Ups and downs of my first flip
What's up guys. I'm here to post a delayed recap of my first flip - delayed by 2 years! Once it was done, I needed to catch my breath and a cooling down period turned into a 2 year hiatus, a move from Richmond, Va to Virginia Beach, Va, and lots of time to think. After all that, I've returned to the investing world rejuvenated and ready to put new ideas, strategies, and systems I've learned since then into action.
Unfortunately, I put all my pictures away and can't seem to find them, so I don't have any visuals, which is a little disappointing, but here are the rough numbers followed by a pretty good overview of how things went:
House Purchase: $75,000
Rehab Costs: $63,500
Holding Costs: $32,000
Sell Price: $182,500
Profit: $12,000
I found this house driving through a neighborhood I had been pretty familiar with for a while. I sent several letters to houses that looked to be in distress, including this house, which had been in repair mode for quite some time. When the owner first called me, he said some of the things that had been going wrong in the property, and using that knowledge, I gave a ballpark figure of what I thought I would be able to offer. He balked, and I said "I understand, have a great day and let me know if you end up changing your mind." Two weeks later, he did change his mind and called me back.
When I went to visit the house, there was a lot more going on that the seller originally let on. I told him that I would have to adjust my numbers to $70,000. He said they needed $73,000 to cover their remaining mortgage, and I asked him if it would be ok if I brought my contractor by to take a look so I could get a more accurate estimate of the construction costs. Sure enough, I was able to come up $5,000 to give the seller a little bit more than he was asking, and we had a deal.
As a little background, I had previously gone through 2 or 3 other houses with contractors that were disasters, so I had developed a pretty good idea of what rehab costs were going to look like. I was pretty happy with myself that my estimate was pretty close to the contractor's.
I used a hard money lender to finance the deal, he paid $131,000 for purchase and rehab, and my brother and I split the remaining costs.
I had met the contractor I used through a recommendation and had walked through another property before this one to get a sense of how he priced certain items. He flips houses himself, so I was comfortable that he knew what he was doing. As we walked through this property, we bounced ideas off of each other and came to an understanding on what the house would look like, and I made the classic rookie mistake of not writing out a detailed scope of work.
The house itself was a split level house a little over 2000sf. It was in disrepair because a car fire in the driveway spread to the carport, which spread to the attic. Luckily, firefighters were able to put out the fire quickly, but as water was being sprayed on the attic, it fell onto the floors below and damaged pretty much everything. The owner had been working with his insurance company to put the house back together, but he was unhappy with the contractor he was working with and was ready to be done with the house and move on. The entire house was down to the studs - the kitchen was bare, bathrooms were bare, the only thing left was the plumbing. Half of the house was brick, which was able to stay, but the other half was siding which needed to be replaced and the roof needed to be replaced as well. The fire happened in November 2013, the seller and I started negotiating in June 2014.
So, we closed on the house in early July. The estimate was $56,000 and the timeline was 2 months, so I was hoping to have the project done and on the market by early September. Throughout the project, I loved watching the progress - I visited the house several times a week. Watching the house come back to life was as great as I was expecting it would be and is why I wanted to flip in the first place. I asked the contractor a handful of times how he was on budget; he assured me he was in good shape. He asked for one draw about midway through, and nothing else until he was done.
That's when he dropped the bomb that he was $7,500 over budget. Needless to say, I was not happy. If I had forced him to keep me up to date earlier, there were certainly things we could have cut that would have gotten us closer to budget. I certainly don't think he was out to screw me over, but I also don't think he did as much due diligence on the quote as he should have. Because he flipped houses himself, I think he was used to spending what he wanted on the repairs, and wasn't used to working on a client's budget instead of his own. It was up to me to make sure my scope was better developed and in the future, I will make sure written budget updates are provided at regular intervals to make sure there are no surprises.
Additionally, the project finished a month behind schedule, so we weren't ready to go to market until October. At this time, I was very anxious because allowing for a closing period, I knew we were starting to get close to closings near Thanksgiving, Christmas, New Year, etc, and I really wanted to be out of the house before buyers got caught up in the holidays.
For that reason, I priced the house fairly low, accepted the first offer, and paid more in closing costs than I wanted to make sure the buyer didn't back out - I had it under contract in 4 days.
So, things to improve next time:
-Create a more detailed scope of work.
-Get written feedback from the contractor at regular intervals to ensure project stays on budget.
-Stay patient when selling the house to ensure I get a good value for the product. I'm not a guy that's going to be so stuck on my selling number I'll let the house sit forever, but I'm sure I could have gotten a better deal on the back side if I was more patient.
-I blew the closing costs on the sell end. It's so normal for sellers to pay the buyer's closing costs, and I underestimated the closing costs on that end.
So, things I did well:
-My numbers were good. I did underestimate closing costs, but I did have them included. Even though my contractor was over and I let it go for less than I expected, I included everything I needed to include and if I had taken a better approach to keep the contractor in line, I would have been on point.
-I stuck to my number when the seller initially said it wouldn't work.
-I helped someone who was in a bad situation get out from under a problem house.
-I renovated a house that improved the quality of the neighborhood and increased home values.
-I made money!
Now, after 2 years away, I'm so excited to get back into more flips down in Hampton Roads and Virginia Beach and hope this becomes a full time venture.
Thoughts? Questions? I'm open to constructive criticism as well, but only if you pass on helpful advice you've gotten as feedback from one of your mistakes as well so we're sharing as much information as possible!