{"id":46683,"date":"2013-08-08T11:15:14","date_gmt":"2013-08-08T17:15:14","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=46683"},"modified":"2021-03-16T10:09:45","modified_gmt":"2021-03-16T16:09:45","slug":"2013-08-08-lose-money-flip","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2013-08-08-lose-money-flip","title":{"rendered":"I’m Starting to Lose Money on My Flip, What Do I Do Now???"},"content":{"rendered":"

Let’s Talk About Harsh Reality For a Minute<\/strong><\/p>\n

There are so many great articles about how to be successful here on BiggerPockets<\/a>, and all the gurus say it’s easy to make millions! \u00a0I am a very positive thinker, but I also like to know about the harsh realities of anything in life. \u00a0If there is a tremendous upside, there is always a risk that must be taken. \u00a0If there was no risk, it would be “too good to be true,” and everybody would be doing it! \u00a0It is the risk-taking, and our individual risk tolerance, that sets us apart from each other in business. What if that risk does not work out in your favor? \u00a0What is the reality of that, and what do you do? \u00a0If you invest in RE long enough, eventually you will make a misstep that costs you money. \u00a0<\/p>\n

When that happens, what do you do?<\/p>\n

We Couldn’t Fail, or Could We?<\/h2>\n

In 2009, we had been investing for about a year. \u00a0We had 3 successful deals under our belt -the first netted us around $17K, the next was $33K, and the next about $70K. \u00a0Wow, we were on a roll, or so we thought. \u00a0An agent presented a property to us in an unfamiliar area that was about an hour away. \u00a0It was in a great neighborhood consisting of newer houses less than 20 years old but, to be blunt, the owner of this home was a slob. \u00a0Dirt and crap from one side of the house to the other. \u00a0<\/p>\n

She was a hoarder in a nice neighborhood. \u00a0<\/p>\n

The agent told us we could buy, clean out, do minimal work, and get out for a clean $25K profit. \u00a0Sounds good right? \u00a0After all, it was going to be an easy, quick flip! \u00a0HA! BTW, when someone tell you they have a simple, quick flip, tread cautiously!<\/p>\n

We had many contractor problems as we did not have proper systems in place, and being so far away it was tough to manage. \u00a0However, at the end of the day, we did get the job done. \u00a0We were behind schedule, but it was ready for sale. \u00a0Day 1 on the market, full price offer….BAM! \u00a0Our projected profit was now close to $38K!! \u00a0Well, we’re cookin’ with Crisco now, everything is just falling into place …. and then the neighbor makes an appearance!<\/p>\n

You’ve Gotta Love Those Negative, Nosy, Know it All Neighbors!<\/h2>\n

The next day our buyer was walking in the neighborhood admiring her new purchase and getting ready for closing when the nosy neighbor came out and wanted to let her know how bad the water in the well was. \u00a0Mind you, OUR water was tested and was 100% fine. \u00a0It was hers that was no good, they were two totally different wells! \u00a0I have no idea what else was said by this PITA neighbor but the buyer promptly backed out, thinking we were hiding something. The house now sat on the market for the next 5 months, showing after showing, no interest. \u00a0I wonder if the neighbor was at each showing to let them know how bad her lot in life was? \u00a0I never understand that. \u00a0Why would a person devalue their own property by making the one right next door sell for less? \u00a0It only hurts the value of their own home!! \u00a0I suppose we’ll just say she wasn’t the brightest light on the block \ud83d\ude09<\/p>\n

After dropping the price numerous times, we finally receive an offer, it was for about $25K less than the first offer. \u00a0If you read my last post on the silent killer of real estate deals<\/a>, you will remember that holding costs can eat you alive like an african skin eating virus! \u00a0Well think about it, we have now accepted an offer $25K less than expected 5 months later than expected, can you say…loss????????? \u00a0Well it sure was. By the time it closed we had to find over $5000.00 to bring to the table just to get us out of the deal, mostly it was to pay off the investor. \u00a0Our investor on that deal made more than we did, heck, the lawn guy made more than we did!<\/p>\n

What Did We Learn?<\/h2>\n

1 – If you have a negative neighbor who tries to kill the deal, bury them in the same well they are complaining about. \u00a0Wait, was that my outside voice? \u00a0Sorry! \u00a0Oops, what I meant was, go out of your way to be nice, introduce yourself to such neighbors and explain how it really helps their values when a new house is sold in their neighborhood. \u00a0(Then let them out of the well) \ud83d\ude42 \u00a0If you suspect a problem neighbor, have an open house for the neighbors and let them know your intentions. \u00a0Offer referral bonuses if they have a buyer they refer to you. \u00a0Send brownies to soften them up a bit, and if it’s out of control, be present at all the showings to run interference if need be.<\/p>\n

2 – Count ALL of your costs each day. The longer you hold out for a higher price, the more you are going in the hole. \u00a0It is a risk\/reward situation, so be very careful as you make decisions about price drops and negotiating offers. \u00a0Remember, the market does not care one bit what you HAVE to get to break even. \u00a0The market will only pay what the house is worth, period. \u00a0Don’t kid yourself about the true value. \u00a0Let the market tell you what it is going to sell for. \u00a0I love to hear people say, well if it costs more money, you are just going to have to ask more for the house to cover your losses! \u00a0My annoyed response is usually, “Okay, lets come back from La La Land for a minute. \u00a0I<\/strong> do not determine a price, the market does! \u00a0So get back in the well!…..Outside voice again? \u00a0Oops!<\/p>\n

3 – Once you realize you are losing money, GET OUT FAST!! \u00a0If you were wounded and hemorrhaging blood, you would need to stop the bleeding in order to survive. Be honest with yourself. \u00a0If you are in a bad deal, it is only going to get worse. \u00a0Are any of you “Cheers” fans? \u00a0It was a great show in the 80’s and early 90’s. \u00a0Sam Malone had a theory in life, “Ignore the problem, it will go away”. \u00a0With investing, nothing could be farther from the truth, most people ignore the daily losses happening, while hoping for a miracle. Make no mistake, whether you ignore them or not, they ARE accruing and happening right in front of you, so be honest with yourself and make sound, non emotional business decisions to minimize the damage. \u00a0Once you have started to lose money, the only question is, how much do you want to lose? \u00a0No white knight with a bag of cash is going to come in to save you. \u00a0You ARE that knight! \u00a0So be a smart, strategic knight, and get out as unscathed as possible. \u00a0Remember the movie, 127 Hours, based on the true story of Aron Ralston? \u00a0He was trapped by a large boulder and decided to cut off his own arm, with a dull knife, in order to survive. \u00a0What an awesome movie. We must do the same thing when we are losing. \u00a0We must make the tough decisions, or the world will make them for us!<\/p>\n

4 – ALWAYS pay your investors, contractors, and suppliers. One of the main reasons we lost money on that deal in the end was because we had to pay a lot of interest to our investor. \u00a0We had no problem whatsoever with doing that because we saw the big picture. \u00a0When it was over, he asked how we did on the deal. When we told him what happened, he was impressed that we held up our end of the deal, even though it hurt. \u00a0Do you want to have a great reputation? Do what you say you are going to do … ALWAYS. \u00a0People will invest with you and know that no matter what happens, they will get paid. \u00a0It is a sound principal that we have built our company on, and my advice is to do the same as it helps our entire industry. \u00a0If you are in a bad crunch and need cash to close the deal but don’t have it, talk to your investor, ask them to let you get out of the deal and write a note outside the mortgage. That way at least you can close on the house and stop all of the other accruing costs. \u00a0Then immediately do whatever is needed to fully pay the investor off with their interest. I would go flip burgers if I had to in order to keep my reputation, it is totally worth it.<\/p>\n

5 – Consider any money lost as tuition. \u00a0People go to school for years and spend $100,000+ only to never really use their degree. \u00a0Was it a loss? \u00a0Of course not, they learned many valuable lessons along the way. \u00a0The school of hard knocks has it’s own tuition. Sometimes it’s time, stress, health, or money. \u00a0If you lose money on a deal, DON’T LOSE THE LESSON! <\/strong>\u00a0We learn so much from our failures, if we embrace them we will come out much stronger. \u00a0Remember, we are human, we WILL make mistakes. \u00a0I think the hardest lessons learned are the best lessons learned and will not soon be forgotten.<\/p>\n

6 – Never listen to anyone who says, “Hey I have a really quick flip for you!” Don’t run for the hills necessarily, but do your homework well, especially on those.<\/p>\n

In Conclusion<\/h2>\n

My hope is not that you get discouraged from investing at all by my stories. My wish is for you to be armed with the realities of what can happen if you do not make sound decisions. \u00a0If you do your homework you greatly minimize your risks. \u00a0In a world of self proclaimed guru’s claiming fortunes (if you give them yours,) I like to be a voice of reason – I am very open about our failures, so that people may learn from them and not repeat the same lessons. \u00a0Do your own homework, be totally honest with yourself, seek advice, but in the end make your own decision. \u00a0Go confidently in the direction of your dreams, and bold and mighty forces will come to your aid.<\/p>\n

Have a great week!<\/p>\n

Photo: ohkylel@twitter<\/a><\/font><\/p>\n","protected":false},"excerpt":{"rendered":"

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