Advice for newbie, flip won't profit

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Advice for newbie, flip won't profit

Charles White
Lynnwood, WA · Member since 2017 · 10 posts · 5 votes

Hello BP members,

Here a newbie from WA that is in trouble. After studying for many months the possibility of buying a house through a foreclosure action I finally did it, and even though I knew about the risk and repeated my self to not make any of those mistakes,  I made them. I'm looking here for a sincere and helpful advice. 

On July of this year and with the help of a bidding company I bought my second flip. This company charged me 3% to represent me in the auction and gave me an overview of different foreclosed properties in the area. They present me this numbers for this house: ARV 460K, rehab cost 40k, decent condition house according to them in a B area, hot market, min bid 300k. This company presents this numbers to the investors one day before the auction, so with the pressure that I had to make a decision and since I have been trying to buy a property for many months without results I made my bid. Result, I got the property for 309k. I was excited since the numbers presented to me made sense, I was hoping to make a decent profit. Next, the day I went to see the house and it was basically a teardown! 7ft Blackberry bushes, leaking roof, carpet had feces on it, wood paneling that was covering a textured wall positive for asbestos, and many many other things that made this house a *hole. Oh, I forgot to mention I got a hard money loan at 12%, 5 months, 2 points with 10% downpayment.

Fast forward to today, new roof, updated electrical system, blackberries are gone with a nice grassy backyard, new furnace, new plumbing, and other things that just keep adding up totaling almost 33k. On the administrative side: payments to the hard money lender, water lien that didn't appear on records for 3.5k. Administrative matters were also on my way; city permits that take 8 weeks to be approved (I haven't even got the building permit yet, and it's already 8 weeks ), labor here in WA is expensive and contractors are busy. Anyways, to make it short, I don't think I will be able to finish in those 5 months and according to my calculations to get this house in a decent condition I will need to spend another 35k ( cabinets, floors, appliances, doors, trims, light fixtures, driveway, siding, drywall, granite countertop) even after that and after seeing how the market is behaving I think I could sell this house for 420000 max, not the 460k I was told. Also, the less I spend the less I will be able to sell it for. 

So at this point, I'm wondering what to do. Should I continue and pay 1 point more to the lender to extend the payment period to finish this property, sell it for 420k breaking even if lucky? Should I try to sell now, but who would like a house like this or maybe cashout refinance after done and rent it out for a while ( rent in this area for this type of property is from 1900 to 2k a month) leaving some money on it? I would really appreciate your output/advice/ creative solution. Thanks

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Nghi Le
Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes
9y

Been down this road before :-)
We've once held a flip for 2.5 years... with 3 different hard money lenders.  Extensions and refinances are pretty expensive.

@Albert Bui He's definitely going to lose money.  I believe he only stated his rehab costs, not his loan costs, holding costs, or acquisition costs (i.e. the 3% of the tax-assessed value up front).  Plus his extension fees...

@Account Closed What is your all-in cost right now (including loan costs, holding costs, insurance, taxes, etc)?

And I'm guessing that you'll have to pay a full agent commission on the sale since you purchased through them?

Our first flip actually came from the auction (with the same company you used).  Ironically, that was one of our more most successful flips to date.  However, we saw all of the things that could have gone wrong and have since decided to avoid the auction.

What city is your flip in? Or do you have the address? We can help you confirm some of your rental numbers and ARV.

I've always believed that if you hold real estate long enough, you'll eventually come out on top.  The question is just how long will that take?  If doing a regular rental won't work due to negative cash, you can try to see if it'll work for AirBNB, or you can lease-option it.  All of these methods will require long-term financing, and Albert can help you out with the refinance.  Unless you can't qualify for conventional refinance, then PM me and I can help point you towards some non-conventional lenders / secondary financing.

Another note... because of how/where ESF gets their funds from, you won't be able to go longer than a year on the loan (i.e. you can't do infinite extensions).  At that point, they get very foreclosure-happy.  So try to start the refinance process (either with a conventional or non-conventional lender) right after you finish rehab.  You can always decide not to go through with it if you do sell.

6Reply
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  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    Hi Charles if you sell for 420k with about 370k in the deal + carry & closing costs, you stand to make about 5-12k assuming you're not an agent your self/representing yourself and you dont give too  many seller concessions.

    If you refinance the home assuming it appraises sufficiently your monthly will be about 1800 + Tax/Insuance so if you rent it out for 2000 you'll probably have -150 to -200 negative cash flow not accounting for property mgmt, repairs, or etc.

    0Reply
  • Robert Callaway
    Savannah, GA · Member since 2017 · 20 posts · 7 votes
    9y

    I'm not a pro by any means but you could try reselling to another flipper to get out of it quicker and break even or possibly make a small profit. You could even try advertising it to others for them to choose the fixtures to add and customise it to their liking which may raise the selling price for you.

    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Chalk this up to the process of education in flipping.

    As you now know you can not rely on others to assess your investments, you must know the business and understand the numbers yourself. There is no blame necessary, you simply continue the process, move forward and learn from your mistakes.

    Many go bankrupt when starting into flipping, you are still liquid and can recover to flip again with greater knowledge and experience under your belt.

    You are operating a business and as with any business there are bumps in the road when beginning. Most new businesses fail in the first 5 years, with determination and greater knowledge hopefully you will avoid being one of them.

    5Reply
  • David Weintraub
    Lender · Berkeley, CA · Member since 2017 · 1k+ posts · 549 votes
    9y
    If your numbers are accurate I’d follow Albert here. Btw...what company pitched you this? What would be the reason to not tell others so they can avoid similar mistakes? And how do they pitch? Best of luck. Worst case scenario you paid money to learn and didn’t go broke doing it.
    1Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    9y

    Consider consulting with a real estate attorney to determine whether this "bidding company" broke any laws and/or has any liability. Sounds like they charged you a commission so there are potential brokerage laws implicated regardless of what they call themselves or what their agreements state or disclaim. I've never heard of such a thing. 

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    4Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    9y

    At this point you have to finish it.  If it's break even or so, no one is going to pay enough to make you whole....they would be finishing it for break even or less, and no one is going to knowingly do that.

    4Reply
  • Charles White
    OP
    Lynnwood, WA · Member since 2017 · 10 posts · 5 votes
    9y

    @Albert Bui , I think I night be able to finish this flip with 35k , totaling 68 k for repairs+ 25,200 for realtors + taxes and other closing costs I basically end up with negative numbers even if I represent my self. I'm curious about your calculations could you share with me? 

    For the refinance/rent  , you are right! Cash Flow will be negative too. 

    Thanks for your input!

    0Reply
  • Charles White
    OP
    Lynnwood, WA · Member since 2017 · 10 posts · 5 votes
    9y

    @Robert Callaway, I thought about this possibility too. However, I don't think that this would be an attractive deal for any real estate investor. House looks pretty bad at his point and if i sell it to break even I would ask for 370k. Good idea about the advertising choosing fixtures , I will consider this possibility. Thanks Robert

    1Reply
  • Charles White
    OP
    Lynnwood, WA · Member since 2017 · 10 posts · 5 votes
    9y

    @Thomas S.,

    Definitely, I'm not here to leave. I'm stubborn as mule. I will consider this experience as my  cheap tuition  to learn and master real estate

    1Reply
  • Charles White
    OP
    Lynnwood, WA · Member since 2017 · 10 posts · 5 votes
    9y

    @David Weintraub , I won't mention the name of the company since I'm planning to go back to them so they can help me sell this one for the price they told me it was going to sell. 

    Also, they make every investor sign documents that frees them for any type of liability. 

    What I can say  about this experience is that regardless of the numbers "this experts" come up with , it was my responsibility to double check the numbers, visit the property and do my due diligence. I imagine how bad things can go for someone that has 0 experience, at least I new the basics. 

    Thanks David!

    2Reply
  • Nghi Le
    Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes
    9y

    Been down this road before :-)
    We've once held a flip for 2.5 years... with 3 different hard money lenders.  Extensions and refinances are pretty expensive.

    @Albert Bui He's definitely going to lose money.  I believe he only stated his rehab costs, not his loan costs, holding costs, or acquisition costs (i.e. the 3% of the tax-assessed value up front).  Plus his extension fees...

    @Account Closed What is your all-in cost right now (including loan costs, holding costs, insurance, taxes, etc)?

    And I'm guessing that you'll have to pay a full agent commission on the sale since you purchased through them?

    Our first flip actually came from the auction (with the same company you used).  Ironically, that was one of our more most successful flips to date.  However, we saw all of the things that could have gone wrong and have since decided to avoid the auction.

    What city is your flip in? Or do you have the address? We can help you confirm some of your rental numbers and ARV.

    I've always believed that if you hold real estate long enough, you'll eventually come out on top.  The question is just how long will that take?  If doing a regular rental won't work due to negative cash, you can try to see if it'll work for AirBNB, or you can lease-option it.  All of these methods will require long-term financing, and Albert can help you out with the refinance.  Unless you can't qualify for conventional refinance, then PM me and I can help point you towards some non-conventional lenders / secondary financing.

    Another note... because of how/where ESF gets their funds from, you won't be able to go longer than a year on the loan (i.e. you can't do infinite extensions).  At that point, they get very foreclosure-happy.  So try to start the refinance process (either with a conventional or non-conventional lender) right after you finish rehab.  You can always decide not to go through with it if you do sell.

    6Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    9y
    Originally posted by @Nghi Le:

    Been down this road before :-)
    We've once held a flip for 2.5 years... with 3 different hard money lenders.  Extensions and refinances are pretty expensive.

    @Albert Bui He's definitely going to lose money.  I believe he only stated his rehab costs, not his loan costs, holding costs, or acquisition costs (i.e. the 3% of the tax-assessed value up front).  Plus his extension fees...

    @Account Closed What is your all-in cost right now (including loan costs, holding costs, insurance, taxes, etc)?

    And I'm guessing that you'll have to pay a full agent commission on the sale since you purchased through them?

    Our first flip actually came from the auction (with the same company you used).  Ironically, that was one of our more most successful flips to date.  However, we saw all of the things that could have gone wrong and have since decided to avoid the auction.

    What city is your flip in? Or do you have the address? We can help you confirm some of your rental numbers and ARV.

    I've always believed that if you hold real estate long enough, you'll eventually come out on top.  The question is just how long will that take?  If doing a regular rental won't work due to negative cash, you can try to see if it'll work for AirBNB, or you can lease-option it.  All of these methods will require long-term financing, and Albert can help you out with the refinance.  Unless you can't qualify for conventional refinance, then PM me and I can help point you towards some non-conventional lenders / secondary financing.

    Another note... because of how/where ESF gets their funds from, you won't be able to go longer than a year on the loan (i.e. you can't do infinite extensions).  At that point, they get very foreclosure-happy.  So try to start the refinance process (either with a conventional or non-conventional lender) right after you finish rehab.  You can always decide not to go through with it if you do sell.

     Awesome post that is definitely a good take on things 

    0Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    9y
    Originally posted by @Account Closed:
    Originally posted by @Charles White:

    @David Weintraub , I won't mention the name of the company since I'm planning to go back to them so they can help me sell this one for the price they told me it was going to sell. 

    Also, they make every investor sign documents that frees them for any type of liability. 

    What I can say  about this experience is that regardless of the numbers "this experts" come up with , it was my responsibility to double check the numbers, visit the property and do my due diligence. I imagine how bad things can go for someone that has 0 experience, at least I new the basics. 

    Thanks David!

     David, it is probably Eastside Funding which specializes in financing people to bid at auction. They have been around a very long time. Although expensive money, they do what they promise and make it clear to the buyer that at Auction in Washington State there are *no* guarantees and they certainly don't know the property. The buyer is advised to do due diligence and inspect the property the night before auction with no guarantee that the house will actually go to auction. It was simply a boneheaded decision that comes from inexperience. This won't make the OP feel any better but for anyone else out there "Buyer Beware".  Your "due diligence" as a newbie will cost you. Instead, Team Up with someone who knows what they are doing for your first few properties. You will be sooo much happier. I learned this by making the same boneheaded mistakes. ;-) And the OP probably doesn't know about the 1.78% transfer fee Washington State charges on the *sale amount*, even if you lost money at sale.

    Let me get this straight. This Eastside Funding bidding company "helps" potential buyers with numbers such as ARV and earns more when they bid higher because they ultimately finance the auction purchase?

    LOL

    Auctions are never a good fit for new investors and yet you have an established entity praying on them.

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    2Reply
  • Youdo ThirakulPro Member
    Anchorage, AK · Member since 2017 · 96 posts · 26 votes
    9y

    Best of luck dude.  I never thought of paying someone to auction for a house for me and now i know never to do that either.  Lesson learned, wish you the best of luck.  I do like the Airbnb idea if you want to keep it, especially in WA, real estate is going up and doesn't seem to be slowing down to much.  I've stay at airbnb in WA the last two time there and in talk with some friends there to do something like that.  

    1Reply
  • Brian Pulaski
    Flipper/Rehabber · Montgomery, NY · Member since 2016 · 2k+ posts · 1k+ votes
    9y

    Looks like you know this, but your best course of action is to get this house done and sold ASAP. Is the $420k figure you determined a good sales price, a high sales price, or a lower price to make sure it sells. Will the sale price/potential be any better come spring time? If you can get out of it breaking even, that is the best case scenario here, as I doubt there is much of a chance to make money on the house renting.

    0Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @Charles White,

    Well, since fix-and-flip looks like it might not work out as you'd hoped, have you explored how it would do as a buy-and-hold?

    If that doesn't work out, how 'bout doing a lease option on it?

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    9y

    @Charles White finish it and try to walk away with some money in your pocket. Even if you break even, the point is you saw it through to completion and paid all your bills. You walk away and that destroys all your credibility going forward.

    2Reply
  • Charles White
    OP
    Lynnwood, WA · Member since 2017 · 10 posts · 5 votes
    9y

    @David Dachtera

    Yes, David, I did explore that possibility, houses in this area appreciated 12 % past year and this market is HOT. However, after all my calculations it seems that I will end up with negative cash flow anyways. Playing the appreciation game while having cash negative cash flow could be a risky move, but I haven't discarded yet. I will for sure consider doing a lease option, I've got to run numbers

    0Reply
  • Charles White
    OP
    Lynnwood, WA · Member since 2017 · 10 posts · 5 votes
    9y

    @Youdo Thirakul , market up here is crazy. Appreciation in some areas are making really hard to buy good deals, that's the reason many investors are considering buying foreclosures.

    Thanks for the good wishes 

    0Reply
  • Charles White
    OP
    Lynnwood, WA · Member since 2017 · 10 posts · 5 votes
    9y

    @Brian Pulaski , definitely, the best case scenario for me at this point will be breaking even,  if I'm lucky

    1Reply
  • Charles White
    OP
    Lynnwood, WA · Member since 2017 · 10 posts · 5 votes
    9y

    @Account Closed , I think that many big brokerage companies have a team of agents that specialize in foreclosure auctions. What they say is that they go to the field, that they even knock on doors and see if the property is vacant to get accurate numbers. I'm just a little upset about the numbers they gave me, it seems that in this case, they didn't go there to get a clear picture of the conditions of the house and that they estimate the ARV comparing this house with properties that have higher sqft and had other add-ons. Regardless, I shouldn't fall for it and do my due diligence.

    0Reply
  • Charles White
    OP
    Lynnwood, WA · Member since 2017 · 10 posts · 5 votes
    9y

    @Nghi Le Thanks for your input! valuable advise. I'll PM you

    0Reply
  • Tatiana Gershanovich
    Real Estate Investor · Seattle, WA · Member since 2014 · 156 posts · 141 votes
    8y

    @Charles White I'm so sorry to hear that! I don't think it will make you feel any better, but you are not the only one who fell for the ARV represented by the bidding company. Since we hold workshops for investors, we see numerous of examples of missrepresented ARVs, conditions and sq ft. Every week we get a questions "Should I buy on the auction?" And our answer is unanimous "STAY AWAY!"

     I would calculate how much you would lose if you finish when you think you will finish, accounting for all extensions (it will be 1 point for 45 days) and compare it to how much you will lose if you sell right now to another investor.

    Most likely you would lose less if you finish and will just treat it as expensive lesson.

    To minimize the losses you can sell on MLS yourself. If you email to me, I'll provide you some pointers for how to do it successfully.

    Good luck!

    1Reply
  • Brian Pulaski
    Flipper/Rehabber · Montgomery, NY · Member since 2016 · 2k+ posts · 1k+ votes
    8y

    Any good news @Charles White?

    0Reply
  • Ryan B.
    Rental Property Investor · Snohomish, WA · Member since 2015 · 25 posts · 7 votes
    8y

    @Charles White hope you came out of this alright. Any update you can share?

    0Reply
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