My First Flip & Fix: Termites, Hauntings & A Foundation of Dirt

We all have crazy things that have happened to us that seem too out of the ordinary to be true.

This happens in all walks of life, but I have found that there is a special kind of crazy for the stories that have come from real estate investors. I have been in the business for a while and had lots of unbelievable stories. The one I will tell you here is one of my first fix and flip.

I’ve outlined the mistakes so you can learn something from them, as I did!

The Haunted House Tour

It all started in the town I live in — Bordentown, NJ.

My wife and I were newly married, and I had just quit my job as a sales rep to invest in real estate full time. We had some rentals, but back in 2007 the fix and resell market was getting so hot that I started looking for a fix and flip project.

The town we live in is a pleasant town with mostly nice houses. There was this one house that was by far the “ugly duckling” in the area. It was missing a few windows and had clearly been vacant for some time. Our town does a “haunted house tour” where they walk you past all the houses that have stories of being haunted — you know what I’m talking about, right?

Well, this house was on the tour.

I would drive past the house on my way around town, and I would always think that it was a shame to let a house get to that condition. I thought that someone should do something about that house. I would think this every time I drove past it, and then I would forget about it for a while. I got tired of thinking and not doing, so I decided to look into it further. I did a public record search online and found the name of the owner of record. I then searched for him online, but wasn’t able to get anywhere.

At least I tried, right?

A Few Months Later

Fast forward the story to a few months later when I was being courted by a title company for my business. They asked me if there was any property they could look into for me at no charge to prove themselves. I thought what the heck and I gave them the address of the house.

They sent me the report and to my surprise, the name of the owner of record was spelled differently on the deed versus the way it was spelled on all the other public record documents. “Huh,” I said. I searched for the name with the new spelling, and only person with that name came up in the tri-state area (it was a very unique name).

I picked up the phone and called the contact.

The man on the other end knew the house I was calling about and said it was his grandfather’s house. The man I was talking to seemed to be in his mid 70’s, so it didn’t seem to add up. I did a bunch of digging with him on the phone — and got the full story.

An Old Home’s Story

Isaac (the grandfather) died in 1964. His son Charles inherited the house, but did not want to live there. He decided to allow his cousin James to live in the house with his family, as long as he would pay the real estate tax bill.

In 1984 Charles dies and doesn’t tell his son Charles Jr. about the arrangement. Charles Jr. is who I am now speaking to on the phone and lives in upstate New York.

In 1992 the cousin James dies. His family and their descendants continue to live in the house, still paying the tax bills addressed to Isaac, who died in 1964. At some time in early 2002, the remnants of James’ family moved out also.

When they moved, they of course stopped paying the tax bills made out to their distant relative who died 40 years ago, so the property went into arrears on taxes. By the time I contacted Charles Jr., he had been contacted by the tax lien holder and was considering his options.

The Deal

Charles Jr. and I were able to strike a deal for me to purchase the house at a price that would pay off all the back taxes and put a few thousand dollars in his pocket. He was able take ownership of the property through the surrogate courts fairly easily, as he was the sole surviving heir to the estate of his father Charles Sr.

It ended up being a nice windfall for Charles Jr., as a few months ago he didn’t even know he owned the house!

It would be great if the story ended there, right? Not so much.

The Aftermath

Once we closed, the tax lien holder promptly sued me for something called “Title Raiding.”

In essence that means that you swoop in and purchase a property right before it goes to the courthouse steps on a foreclosure. Most of the time, banks are happy when you do this because it’s off their plate. Not the same for tax lien holders, as they actually WANT the property.

Mistake #1

I was not sure what to do and hired the first attorney I could find who was able to come to court, not necessarily one who knew anything about real estate. We ended up having to defend ourselves in court and also pay settlement to the tax lien holder, which combined set us back $15,000 right after we purchased the house.

Mistake #2

In hindsight I should not have let the tax lien holder push me around and paint me as a big developer who was trying to rob them of their profits. I was a small time investor just getting started, but didn’t get in control of the conversation in court so I was bulldozed by their attorneys.

Once all that was done, we unsuccessfully tried to do a quick flip and sell the house as is to another investor. No bites. Plan B was to fix and flip it ourselves, which was still a possibility as we had a little less than $80,000 invested so far and the ARV was $350,000 at that time. We had a line of credit in place that was attached to some real estate owned by some family who were willing to back us. Through that line we had the cash to redevelop the house but weren’t sure where to start.

Mistake #3

Instead of taking time to get a mentor and develop a plan, we just jumped right in.

Our first move was to get all the possessions out of the house — and it was full of them. There were interesting items like a player piano, the kind that play music on their own using those big rolls, the ones you see in the old cartoons. There were American Flags with 48 stars, bottles of unopened whiskey from the 1970’s and a ton of furniture.

On this job, we did not make the mistake that some investors including myself make of getting hung up on the stuff inside a house versus fixing the house itself. We brought in an auction house who took everything (I kept the flags and the whiskey of course), sold it for us and sent us a check for the sale minus a commission and a fee for disposal of what they couldn’t sell.

We had the house emptied within a week!

Mistake #4

Our next move was to replace the roof because it was leaking in many places. We went with the contractor that returned our calls.

Once they replaced the roof, they then informed us that the roof joists had termite damage and needed to be replaced. Think about that for a second — the ROOF joists had termite damage, meaning that the termites had to work their way through the whole house from the ground up to get to the roof.

Mistake #5

We would have discovered that had we done a full demolition of the inside of the house to assess the structure first.

To see how bad the damage was, we had a structural engineer come through along with an architect. Right away both of them told me the house was beyond repair and that it needed to be torn down.

Mistake #6

Instead of listening to them and investigating the costs of building a new house, I stayed the course to rehab the house because I thought it would cost too much to build a home from scratch. I told the architect to draw up plans to reframe the interior of the house to replace the termite damaged wood, which he was glad to do.

Now it was time to start rebuilding the house.

Mistake #7

We hired a framing crew consisting of a few people I could find in the neighborhood that had been laid off from other construction projects.

Upon further inspection of the interior framing, we found that the back of the house had no foundation; it was sitting on dirt! That explained all the termites.

Mistake #8

Our “framing crew” convinced me that they could dig out an area under the exterior wall and install a foundation over a weekend to avoid pulling permits for the work. I agreed.

Of course the crew was not able to finish the foundation within a weekend, so the house was left with a an open hole and concrete forms sitting in them on a busy intersection come Monday morning.

Hitting Rock Bottom

By Monday afternoon, I got a call from the local building inspector. I think that was the point where the project hit “rock bottom”.

I decided that I couldn’t lie to him so I decided to tell him the truth about everything I confessed to working without permits on the house and hiring non-licensed contractors. I told him that my architect and structural engineer had recommended that I tear the building down — and I didn’t listen.

I think he felt bad for me because he charged me a nominal fine and told me to come in with a viable plan for the house in 2 weeks.

That was the point when I decided to stop trying to do things myself. I wasn’t qualified to run a project like this myself. I let my ego and desire to make money get in the way, which prevented me from seeing what was in front of me clearly.

Picking Up the Pieces

I went out and found someone in my network who had handled large projects like this and asked him for help. He came to the site and showed me that the house needed to come down; there was no saving it. He also showed me that I was wrong on the costs to build a new house on the site. If I played my cards right, I could build a new house on the site and get out. I might not make much (if any) money on the sale, but at least I would get out of the project.

My mentor introduced me to a few builders he had worked with and helped me negotiate a deal with them. Once we had one selected, I went back to my architect and got plans for a house that would fit the lot and the character of the area. I took these plans with my newly hired builder to the town inspector and got moving with our new plan.

It was a very hard thing to do, but we took that house with a new roof, a new foundation in the back, some new framing and other interior work, and we tore it down. To be honest, with all the termite damage it didn’t take much to influence to get into the ground.

Within about 3 months, we had a beautiful new house on the lot.

My mentor was right; the cost to build was less than what I thought and had I proceeded with that plan from the start I would have been in a good position. The problem was that I didn’t go with that plan from the start and had to account for all the money I spent on the house we tore down. We priced the house to cover all our costs and break even. The house sat for a while because the market at the time to sell the house was very different than it was when we bought it. I got stubborn for a while trying to hold out for our price to no avail. I ended up having to let the house go for below asking and ended up taking a loss on the project.

The problem was that we were now in late 2007/early 2008, when the bottom fell out of the real estate market. Home sales were falling off the map, and the price we thought we could get for the house when we started the rehab was nowhere near the current market. By not having a tight timeline from the start of the project with a solid plan and by sitting on the house waiting for our price, we allowed too much time to pass. (We can call this Mistake # 9).

Time is money, right?

Conclusion

The good news is that I learned a lot from the project.

I learned not to do things that I wasn’t qualified to do by myself. I learned how to build a house from the ground up, which has benefited me greatly through my career. From that one lesson, I have made back what I lost on this project many times over.

I hope my mistakes taught you something and that you don’t make them yourself!

I would love to hear from others on their first fix and flip.

What successes and/or challenges did you experience? What would you do differently? How has it changed how you conduct business today?

Thanks for reading and please — don’t forget to comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.