First flip & the death of a partnership: Metro Orlando
First flip in Metro Orlando with photos! For my purposes, I define Metro Orlando as everything within a 1-hr commute to downtown Orlando. I use this definition because the actual city limits of Orlando are quite small (at about 240,000 people) while the metro is about 2.5 million people. This story takes place Dec 2017-September 2018. I'm finally getting around to making this post a year later!
Purchase Price: $56,000
SFR: 3/2, 1232 SF, Wood frame on block foundation, Built 1986
Distance to downtown Orlando: 45 minutes
Realtor commission: 6%
Labor partner profit split: 50%
ARV/Sale Price: $129,900
Hard Money terms: 10.5% interest, 4.5 points, 9 month amortization (with no payments)
At the outset of this project, I had 4 rental units and I took this on as a starving Realtor with no clients and no business. I had quit my high-paying job in pharmaceutical sales, and relocated to Orlando to try to make it as a Realtor a few months earlier. I had to find a way to provide for my family, and my wife and I had always wanted to do a flip. I cashed out my 401k for the down payment and initial funding, and used the cash flow from my rentals to keep the project running between reimbursements from the hard money lender.
During one of my many days sitting at the brokerage office browsing through the MLS, I came across this deal. The price tag immediately caught my attention at $67,000 (it's uncommon to see SFRs in Metro Orlando under $100k on the MLS) and it had been on the market for 28 days. I immediately jumped in my car and drove out to see the property. I looked the place over and I figured that the ARV would be in the $130k-$140k range with possibly higher potential. I'd get the place rehabbed and relisted within 3-4 months. I made my initial offer with an inspection contingency and wrote in $0 commission for myself to help seal the deal. The listing agent confirmed with me that this move did indeed help me get the deal as they had received similarly priced offers from other "licensed investors" but they had also wanted a cut of the commission. With my own commission eliminated from the deal, the listing agent cut his commission to allow the owners additional wiggle room to accept my offer.
I thought it’d be a great idea to partner on this one with a handyman friend of mine who had done a lot of work for me previously on my personal residence as well as my rentals. I didn’t want to be swinging the hammers myself on this one. Instead, I wanted this labor partner to do nearly all of the work and receive 50% of the profit after closing. This again kept my operational costs low during the rehab (as was my intention since I had no income other than my rentals).
This property had been a rental-gone-wrong situation with a mom-and-pop landlord. The tenant went months without paying rent and wrecked the place. Apparently the lady was an animal hoarder as well, and even had free-ranging rats and an iguana roaming around the house.
The inspection found that the roof had been leaking (and would need to be replaced), some mold, and the septic system was original to the house as well (1986, ouch!). I used this information to ask for a few more thousand dollars to be knocked off the price. The owner assured me that the septic system had been recently pumped and was functional (more on that later). In hindsight here, I should have asked for that documentation and hired a separate septic inspector.
Our rehab included all the major big ticket items: new roof, all new flooring, new appliances, new cabinets and countertops, new windows, new A/C, all new paint inside and out, new septic system, etc. We closed on the deal and went to work on the rehab.
In the midst of the project, I finally (and thankfully) pulled the plug on my ill-fated Realtor experiment and got another stable W2 job as a construction manager for one of the nation’s largest homebuilders. I was forced to be a renter during said experiment, so immediately upon receiving my job offer I marched out and put a contract down on a new construction house for my family. I only needed to break even on the flip and finish on time in order to successfully close on my own new house.
Unfortunately, I would come to regret my partnership arrangement on this project. I had such a level of trust and respect in the relationship with my labor partner that I felt no need to put our arrangement in writing. In hindsight, this was foolish even in the best of circumstances and I should have had us both sign a detailed scope of work, construction schedule, and operating agreement. It would have provided us with an agreed-upon path forward when the project fell considerably behind schedule (which it did). However, the quality of his work and his ingenuity were always top-notch.
At about 60 days before the due date on the hard money (about 7 months in), the place was beautiful and we were finally able to get the project listed for sale at about 98% completion (minor punch list things remaining). Despite having a real estate license myself, I decided to go with a local listing agent who knew the local market better than I did (more than 30 minutes from my house). I knew I didn't want to drive to the project to do showings, etc. In hindsight, I should have listed the property myself and paid other agents to do any necessary showings. I needed the property to sell quickly to recover my equity and ward off the hard money lender from foreclosing. At the very end, the hard money lender began sending me threatening emails reminding me of the 10% late fee and 30% default interest rate (and at 30 days past the due date, they would move to foreclose on my LLC). If I had plenty of time to spare, I probably would have listed the property at $140k or higher but I had absolutely no time to lose so we listed at $5,000 below the listing agent's recommendation at $129,900. We received a full price offer within 12 hours of listing and went under contract. I sighed a breath of relief as I could now see the end, the recovery of my equity, and closing on a beautiful new house under construction for my family. The buyer's inspection brought me additional headaches to say the least. They came up with a typical punch out list that I expected, but the real kicker was the septic inspection. The buyer's septic inspector found that the tank was cracked and the entire system would have to be replaced. While I had budgeted $5,000 to replace the septic if needed, no indication had yet arisen to require a system replacement (other than being really old). I called a septic company and found out that a full system replacement would indeed be required, but additional equipment would likely be needed because of water table considerations. In short, the system replacement ran me about $8,000 and I had to get an exemption from the county on the location of the system because of the unique limitations on this property.
We finally closed on the deal with 1 week to spare on the hard money note. The total profit turned out to be $5,500 after all closing costs, commission, hard money fees, etc. Keep in mind this total profit still had to be split between the two partners in the deal. The stress of closing that deal with only 1 week to spare on the note with a very strict and severe hard money lender probably took years off of my life.
The silver lining in this story is that I did indeed finish my first flip profitably while learning a great deal about the game and myself during the process. Towards the end of the project, I even managed to acquire a triplex (50/50 with another partner) which increased my rental count to 7 units! I quickly cut my teeth as a construction manager at my new company and gained valuable experience in new construction, from bare dirt to completion. I was promoted and am now in the land development side of the company. On the side, I’m upgrading my real estate license to Broker and I plan to offer property management services to others soon thereafter. The first flip experience was stressful but still positive overall, and I look forward to doing more flips and tear-downs/new construction.
Great post! lots of detail and valuable lessons learned.
I am curious about the partnership aspect and how/why that fell apart?
FYI, I think it was Warren Buffet or some other financial guru advice that said: Rule#1 Don't loose money!
@Isaac S. As for the partnership, I began to question my labor partner's commitment to the project when he had several missed work days and short days when the project was already way behind schedule. Our arrangement called for him to do the vast majority of the work in exchange for 50% of the profit at the end. This problem was compounded when he took on additional outside time commitments during the project. My wife and I had to intervene with our own very significant labor contribution to rescue the timeline. That's about as specific as I want to be in a public forum because I still have tremendous respect for him and I hope to reconcile eventually.
I completely agree on the Buffet reference. The bottom line is that I enjoyed doing the deal, the design, the renovation, the adventure, and the education. None of the challenges of the project stressed me out--it was ultimately the due date on the hard money that I feared the most. And that's why I'll definitely do it again. I feel the experience did more for me than any boot camp ever could have.
@Andrew A. , great post! We see alot of partnerships creating relationship problems that take time to heal, if they ever do. Wishing you the best for yours. Hammering out operating agreements as well as other details for partnerships is well worth the time investment since it saves relationships, especially in family situations. Too bad we often feel this planning questions the strength of the current relationship, when in reality it strengthens the relationship.
Thanks again for your story!
But this is why I’ve never flipped.
You made $2750 over 9 months.That’s $306/month active income.And the asset is now sold.Forever.
Given all that stress and sweat, that’s abysmal return.After taxes,it’s even less.
But lesson learnt.
The closest I’ve come to a flip is my several BRRRRs.
You refy out,pay back lenders and partners AND keep the asset and small cash flow.Forever.
But I understand it’s not always possible for everyone’s circumstances.
Andrew, I'm the last person to comment on any of the shortcomings you had on this particular flip as i have not yet done one myself. But just a suggestion, i've been working with a company called Fund & Grow who i am in the process of securing Business Lines of credit with 0% interest. Perhaps you should contact them for more information, but i plan on using the business lines of credit they get for me to fund my first acquisition/rehab project. This help you to avoid the outrageous terms that Hard money lenders place on investors like us.
Tough lessons learned.
I have flipped a few, done some BRRs, and I have bought to hold.
My other business is a design build remodeling business. For that business I must manage my clients funds well so each project comes in on time and on budget. Same goes for my side projects naturally.
I have subs I call in for my side projects or better yet, I like to try any new subs out on my personal projects before they get to my private client projects.
Over the years, I have had subs say they want to "team up" on my flips or buy and holds. Yet it never seems a fit when I discuss things a little deeper with them.
They always they over value their time's value spent doing manual labor.
They do not take into account other costs like insurance, carry costs, cost of time, opportunity costs...
They always undervalue my time and expertise finding the right project and the money to do it, working weekends holidays and nights.
If they don't have actual skin in the game, as in they have put at risk personal money, they don't seem to be willing to prioritize my project.
They think just showing up is worth a lot. But if the lawn needs mowing or there is sweeping to do, a problem to solve...shrugs shoulders not their problem right?
They imagine they will be able to take on side jobs same time as this project.
They think its "OK" to not make the profit planned for when the project is first examined, i.e. they think failure is OK.
It is for these reasons I haven't yet found other contractors to team with. I will hire them but I won't put my money at risk with them. I think it comes down to the difference between employees and business owners. Anyone doing flips has to treat that flip like a business, not a job.
Cheers and better luck on the next one!
@Diane Menke , you're absolutely right about that oh-so-common mindset of valuing time over effort/completion. You're right about the skin-in-the-game as well. While my partner stood to lose the time value of his labor (really opportunity cost), it's not the same as losing already-earned post-tax dollars.
Thanks Andrew, You said it more efficiently than I did!
Thanks for sharing your story @Andrew A. . It's important to see that not every flip ends with $100k profit and everyone being happy. Especially the first one is mostly for the learning experience and not the profit. I think it was a great accomplishment that you still ended up with some profit after all the problems you had. I'm sure you learned a lot and will do it better the next time.
Great post. Thanks for sharing your story. It's good that you are able to see value in the lessons you learned along the way. Multi-family guru Rod Khlief likes to call money-losing deals "seminars" and talks about how much he paid for each of his "seminars." You were lucky - your "seminar" was free (even made you a little money). Next deal I'm sure you won't make the same mistakes, and your odds of success will be higher. Hang in there!
Hello Andrew, just curious, what lender this you use on this deal? And can you give a bit more detail on what the requirements were?
Andrew, thanks for sharing your story. As a newbie, its nice to hear a "close call" testimony amongst all the "home runs". It sounds like a lot of stress; but the way I see it, you got paid $2,500 to learn a handful of lessons that you can't learn elsewhere. Plus, you had enough foresight to not lose a ton of money.
I suspect that your handyman buddy realized that he was getting the short end of the stick so took on better paying jobs while you and the wife did the time consuming grunt work.
@Andrew A. You did great! You didn't lose money. Think about college. You go for 2 or 4 or more years paying people a ton of money to earn your degree. So you got paid a couple grand and learned a lot. That is a plus.
Take your lesson and apply it to the next one. I hope we manage to make money. We are about to purchase our first flip. We should know in a day or two whether our offer is accepted. We have done a lot of rehab on our rentals and our personal homes. Hopefully those projects will serve us well for our first flip.
At this point, we have decided that combining flipping and rentals will allow me to contemplate leaving my day job sooner than retirement and to work for us instead.
Good luck with your next one.
A very informative case study. Thank you!
Andrew, thanks so much for sharing your story and best of luck to you in your job with the new builder developer. If you need innovative land planning to give you an edge in land development, drive through Viera’s Trasona section. We planned it, there are many advantages to the design.
Andrew, great share! I too am in the throwes of a similar rehab deal. Only difference is it's not my first one, but I acquired a higher end property that was a"studs-up" rehab. My first and deadliest mistake was hiring a new GC over my preferred and long-time regular contractor. In less than two months these guys drained me of a significant amount of my budget. Then I lost a month of my schedule fighting legal battles with them after I locked them out. I finally prevailed but my schedule (and budget) was trashed.
The silver lining in the whole deal was my hunting down and getting back with my long-time contractor. He did more work for less in 4 months than the original clowns did in less than two months. And for significantly less $$$. I also had to bring in my partners to help me finish the project as I was working with a more sophisticated clientele on the high-end rehab and needed their guidance on the finish out of the property.
We are 98% complete with the rehab and my partner-realtor is listing the property this Friday. The saving grace is that the average DOM for this neighborhood is less than 30 days for comparable properties to mine. We have a little more than two months before the private money guys come knocking, but I'm prepared to do what it takes to sell before then.
Bottom line, this was a true 70% deal when I went in. I made the cardinal mistake of using new contractor who was not "investor friendly" and spent like money grew on trees even though I had vetted them through other investors (more on that is a future post). Now, between blowing my budget, borrowing a 2nd note to finish and sharing with my partners the profit for their willingness to jump in, I'll be lucky to make what you did. But the lessons I learned were invaluable for high-end rehabs. I'll be staying away from the high-end properties for the foreseeable future as I recover through other means. But I definitely will not shy away from rehabs altogether from this experience; rehabbing is in my DNA. It is the ultimate in satisfaction when successfully done. And most of mine are successes as long as I stay within my abilities/limits.
Thanks for the heartfelt share Andrew,
@Robert Cantu , the lender was Ground Floor LLC out of Atlanta. They advertise on BP.
@Cary D Honganen , thanks so much for your post. I've always been interested in targeting the higher end flips, but conjuring up the down payment and rehab funds has proven extremely difficult so far. Ideally, I'd like to go for a major lakefront rehab/tear down/new construction in Metro Orlando. The area's accelerated pace of growth has meant that the housing needs have been met mostly by major "cookie-cutter" developers and unique well-located non-HOA properties are in short supply and high demand.
overall not bad then, just stressful. What would you recommend doing differently? sounds like you were good with the negotiation but not so much on due-dilligence, accurate assessment?
@Stephen Torti , I wouldn't necessarily fault the due diligence. I probably could have netted another $5,000 if I had put in greater care with the septic issue before closing. I think the real lost money was not getting it listed 2-3 months sooner and potentially making an additional $10-$15k more (counting holding costs and the luxury of a higher listing price/sitting time).
Yikes 4.5points 10.5% interest? I'm very sure you can find a more affordable lender.
@Pratik P. , yes I hope so at this point now that I have verifiable success on my first flip and experience in new construction as well. I built about two dozen vacation rental houses. Hard money lenders will typically reduce the down payment percentage for more experienced flippers as well.
Hey Andrew! Great post! So much detail, i love it.
I'm in the process of searching for my first flip opportunity. In retrospect, do you wish that you had chosen a simpler project for your first flip (i.e., not a defunct animal shelter)? I feel like for my first project, i am willing to take a smaller return in order to go through the process and learn the basics, and then graduate onto bigger, riskier jobs as I learn the ins and outs. Would be great to get your take! Thanks for the post again.
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