Real Estate Investing Basics

Epic FAIL House Flip and The Lessons I Learned

Expertise: Flipping Houses, Personal Development, Real Estate Investing Basics, Mortgages & Creative Financing
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House Flipping Fail

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They always want to show me videos on there and one of their recent favorites it’s a series of videos called “Epic FAILs” – which are some of the most viewed videos on YouTube. They are videos of people “epically failing” doing something: from the Brazilian soccer goalie who goal kicks in the opposite direction to the news anchor who inadvertently blurts out a part of the human anatomy on live news to wardrobe malfunctions more embarrassing than Janet Jackson, these videos are all the rage.

Based on YouTube views alone, it’s readily apparent that people love to see other people failing in some way. Maybe its be because the viewer can say “good thing that’s not ME” or if it’s just human nature to rubberneck at car accidents, I’m really not sure.

I actually hope it's because people have a strong desire to learn from other people's mistakes. The point is that we as humans learn far more from failure than we ever do from success. And it's really no different in the real estate investing world.

Failing is all part of the real estate investing business. As much as you'd like to hit a home run on every real estate deal you do, for some of them, you just mess up. And hopefully, you pick yourself up, dust yourself off and move on to the next deal – having learned valuable lessons never to repeat again.

The Importance of Sticking to The House Flip Rules

As much as I am a big believer in NOT breaking the rules, sticking to the numbers and making disciplined real estate investing decisions, I am guilty of not listening to my own advice at times. As my father used to say, “do as I say, not as I do”. How Dad knew. But the longer you invest in real estate, the more mistakes you will make and the more failures you overcome and the more you learn.

And although this EPIC fail house flip happened nearly two years ago, this is the story of my most recent (and hopefully last) EPIC fail. As a full-time real estate investor, I just should have known better, but I broke my own rules. But I came away with some valuable lessons learned that no matter what, stick to the rules and keep yourself in the black at all times.

Although this epic fail didn’t sink me, I did learn a ton from it and hopefully you will too.

Epic FAIL House Flip: Vital Stats

  • When: Mid 2011
  • Where: Buzzards Bay, MA (2 Bedroom, 1 bath)
  • Projected ARV: $170,000
  • Financing: Private money lenders
  • Type of House: 2 Bedroom, 1 Bath
  • Projected ARV: $170,000
  • 70% Rule: $119,000
  • Estimated Repairs: $50,000
  • MAO: $69,000
  • Projected Profit (at 20%): $34,000
  • Projected Other Expenses (at 10%): $17,000

House Flip Projection Summary

As you can see on this house flip, I didn’t use any of my own money at all. I found the private money through friends, family and other associates who I had met through networking. As I and many others have written here on Bigger Pockets before: it is actually possible to flip houses with no money. And although this flip didn’t go as planned, the financing part was fairly sound.

With the kind of money lenders I used in this house flip, you can negotiate very favorable interest rates. In this case I paid out all the interest at closing and not monthly. Two things you can always negotiate with lenders are: financing rates rates and payment terms.

If I'd used a traditional hard money lender, which in many cases is a great way to get into house flipping with no money, my margins would've been even more slim than they were using private money. Every house flip is different, so you just have to work the numbers to see you which works out best.

The Epic Fail House Flip: What Went Wrong?

On this house flip, I simply didn’t stick to my own rules. Of course, you learn lessons as you go along as a real estate investor and I certainly learned mine here. Since this flip in 2011, I have never deviated from my own rules. And as you’ll see, although the profit was fairly slim, in my opinion it could’ve been far worse if I didn’t even have the framework for the rules that I still follow today.

By sticking to the rules; including ARV, the 70% Rule, not over inflating your ARV and holding firm to your MAO, you stay in the game and they help prevent you from serious downside risk.

Here’s the breakdown on the numbers:

MAO

Projection: $69,000
Actual: $74,000

-$5,000
Cost of Repairs

Projection: $50,000
Actual: $56,473

-$6,473
Other Expenses

Projection: $17,000
Actual: $17,515

-$515
ARV

Projection: $170,000
Actual: $162,000
-$8,000

Profit

Projected: $34,000
Actual: $14,012

Total Downside: -$19,988

Why Was This House Flip an Epic Fail?

As you can see, most of the major numbers were in the negative, with cost overruns on just about every aspect of the project. The major mistakes are as follows:

  • MAO: The biggest cost overrun was on MAO having paid $5,000 more than I should have paid. The reasons for this are many, but none of them are really all that good. The truth of the matter was is that at this point, my deal flow was light and I believe I was just too overeager to make it happen. The seller just wouldn’t budge and come down to my MAO and I figured that I could make up the difference on the repairs, which I never did.
  • ARV: On this one, I actually thought I could sell it for $172,000! My realtor had given me a number below 170,000 to begin with, so I broke those rules using some “eraser math” right at the start. Don’t ever do this!
  • Cost of Repairs: Another part where I did some more “eraser math” was on the cost of repairs. I never factored in the frame problems that we eventually had on this project. I knew there were some framing issues Right from the start and I figured I was so smart I could manage my way into profitability with my contractors. How wrong I was!

Why House Flipping Formulas Are So Important

Some of you might actually be laughing at the fact that we did actually make a profit of over $14,000 on this flip. But for me, it was an epic failure because I failed to keep to my principles and formulas. That “inner voice” was calling to me throughout this entire house flip and I just simply ignored it.

As you look at the numbers, you can see that when you do stick to the rules how much more profit you can make. But the best part of the rules is that even when you fail to follow them and fudge them just a little, they still keep you out of real financial disaster. However, when you fudge them a lot, that’s when you get into real trouble.

Ever since this flip, I’ve stuck to my rules nearly 100%. Even on one of the most recent flips that made me out very nice profit, I did have some variations in my numbers. But overall, I stuck to the rules as much as possible. And when you do this, you make big profits, not tiny ones like this one.

If you’re first starting out flipping houses, you’ll probably be tempted to break the rules. My advice is don’t do it. The more you do it and stick to the rules, many of which are outlined here on Bigger Pockets, the more money you will make – regardless of market conditions.

And when that happens, I can’t wait to hear about it.

If you’ve made it this far, please leave a comment below! I’d LOVE to hear about any of your EPIC fail house flips or anything else related to real estate investing or flipping houses!

Photo: Iwan Wolkow

Michael LaCava is a full time real estate investor, house flipping...
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    Jim Pratt
    Replied over 7 years ago
    Hi Mike, nice article, short and to the point. The reason I’m not a flipper is when I buy property usally at 60%, rehab around 10%+/-, ARV 160%, it’s kind of hard to sell something that’s going to give me $250+/- profit every month. I simply refinance to get all my money back for the next one. The other problem I have is my silent partner who wants 35% of my profits, NO WAY! By using a HELOC loan, bought 3 properties the first year alone, refinance each one and now have $375,000 in assets and $1,000 positive cash flow with no money out of my pocket. Since I can build a house from the ground up, didn’t have any “EPIC FAILS”. Their were some close ones, but with the positive monthly cash flows and apperciation came out OK. One has to have workable and doable rules or they WILL FAIL.
    Gary Leonard
    Replied 2 months ago
    I agree 100%. I called this scenario “magical math” or “Lying to myself”. In the beginning I made huge mistakes and even loss money by going against my formulas. In the beginning I always thought, that my formulas were very conservative and i turn I could wiggle to make a deal work. I was wrong. Sometimes the best of deals are the ones you walk away from. Yes of course, take risks, but take risks while you are inside the funnel, not when entering. You make money when you buy, so stay conservative. If you have problems sticking to your formulas my suggestion is always increase your strict guidelines. So if your percentage of ARV is the 70% rule start from the gate at 60 or even 55%. Always add a random $10,000 to $20,000 on top of total repairs as well as deduct $15,000 from overall MaO as a phantom wholesale fee (even if you didn’t go through a wholesaler) . In addition ALWAYS GET you REALTORS most current sold, pending, withdrawn, contingent and on the market, And day on Market Comps within a .5 mile radius of your subject property as well as a conservative $15-$20,000 deduction from your MAO - ARV data MUST be from MLS and not Trulia or Zillow! Your formula with a MLS average ARV of $300,000 ( heres is what to do): ARV = $300,000 Repairs= $25,000 $285,500 x 55%-$35,000-$10,000= $112,025 then round down $112,000 then deduct $20,000 from MAO 92,000 will be your first offer then just counter in increments of $1500 ONLY Now the original formula less conservative ARV $300,000 Repairs = $25,000 $300,000 x 70% - $25,000= $185,000 MAO = $185,000 deduct $20,000 Non Conservative first offer = $165,000 So start at $92,000 and know in the back of your head you want the seller to get into your Kill zone which is calculated between a $73,000 difference As long as your seller falls between $92,000 and $165,000 You are SAFE! of course try to get them a little below $165,000 and as close to the $92,000 side of the kill zone as possible. However, even if you made it to $160,000 YOU are a winner! even is you agreed on $164,500 Take it! However do not go above even a $100 from $165,000. Do this and you will NEVER lose or it will be very difficult to Lose
    Michael
    Replied over 7 years ago
    so true Jim. Great plan you have here. I am buying and holding as much as I can now as cash flow is great as you have proven as well. Thanks for you sharing your plan & hope you reach all your goals in 2013.
    Ryan Swan
    Replied over 7 years ago
    Hey Jim, I’m interested in doing exactly what you described. Could you elaborate on the process? Do you refinance the HELOCs into equity loans on the new properties, or do you just obtain all new financing?
    Jim Pratt
    Replied over 7 years ago
    Ryan, I obtain new financing on the property to get back ALL the money I have in it. This way the HELOC is paid back as is the money out of my pocket for the rehab. When my banker saw what I was doing and the money I was making he wanted to raise the rate, told him go ahead. The second year bought 4 more properties the same way, wish I did this sooner. After the tenth one had to stop, ^$#^*. Because of the HELOC loan, now recieving an extra $3,000 a month positive cash flow that cost me nothing:) Note: there’s some really good deals on the market where one can buy some nice property for 50 cents on the dollar and very little rehab.
    Keith and Kinsey
    Replied over 7 years ago
    Failing is a great way to learn, and fear of failure often stops people from ever starting. My epic fail was on out of state rental that I purchased in 2009. The numbers looked great, but I didn’t do enough due diligence. The guy who rehabed it didn’t do quality work, and my property manager strung me along with a series of lies. Two evictions, a lot of damage, and a few years later, I sold it for a hefty loss. …but I learned a lot!
    Michael
    Replied over 7 years ago
    Thanks Keith & Kinsey – Did you visit the out of state “deal”. Just curious where and how did you come about it. Thanks for sharing & it is a good warning to anyone that you have to be that much more cautious especially when it is out of your area!
    Michael
    Replied over 7 years ago
    I haven’t made any big blunders in the last 6-7 years, but man, I could tell you some stories from years prior that would make this “fail” look like a walk off grand slam. Enjoyed the post.
    Michael
    Replied over 7 years ago
    Ok Michael that was a tease. Now I do want to know. LOL. How about just sharing one. Good to see you recovered & doing well. Funny because I know some very successful investors and their beginnings were disastrous and they persevered and are now millionaires!
    Michael
    Replied over 7 years ago
    Ok Michael that was a tease. Now I do want to know. LOL. How about just sharing one. Good to see you recovered & doing well. Funny because I know some very successful investors and their beginnings were disastrous and they persevered and are now millionaires!
    Brandon Turner
    Replied over 7 years ago
    Thanks Mike for the article. Just last year I had a flip that I vastly underestimated repairs and overestimated the ARV. Ended up escaping that with not much at all. Good lessons to learn though!
    Michael
    Replied over 7 years ago
    Sure is Brandon. The good thing is you didn’t loose any money and learned I am sure some techniques to improve upon as to avoid a repeat. Thanks for sharing!
    Shanequa Jones
    Replied over 7 years ago
    With my current rental, I vastly underestimated the surprises that would spring up in a 1941 house that was vacant for 3 years. However, this is my first big project. I looks like I will go 10-15k over budget! It’s a great learning experience though.
    Michael
    Replied over 7 years ago
    Your not alone Shanequa – Believe me most under estimate cost of repairs. Sometimes it is hard even with a contractor to see everything. I try to anticipate what could be based on the year the house was built and build in a cushion on top of that. At the same time you can’t over estimate to determine you MAO because you may just price yourself out against the competition in acquiring property. Thanks for sharing and as long as you learned some things to improve upon and not repeat then chalk it up as a good education & go get your next one.
    Jerry
    Replied over 7 years ago
    I just lost over $2K on my last flip. Woulda loved to have made that kind of failed profit. Real estate agent way overpriced my ARV and I bought it with $$$ in my eyes. Live and learn.
    Michael
    Replied over 7 years ago
    Sorry to here that Jerry. Hopefully your making money now on your flips! ARV is everything and if that is way off as you know disaster is abound. I push my RE agents and let them know as an investor I need to move house quickly & tell them to price below the competition. I want to see every comp they come up with and then do a cross analysis of what I find or even get a few more CMA’s if need be. An appraisal may be another option and one BP guest shared that in one of my post’s. I have learned the hard way as well it is one thing to trust the professionals but you must do your due diligence to back up their findings or not.
    Jeff Brown
    Replied over 7 years ago
    Epic Fail — The name of my old band. 🙂
    Michael
    Replied over 7 years ago
    Who would of thought Jeff.
    Robert Steele
    Replied over 7 years ago
    I don’t get it. How is this an “epic fail”. You still made a profit! I know two flippers who lost money; both around $20K. Back when I was a newbie I made a whole $600 profit on a $30K budget flip. So I would characterize your experience as “missing the profit estimate by 50%”.
    Robert Steele
    Replied over 7 years ago
    I don’t get it. How is this an “epic fail”. You still made a profit! I know two flippers who lost money; both around $20K. Back when I was a newbie I made a whole $600 profit on a $30K budget flip. So I would characterize your experience as “missing the profit estimate by 50%”.
    Michael
    Replied over 7 years ago
    True Robert and I pointed out exactly what other’s might think as this not being a failure and why is was for me (see below from the article). The main point is to stick to the rules & formulas. Why House Flipping Formulas Are So Important Some of you might actually be laughing at the fact that we did actually make a profit of over $14,000 on this flip. But for me, it was an epic failure because I failed to keep to my principles and formulas. That “inner voice” was calling to me throughout this entire house flip and I just simply ignored it. As you look at the numbers, you can see that when you do stick to the rules how much more profit you can make. But the best part of the rules is that even when you fail to follow them and fudge them just a little, they still keep you out of real financial disaster. However, when you fudge them a lot, that’s when you get into real trouble. Thanks for sharing the losses. Maybe you can share some winners.
    Glenn Espinosa
    Replied over 7 years ago
    I totally get why that would be an EPIC fail. Just to come out with profit, no matter how much it is, doesn’t mean anything if you didn’t hit the numbers you planned on hitting. I had a very similar deal last year that I still look back on unfavorably because of the big discrepency between what I projected to make and what I actually made. I bought for 60k, projected 53k in repairs and an exit price of 179k. In the end my total rehab came to 64k, rehab was 2 months longer than what I had planned for and my exit price was only 168k! My 45k+ projected profit was dwindled down to just over 15k! Also the opportunity costs as my money was tied up much longer than I had planned. Thanks for reminding me to stick to the real numbers Mike! Glenn
    Michael
    Replied over 7 years ago
    Hey Glenn – Thanks and I am glad you get the point I was making here. Number’s don’t lie so stick with the formula. Hope you have much success in 2013.
    Leo
    Replied over 7 years ago
    What does MAO stand for please?
    Leo
    Replied over 7 years ago
    $14k profit does not look like anything close to an epic fail.
    Glenn Espinosa
    Replied over 7 years ago
    MAO = Max allowable offer. And it is a fail when compared to what he projected to make. If you were to make those same mistakes on other projects eventually something will bite you in the butt and you’ll lose big time.
    Michael
    Replied over 7 years ago
    Thanks for replying to Leo!
    Rob B.
    Replied over 7 years ago
    Wow! Great post! I’m a newbie and really appreciate this advice.
    mike
    Replied over 7 years ago
    My pleasure Rob. Where you looking to invest?
    mike
    Replied over 7 years ago
    My pleasure Rob. Where you looking to invest? Reply Report comment
    Fabian Rivas
    Replied over 5 years ago
    Great Post Mike! One question, you say to stay firm to your numbers but should one walk away from deal for 5k? (MAO $69,000 Actual: $74,000)
    Michael
    Replied over 5 years ago
    No you just don’t’ want to try and change #’s to make a deal work. What does that do to your bottom line is the question. If you were projecting $15k profit then I would not accept a $5K reduction as that would be a big hit on the bottom line. If it was $45K to $40k then I would be ok with that. It is all relative.