadsheet into the BiggerPockets Calculators.

This is why I’m so passionate about this. This isn’t just a sales pitch – this is the difference between wasting unbelievable amounts of time and money and finding incredible success.

Now – you may be asking “What does Math have to do with being a BiggerPockets Pro?”

Here’s the low down: The calculators are exclusively for BiggerPockets Pro and Plus members (“Plus” is like a miniature version of “Pro”. Still cool – but not quite as fancy.) In other words, if you aren’t a BiggerPockets Pro or Plus member, you can’t use these calculators. (Well, you can use them once, to test drive them, but after that … nada.)

(If you wanna see a video of the calculators in action check out this video to see how I used the Rental Property Calculator to buy an Ugly Purple Triplex and this video to see how I used the House Flipping Calculator to analyze a potential house flip.)

What Will You Do?

You don’t need to become a BiggerPockets Pro member to analyze deals. There are millions of people who have succeeded in life without out it. However, I CAN tell you that these calculators were designed by investors, for investors, with the purpose of saving you time, money, and risk on your next real estate deal.

Whether you are a house flipper, buy and hold investor, wholesaler, or not quite sure yet – these calculators, and other tools for BiggerPockets Pro members, can help you avoid mistakes and find success in 2014.

Even if you don’t care about the calculators, there are benefits to being a Pro member that you probably do care about, such as:

  • Helping out BiggerPockets
  • See who’s looking at your BiggerPockets Profile
  • See who’s investing nearby you – and connecting with them
  • To stand out in the Forums as an expert
  • To download unlimited files from the BiggerPockets Fileplace
  • To post ads in the BiggerPockets Marketplace
  • And much, much more.

To upgrade to BiggerPockets Pro or Plus memberships today, or simply to learn more about the many benefits to going Pro, click here. If you are not even a part of the BiggerPockets Social Network – I invite you to join! Basic memberships are totally free and get you access to a TON of great features on the site. If this is your first time here – be sure to check out the Start Here page!

Okay – I’m off my soap box. Now go sign up and avoid the mistakes I’ve made. 

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{ 26 comments… read them below or add one }

Lisa Phillips December 26, 2013 at 5:12 pm

Lol, I already have a pro account, but this just makes me want to finally use those spreadsheets. Thanks

Reply

Brandon Turner December 26, 2013 at 6:36 pm

Lol thanks Lisa – Do it! They are wonderful, I think so anyways :) Try em out!

Reply

Matt December 26, 2013 at 5:50 pm

I know here in Southern California, the saying is never ever reduce the amount of units (like you did from 2 to 1). Some wealthy homeowners combine lots, but even these don’t make financial sense – they just have money to burn.

It may not be the case in the rest of the country as this is a different market from the average one in the US.

Reply

Brandon Turner December 26, 2013 at 6:36 pm

Hey Matt, yeah I think that should have been more obvious to me at the time. Oh well! You live, you learn, you get Luvs. :)

Reply

Gerald Harris December 26, 2013 at 10:49 pm

Nice article!

My second deal was a house in Victorville CA. It was a 3 bedroom 2 bath house over 1500 sqft i bought for 47k. the house had a hole in the roof the size of a Volkswagen Bug. I had no idea of repairs or ARV, i just bought it to rent it out. It was winter 1999. It was an extreme learning experience. I had gotten taken for almost 3k for my roof from “Abracadabra Roofing” Sad. It was probably the saddest time in my investing career, but it did not stop my passion. Learn from your mistakes.

Reply

Brandon Turner December 27, 2013 at 10:24 am

Excellent advice Gerald -learn from those mistakes! Thanks :)

Reply

Douglas Larson December 27, 2013 at 1:18 am

Love the honesty Brandon!
Thanks for sharing one of your learning experiences with us!
… Oh, and nice work by the way.. Do you have any more pics of this over-improved beauty?

Reply

Brandon Turner December 27, 2013 at 10:25 am

Thanks Douglas! Here’s the complete story, with photos: http://www.biggerpockets.com/renewsblog/2013/06/22/how-not-to-flip-a-house/

Reply

Sharon Vornholt December 27, 2013 at 12:23 pm

Brandon -

We all have one. I rehabbed ONE big, old house that was previously a duplex years ago. My story was similar to yours. I didn’t lose money, but I didn’t make a whole lot either. Those big old houses are not a project a “rookie” should tackle. Merry Christmas.

Sharon

Reply

Brandon Turner December 28, 2013 at 12:12 pm

Thanks for the comment, Sharon! Looks like you know exactly what I’m talking about :)

Reply

Jenna Stonecipher December 28, 2013 at 9:00 am

I just recently upgraded my account to Plus because I wanted to post something in the marketplace. I didn’t think I would use the other features though. I was SO wrong. In less than a week, I have reached my file download limit. Another upgrade may be in order…

To anyone considering upgrading, there is value in it–especially if you have already launched your real estate aspirations. I <3 Biggerpockets.

Reply

Brandon Turner December 28, 2013 at 12:11 pm

Hey Jenna, thanks! You rock!

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Greg Jackson December 28, 2013 at 10:50 am

Brandon,

“The word ‘genius’ isn’t applicable in football. A genius is a guy like Norman Einstein.” –Joe Theisman, NFL football quarterback & sports analyst.

Thanks for the great lesson, and BiggerPockets Pro opportunity!

Reply

Brandon Turner December 28, 2013 at 12:11 pm

Thanks Greg! Great Quote :)

Reply

djopgenort December 29, 2013 at 12:24 pm

I agree that “unconverting” from a duplex was probably a bad idea, but I’m curious about a lot of the numbers.
Where does the Bigger Pockets calculator come up with the $1,200 per month hold cost ? Is that due to the higher cost of private money and/or because more $ was borrowed in order to do the remodel?

Reply

Brandon Turner December 30, 2013 at 9:33 am

Yeah, it was from a few places. The hard money was around $700 per month, the water/sewer/garbage was around $200, the electricity was around $100 per month, and the property taxes (on average) were around $200 per month. So it added up really quickly. This doesn’t count the fact that I used credit cards to fund the remaining repairs, and I had almost $500 per month in payments on those. Ugh. It hurts to think about!

Does that make sense?

Reply

Robert Adams December 30, 2013 at 10:40 am

this story explains well how good intentions are not all you need when flipping properties. You really have to know the market for the resale values and demand. You also have to have a solid budget in place that is comprehensive and includes all of your actual costs.

Best Regards,
Robert Adams

Reply

Brandon Turner December 30, 2013 at 4:19 pm

Hey Robert, thanks! It’s so true – that ARV is so important, and even if I hadn’t gone over budget – I still would have overestimated that by a ways! Never again!

Reply

Jonathan Ramsuchit December 30, 2013 at 11:51 am

How on earth can you find a property for 40k yeilding such high rent! ?

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Brandon Turner December 30, 2013 at 4:20 pm

Hey Jonathan,

Thanks for the comment! They aren’t everywhere, but most rural areas have prices similar to this. I’ve always believed there are incredible deals within a 2 hour drive of any major area.

That said, this was an incredible deal. :) I wish I had taken advantage of it as a rental!

Reply

Shaun January 1, 2014 at 2:24 pm

Nice points.
Seems like you got caught up in the romance of making a big beautiful house and making a killing. Which is great as long as you have your numbers down. It seems that you overestimated the ARV if you held it so long.
I agree that some of these BP tools would help newbies realize some hidden costs and show how a longer hold could effect things. Though if you wiff on the ARV and/or budget then it’ll be a GIGO situation.

What did you THINK your profit was going to be to have it better than as a rental duplex?

Reply

Amy January 11, 2014 at 8:24 pm

I agree making 2 units into one is not the best way to go, as you learned! I made a mistake years ago when we bought a lakeside rental property in going a bit overboard with too many upscale finishes (glass tile backsplash, granite counters, separate soaking tub and shower in main bath (no master bath), which was not necessary in hindsight for this lower-priced community. However, it did rent out in 2 weeks to a family who have been steady, reliable tenants for 6 years now. IF I had to do again, I would have saved several thousand dollars at least with cheaper finishes, though.

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Frank April 7, 2014 at 12:34 pm

Everyone makes mistakes, sometimes experience is the best teacher!

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Brandon Turner April 7, 2014 at 12:35 pm

I agree Frank!

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Frank April 7, 2014 at 12:55 pm

Brandon, i just used your Rental Property Calculator for my latest single family rental purchase! I love it, the future projections graphs make me smile. I love having that info at my finger tips. Love the podcast also, i listen religiously. Keep up the good work.

Reply

Brandon Turner April 7, 2014 at 12:57 pm

Awesome Frank! That is awesome to hear! I also use that thing all the time. I appreciate the support!

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