First Deal Gone Wrong

44 Replies

Hello all,


A business partner and I have found ourselves in a pickle with a single-family rehab project that we are looking to flip on the backend. This is a 3 bed 2 bath home that we found on Craigslist and purchased directly from an owner who was originally planning to flip the property himself.

The problem with this one is, the house is in really bad shape and needs much more work than we originally expected. Being first-time investors, we had connected with a contractor to do the work and came to find out on the day we got the contract that he was unlicensed and did not have insurance, etc.

Our inspection contingency period was 10 days with a 3-day contingency following receiving the inspection report. During that time, we continued to try and figure out how to make the deal work and not back out, so we overran the contingency.

Currently, we are in limbo waiting for the title search to come back before we close. However chances are, we will be contractly obligated to move forward with this one, so we need to make it work. It would be great to get everyone's opinion on how they would best go about making the most of this deal.

Here are the numbers for your reference:

- purchase price: $25,500

- estimated repair cost: $40-70K

- taxes: ~$4,250

- expenses: no legal fees (family is lawyer), inspection = $450, title search = $700; cash offer out of pocket, so no interest on a loan

- estimated ARV: ~$100k (conservatively high)

- down payment: $9,000 (yes, you read that right. why did we put $9,000 down? great question, who knows.)

Let me know if you'd like any more information. Thanks!

If there's no way to cancel the purchase, you could close and do a little cleanup and flip to a first time buyer who can do their own work. Flip to a better equipped rehabber who can buy you out flush. See it all the way through so you can take your exam at the end of the semester and see what you score and how much you learned. Is there extra land that could be sold off as a separate lot? Good luck.

Clint

When you say $9k down, do you mean you’ve already paid the seller $9k?  Or that is what you will pay?  I’m assuming you are seller financing or all cash since the price is so low. Did you put earnest money and an option fee down? 

How big is the house?  I have a hard time believing a house needs $70k worth of work and will only be worth $100k when done. You’re either fixing it up too much or you have bad estimates. 

If you’ve only paid the usual $1k earnest money, then just back out. They keep the option and earnest. 

What type of work needs to be done?  Can you swing a hammer or paint a wall?  If yes, try to do some of the rehab yourselves. 

If you aren’t willing to do some of the work and really already have the seller $9k...well that wasn’t very wise, and if you’re numbers really are correct, it might be with it to still walk and lose the $9k. If you’re all in for $101k in the worst case scenario, by the time you pay agent fees, you’re going lose $7k. If that is a likely outcome you’re better off losing the additional $2k and saving a few years of your life with reduced stress. 

@Bruce C.  Thanks for your input! To answer your question, we put $9,000 in escrow out of the $25,500 to purchase the house.

The house is about 1,400 sqft. $70K may be a bit high - we got a quote from the unlicensed contractor for about $40K. Assuming a licensed contractor will charge a lot more, however we still need to collect a few more quotes.

ALOT of work needs to be done - problems with foundation, electrical, plumbing, mold, etc. It's in rough shape. But yes, we can definitely help with the project. Problem is, the property is 3+ hours away from where we work/live so we can't be there every day.

We've considered backing out and losing the $9K, but might lean towards making the deal work depending on what strategies we can use.

Man. That's a long way away to do your own rehab. You'll grow to resent that place. I'd get the mold gone, stop the leaks, fix broken panes, and spend a Saturday spraying the whole place with kilz. Then wholetail that baby and try again.

This post has been removed.

I think I like Clint's idea. Buy it, clean it out and resell it to another investor or do-it-yourselfer. Unless you think you'll lose close to $9000 by just dumping it like that, I would do that. If you think it will lose you close to $9000 or more, then it's probably worth just biting the bullet and taking the $9000 hit.

Originally posted by @Jake Lord :

@Bruce C.  Thanks for your input! To answer your question, we put $9,000 in escrow out of the $25,500 to purchase the house.

The house is about 1,400 sqft. $70K may be a bit high - we got a quote from the unlicensed contractor for about $40K. Assuming a licensed contractor will charge a lot more, however we still need to collect a few more quotes.

ALOT of work needs to be done - problems with foundation, electrical, plumbing, mold, etc. It's in rough shape. But yes, we can definitely help with the project. Problem is, the property is 3+ hours away from where we work/live so we can't be there every day.

We've considered backing out and losing the $9K, but might lean towards making the deal work depending on what strategies we can use.

question is who the heck is representing you here.. and was the 9k into escrow Earnest money.. that cant be release without your consent.

just refuse to sign the release then you normally can split the baby down the middle and get half your money back.

if you gave them 9k without it being EM your screwed. And who every is representing you in the transaction has done a poor job

 

Sounds like a weird/strange/rushed deal.... my advice is to get out as quickly as possible for as little as possible. You’ll probably take a small hit on this one but so be it.... and maybe do a little more DD upfront. You gave them 9k because who knows why....? Back to the drawing board.

Lots of lessons to be learned here.  And who pays $700 for a title search?  First American will email you a full O&E for $150. Maybe that includes insurance?  

Anyway, at least it's only a $22k house.  To reduce liability I would remediate the mold and stop any leaks as mentioned.  From there you could sell with owner financing or outright. 

Even if this work(s)/ed out, keep in mind the tax rate on flips after SE, state and uncle sam get done with you is close to 40%. The 3rd half goes to the realtors.  The slice left in your case is then split in 2.  Woo--hoo. For future reference...

Next time I'd stick closer to home, have a contractor already vetted, do not miss the after-inspection repair request or cancel deadline and move to a hold strategy because of taxes and transaction costs. 

You've just attended a valuable seminar that will not break you.  Dust off and carry on!

@Jake Lord

The first thing I would do is get a grip on the rehab costs. There is a major difference between 40k and 100k. THIS WILL MAKE YOU OR BREAK YOU so get 2 more quotes.

I can redo an entire 1400sf house for well under 100k- full gut new everything at a modest level and id.guess our labor prices here are more than your area.

Your contractor was unlicensed but was he competent? Did you feel he was capable of getting the job done correctly and swiftly? Have you seen his other projects and checked references?

Im not advocating using a unlicensed contractor but depending on the scope of the work he might be worth hanging onto especially if your going to sub contract out all the other trades like plumbing electrical hvac etc.

@Jake Lord Hey Jake, first welcome to Real Estate Investing. Anything can happen!

Luckily for you, there is BP for the sniffer test. 

As @Steve Vaughan said, your returns seem razor-thin for all your effort plus you have a partner to split the profits with.

One thing to note is that many projects cost more than expected and take longer (believe me). 

Now, on the flip side (no pun intended), many flippers/contractors can keep project costs' down and hit their timelines no problems. however, you guys are just starting out and taking on a big project + a contractor who you guys are unsure of. You might want to figure out if you can wholesale this one to another flipper in the area. 

Whatever happens, I wish you all the best with this deal.

Going on to Craigslist was your first mistake. It has a reputation for shady operators. My next biggest concern is foundation problems. They can potentially be very expensive to fix. I agree with @JayHeinrich. Get as much of the $9k back as you can. Find yourself a reputable agent and move on. Next time, do a thorough due diligence before you sign anything or hand over any cash. 

@Jake Lord - you have some very good ideas here, from cut your losses and bail out to whole-tail it or turn into a rental. All good options, but which one is the best for you - it's always difficult to give someone sound advise based on a post. Before you decide what to do find someone competent in your town who will go look at the house with you and help you make that determination. If you search on BP by your town hopefully you will find some seasoned investor or agent who will come out and take a look.

Originally posted by @Marcus Auerbach :

@Jake Lord - you have some very good ideas here, from cut your losses and bail out to whole-tail it or turn into a rental. All good options, but which one is the best for you - it's always difficult to give someone sound advise based on a post. Before you decide what to do find someone competent in your town who will go look at the house with you and help you make that determination. If you search on BP by your town hopefully you will find some seasoned investor or agent who will come out and take a look.

that's a nice service.. and for a newer investor I am sure well worth the money.. especially in low value asset areas. were properties are block to block in man instances.. 

 

@Jake Lord , when will title come back? There's a chance that title will be clouded, and you could walk away from that and still get your EM back. 

For future deals, Keep an eye on those deadlines, and ask for extensions rather than run them out. 

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