Seeking “Biggest Mistake/Lessons Learned” Stories for BP Magazine
Melanie StephensPro Member
Investor · Tabernash, CO · Member since 2012 · 11 posts · 237 votesSeeking “Biggest Mistake/Lessons Learned” Stories for BP Magazine
Most Popular Reply
Member since 2018 · 25 posts · 45 votes
6yOne of my recent investments. I purchased a house in Hampton Virginia, an out of state deal. My goal (was/is) to build a Investment business investing across the Country. I connected with a fellow BP member. House details, I purchased in 426 Chapel St Hampton Virginia, 23669. Purchase price was $65,000. Was planning on reselling at $160,000. I met the realtor that I hired and he showed me properties in January. I did my due diligence as far as area, and type of house and got a good feel of it, so I decided to move forward. Looking back, my due diligence worked, I purchased for $65,000 and sold for $159,900. My budget according to the contractor that I hired sent me a bid of $45,000 which in my experience where I have successfully invest seemed correct. Timeline, 60 days for rehab. Fast forward to the first day of work, contractor requested $10,000 for labor and material for a roof. I gave him $5,000. He finished the roof and started demo on the interior, so I sent another $5,000. My confidence in him was quickly growing with how fast they were moving. He requested another $10,000 so I sent him more money, there he started some framing, electrical, plumbing and drywall. He asked for another $5,000 for kitchen cabinets but and windows. (I bought the material, he mentioned he would deduct from what I owed him). I asked him to send me photos and updates, he rarely sent any photos and it took 3 days at times for him to get back with me. I knew in my head I gave him close to $10,000 to much already. At this point of the project we were hitting 3 months. I grew nervous and he kept asking for more money. I told him to work on the flooring before I send more, he acknowledged and said okay. Two days later he asks for money to pay his guys so I requested photos, again it took about a week to receive any. At this point we hit 5 months and my loan fees were growing. Fast forward I called for a construction draw, my lender gave me a lot less than requested. I then asked for photos of my project because my contractor rarely sent me any. Once I received the photos, I saw that only 30% of the work that I had paid for was completed. The contractor was getting further behind and decided to quit taking my phone calls. For about a month my project was sitting trying to find another contractor. Fast forward from this point, I hired another contractor who ended up more expensive than their original bid to me of $40,000 to finish the job. A lot of add ons and so called issues that came up. Job was finally complete and it took a total of 8 full months to complete (well over my 60 day timeline). The house due to horrible workmanship according to a lot of realtors in the area, the house took 3 months to sell. All in all I lost a little over $30,000 with extra time that wasn't anticipated and well over budget. What I learned was first get a home inspection not matter the cost so I know exactly the issues so that I do not have a contractor telling more issues came up. Hire the right contractor, interview interview interview. DO NOT PAY FOR WORK just because the contractor has to pay his guys. So many things I would change. Looking at the deal now, if everything went smooth with my contractor, the deal itself would have made money. I'm planning on moving forward in the future however I would like to organize and plan a lot better than I did.
Apologies if the story is confusing or choppy.
97 Replies
- 6yGregory SchwartzBusiness MemberRental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
Due diligence on the house but more importantly the tenants!
I purchased a 4 plex. I knew that 2 units were vacant but didn't request nearly enough info on the current tenants. One of the inherited tenants left mid-lease about 2 weeks prior to closing. She left a number of pieces of furniture behind and it became my job to clear out her belongings. Then about a week after closing the owner informed me that the remaining tenant hadn't paid that month's rent or the utilities. The applications for these tenants we're barebones at best with an equally basic lease.
In hindsight, I should have screened the leases, applications, and negotiated the purchase price based on what I found. The tenants cost me as much if not more than the roof I ended up replacing.
6 months later we've filled 2 of the 3 units. Long hard lesson learned
Schwartz Realty Group5118 Reviews - Rental Property Investor · Austin, TX · Member since 2015 · 45 posts · 27 votes6y
Originally posted by @Kevin S Porter Sr:
I made the mistake of trusting a contractor in San Antonio, TX. Paid him several thousands of dollars for work completed that was done subpar. I lost my entire investment and my livelihood. I will now obtain contracts for all vendors and vett those vendors extensively. I now am trying to start fresh from the beginning after being forced to file BK.
Hey Kevin! I’m sorry to hear what had happened to you. I’m curious to know the contractor’s name. The reason is I’m about to invest in SA and would like to avoid people like this. Thanks in advance, feel free to message me if you don’t want to put this person on blast for any reason .
- Rental Property Investor · Austin, TX · Member since 2015 · 45 posts · 27 votes6y
Originally posted by @Collin Corrington:
I'm due to close this week (fingers crossed) on my biggest dumpster fire of a deal, AND it looks like I might actually make a couple grand off it.
I found the deal marketing to foreclosures. Single mother of four that ran a daycare out of her home. She was $14,000 in the hole and couldn't lose her home and only source of income. Her story tugged at my heart strings.
She owed $120,000 on a house that I had valued at $165,000. So I proposed a "sub-to". The way I saw it, $14,000 for $45,000 in equity wasn't a terrible deal. Her mortgage payment was $1,200/month and I told her I would rent it back to her for $1,300/month for 1 year and then reevaluate.
I did the sub-to as thoroughly as I knew how. Got her to sign a POA on all things mortgage/house related. Had my attorney run an opinion of title. She had cosigners (her parents) on the loan, so we checked them out too. I also check that she had all the state required insurances/documentation to run a daycare.
As I'm sure the experienced investors can predict, she was late on her rent every month. A constant stream of phone calls and texts to get the rent from her. Finally one day she asked if she could prepay 2 months. Absolutely! Come the third month she was MIA again. After a week of zero response from her it was time for me to evict her. I typed up the letter for her door and set it on the counter to take to the house the next day. A few minutes later my wife set a letter from a lawyer on top of it.
The letter was to notify me of a potential lawsuit. An 8 month old baby girl had died in her daycare, which was in the home. Being a father, my heart broke. Being an landlord/investor, I freaked out. Honestly, I didn't have insurance to cover this sort of thing or have any clue what to do. I wanted to call the mother, send her flowers, something...but my lawyer insisted that I stay out of it to prevent any admission of guilt.
My lawyer also told me not to evict her until I got all of this figured out. Turns out the baby had died of SIDS and I nor the tenant were not liable. However, it didn't mean that lawyer was going to stop trying. After about 5 months of me paying the mortgage we finally got everything settled and it was time to evict her. Another 2 months of mortgage payments. All the while, no communication from the tenant.
When I finally got the writ of eviction, I went to serve it to her and the house was vacant and trashed. No idea for how long. And honestly I was out of cash. I had a few other deals going on and 7 months of mortgage payments and lawyer bills. A few more months went by with me scraping together the cash to keep the mortgage current.
Finally, a friend of mine that was wanting to get into real estate investing got me talking about this deal. We decided to partner up. She would bring the cash needed to rehab. Her husband is a GC so he would do the work and save us some money. We would split all funds at the end.
Naturally we finished the 2 month rehab and put it on the market about 2 days before they shut the world down due to COVID-19. And so it sat, beautifully rehabbed, for another 2 months with very few showings. 4 more months of mortgage payments.
Finally, we got a full priced offer on it. 195,000! The rehab came out great and we were able to add some sq footage. They asked for $10,000 in concessions which I was hesitant to give but I wanted this house gone. I got them hooked up with my loan originator and 24 hours later she tells me that he is on the Federal "do not loan to" list due to unpaid student loans. She says he can fix it but it is a documentation nightmare. And like clockwork I got 3 more offers with in 48 hours after this news. One for cash, one for over asking, and another similar to the one we got.
During the inspection we come to find there is a foundation slip and now we have to tack on foundation repair. Then the house appraises for $5,000 light. Then the doozie...as soon as they issued the closing disclosures the title company calls me to tell me that both of the cosigners, who have very common names, are showing up all over the place with child support and tax liens. The parents of the lady who I haven't spoken to in over a year. All I remember from the purchase is that they live 5 hours away. And of course I cannot find any contact info in my files.
After 2 days of freaking out on this note, through the grace of God, my lawyer found a 2 year old email in which I sent her the cosigners identifying documents. Title informs me that this will suffice to disprove the liens. Whoop!!!
But wait, there is more....while we're trying to get to bottom of the lein sitation the mortgage company sells the mortgage. 2 more days of getting a new pay off.
As I write this we are due to close Tuesday (and I'm probably jinxing myself writing this). And it looks like I'm going to make around $2,000 profit when this is all said and done.
Lessons learned:
1. Don't let tenants stay. This is said all over BP. They're behind for a reason and are unlikely to change their behavior.
2. Get more insurance. Crazy things happen, be prepared. I thankfully didn't need it here but I would have felt a lot better with it.
3. Keep better records of the people you buy from. You never know when you'll need it.
4. My wife has informed me that I'm never buying another house with a business in it. There is additional liability when a business is in the home.
5. Communication is king. With everyone! My partner in the deal was freaking out but knew I was going to take care of her and figure it all out.
6. Don't give up. This was without a doubt an exercise in persistence. And I passed the test, barely.I felt like I was in the middle of a whirlwind just by reading what happened to you so I could just imagine what you’ve been through. Good for you that you’ll make some money out of this not to mention the boatload of lessons that comes with it. Cheers!
- Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes6y
@Melanie Stephens
Biggest mistake. Not starting sooner!
- Real Estate Agent · Dallas, TX · Member since 2019 · 14 posts · 3 votes6y
We are about to finish our first investment property, where everything that could've gone wrong pretty much did. Our contractor stole from us, craftsmanship is TERRIBLE (lots of pics to prove it), he basically robbed Peter to pay Paul. We are now registered with the city and finishing the project on our own. It was originally going to be a buy and hold, but we instead are selling so we can pay back our investors, and still make a bit of cash to put into the next one. So many learning experiences, the little things that you don't think of when you're going into this. I'd be happy to share my story in more detail!
- Rental Property Investor · Russellville, AR · Member since 2014 · 688 posts · 509 votes6y
Contractor management..... On my very first property, I went with a plumber/electrician that was highly recommended by a carpenter I was using. This plumber gave me his quote and I was very happy with it. It was competitive, but just barely. He was about 15% lower than the other quotes I had received. Anyway, we get the job underway and he misses his promised work start date by three days. Ok, I get it. Sometimes emergencies come up. I can look past it. A couple of days into the job, he tells me he has another emergency come up and he has to go work on it. Ok, but I can't keep waiting on you. He finally returns about three days later and gets back to work AT A SNAILS PACE. The ten days he promised the job would take finally comes to an end and he hasn't even started installing new pipes/wiring. He takes advantage of my inexperience and tells me that he can have it done in three or four more days... Ok, but last chance. I drive by the property two days later and he is nowhere to be found. Turns out another job came up that he needs to work. I finally have enough and tell him to gather his materials and leave the site. All hell then breaks loose. He calls the city inspector on me for work that is "illegal". The inspector basically rolls his eyes, but this takes several days out of my timeline. He then verbally berates me at the city offices. When all is said and done, he ended up stealing several plumbing fixtures, all the copper piping he removed, a 4-piece shower, and several electrical components. The lesson learned is to be very cautious of the cheapest guy and always search for more references.
I did get a little satisfaction when I heard a friend of mine's dad had hired him for a new construction. After hearing my story, he lost that job before it ever started. Karma is a _______!!
@Collin Corrington Thanks for posting your experiences, I've learnt a few notes of caution.
- Waltham , MA · Member since 2018 · 35 posts · 6 votes6y
Hi, missed a $10k mistake in contractor quote...
- Member since 2020 · 3 posts · 3 votes6yThanks for all the helpful advice and wish you all health and wealth!!!!!
- New to Real Estate · Dallas, TX · Member since 2020 · 94 posts · 20 votes6y
Hi BP Family
It's a lot of horror stories told here, and many lessons to ponder. Here's my horror story, although just more of a lessons learned.I placed a contract on a house in Oak Cliff, TX (Dallas proper) the owner was asking 110k for a 'shotgun' floor plan, 4 bed, 2 bath, 1720 sqft built in 1957, remolded in 2003. The comps I pulled on the property told me that, the house was worth only 85k. So, I knew going into this deal that I had to persuade the owner to come down off the asking price.
What I discovered was, the owner would not budge so easily, no matter what offer I had on the table, 85k, 87k, 91k all turned down. No matter what the rehabbers were telling him, no matter the differences I outlined in evaluating houses last sold (new, old, or remolded) in the area verse constructed homes sold. He wouldn't budge. So I formed a new strategy, (Although it wasn't quite true)
I told him, you've been trying to sell this house for more than a year now,(true) what have people been telling you about getting the finance to purchase the house? he said, the finance kept being rejected at closing, I ask, do you know why? he said, I don't know the real reason, but it kept happening.(bingo!) I said, I found out why the banks are not financing homes like yours, if houses were built in 1980 (not really) and under, the up keep and liability is to great for banks, and financial institutions to bear. He bought it.
Thats when I said, lets do two things, lower your price a little and I'll find people who are "cash buyers" to purchase the house, keep in mind cash buyers were the main ones making offers in the first place I just didn't tell him that. So, he agreed to 97k. But here was where I learned another lesson. An real estate agent brought a client to look at the house and he loved it. Her and I settled on a purchase price of 105k and she agreed to take $1800 for her services, but when the contract was sent to me to sign she had $3000 on the deal. we went back in forth about her scheming, till the owner call me and said take the deal NOW! so, I did.
Lessons learned, Always prepare for a "Hard Sale" before you go under contract, and never agree on "back door" contracts verbally.
Well, here we go. My biggest mistake(s) bled over two properties.
-I bought a house with a capital partner in River Forest, IL for $305k (PP included architectural plans). Since the plans came with the property we were VERY confident in our rehab budget. The problem was that the plans weren't approved by the city. By the time the city got done changing the plans, our rehab budget went from $90k to $154k.
-I hosted 5 local high performing brokers approx 6 weeks before completion. 2 said they predicted a sale of $625k, 2 said $650k and 1 said $615k. We hired one of the Realtors that predicted $650k. We ended up selling at $550k, but the worst part about that is it took 7 months for us to listen to the market...while the HML 12% interest was running the entire time.
Lesson: Value is based on what someone will pay, regardless of how much you feel it's worth. Drop the price aggressively until it sells. Time is just as important as the profit.
-After we received the BPO's for River Forest (but before sale), we were presented with another opportunity in Wilmette, IL. The same capital partner and I decided to purchase and get the next one started...like a well oiled machine. We decided to finance the purchase and a portion of the rehab with the idea of rolling the River Forest profits into the remaining rehab funds needed to keep the high percentage loan down. When River Forest sold for $550k, the holding costs and interest ate up all of the profit leaving us without the construction start up costs (HML works on reimbursement). I was able to contribute $10k and my partner put up $5k (initially) to get the project started. Needless to say, the rehab took forever @ $15k at a time on a $250k project. Instead of being able to send full crews in there, only one trade could work at a time. When they finished, everything stopped for inspections and draw requests. Each time we stopped, it was 1-2 weeks before we received the draw and could continue. We added more money throughout to cut down on draw requests but we limped through that project from beginning to end. The property took approximately 15 months to complete. We initially planned to be in and out in 6-7 months.
Lesson 1: Do not count your wins until the property has closed.
Lesson 2: When a seller includes unapproved plans, that is a huge red flag to dig deep into why they aren't doing the project themselves.
-For anyone reading that is looking for closure, Wilmette was purchased for $525k, rehab was approx $250k and we sold @ $875k...despite having a $950k appraisal. Again, costs of the project ate all of the profits. Money lost aside, that was 2+ years of expected income gone and created a big hole I had to get out of.
Lesson 1: While they look official, appraisals are just one person's opinion.
Lesson 2: As soon as we realized that we didn't have the sufficient funds to get through the rehab properly, we should have sold the project.
Notable project mistake made:
-I JV'd with two inexperienced investors (2 males). One of their wives wanted input on finishes. We had nothing in the agreement that allowed me to prevent this. At the end of the project, the investor wanted to purchase the property with his wife at a significant discount. The relationship soured when I refused. The property was in North Center in Chicago.
Lesson 1: If you're going to JV, there should be one person in charge. It's extremely difficult to rehab by committee.
Lesson 2: I now structure my agreements with investors so that I get paid for work performed rather than an equity stake. This gives the investor complete control over the project and control over the exit strategy as well. At that point they can keep it for themselves, keep it as a rental or move into it if they prefer.
While I don't necessarily like putting my dirty laundry in the street, my hope is that someone reading this can avoid my mistakes.
- Member since 2020 · 6 posts · 5 votes6y
Location, location location!! A nice house or a great deal are meaningless if there are no services nearby, the commute is too hard for renters, or if the neighborhood is sketchy. KNOW the area! I once purchased a townhome in area I had no idea about and realized too late that the home values were decreasing and the neighborhood was tanking. Became very crime ridden. There was literally a small riot outside my unit one day when I was home - with my kid! I let that place foreclose when I couldn't sell OR rent it. Value decreased over 50K in a year. I also purchased in a rural area that had no stores nearby, no malls, no gyms (although it was a ski area in NJ - that was nice), nothing! I had to pay buyers closing costs to get rid of THAT! I also purchased a beautiful loft with an ex years ago - there was NO commercial business to contribute to their tax base in that town so when we purchased it, the taxes doubled! Essex county NJ is very bad for that. So, my point is, do lots of reconnaissance regarding the location before purchasing. These experiences are the main reason why I am gun shy to buy now!
And thanks for letting me share! Phew! feels good to get those stories out!
- Member since 2018 · 16 posts · 12 votes6y
The market I invest in is a beach community near a university, so the rentals range anywhere from $500-700 per bedroom during the school year and weekly during the summer.
I'm familiar with the market, as I used to live there. My first property went incredibly well. I bought it at the right price. No emotion, I didn't even particularly love the house but the #s worked and I could add a bedroom cheaply. I established my walk away purchase price # and I walked away once that was rejected. Two months later, the seller came back and I got the deal at my #. Then, my second property......was a totally different story.
Lesson 1: Don't scale too fast.
OK, going from one property to two may not be impressive scaling, but I got a false sense of security from how well property #1 went. I bought it right, renovated cheaply adding a bedroom and had it rented before I made a mortgage payment.
The 1st mistake: I went to view the second property before I was really ready to be looking. I needed to build up more reserves. I was overconfident and enthusiastic and felt like I could just will this thing to work. I felt unstoppable. So, I looked. What's the harm, right?
Mistake #2: I got emotionally invested in property #2. I pictured it as a second home, vacation home, eventual retirement spot - fell in love with the location. This clouded my thinking. If I didn't love the location, I may not have bought it based on the numbers. NUMBERS DON'T LIE, but emotions do.
Mistake #3: I talked myself into making the numbers work, so I bought it a little higher than I wanted to, but the #s still worked as long as I could get through the first year without having to repair anything huge. THAT is a big and dangerous assumption. The water heater went, the stove failed, the washer/dryer broke, a root grew into the sewer line and backed up pressure so that the cap blew off the sewer pipe in the crawl space, so we were flushing everything into the crawlspace......expensive clean up! Oh, then the furnace went, mid winter. Can't make this stuff up.
Next time:Lesson 1: Run the #s including updating the mechanicals and appliances and have at least a six month reserve. Sounds so basic, and it is.
To be fair, I didn't see the potential for the root issue coming, but now I know that the weeping willow roots cause havoc frequently in this area so I'd probably have someone do an exploratory roto rooter or something next time!
Lesson 2: Always set a "walk away" offer # before I begin discussions and be ready to really walk away.
Lesson 3: NO EMOTIONS.
Would love to talk with you about this if this story fits what you're looking for.
Judy
- Member since 2020 · 1 post · 0 votes6y
@Michael B. Just curious why it would be a mistake to buy off of MLS? As long as the price is right does it matter where the deal comes
In?
I’m a rookie so this could be glaringly obvious lol thanks in advance!
- Rental Property Investor · Lehigh Valley, PA · Member since 2017 · 200 posts · 191 votes6y
My biggest mistake was not doing research on local government fees and taxes and not calculating post sale property taxes into analysis.
In 2018 I completed a 1031 Exchange where I sold a 2-bed condo and leveraged the capital gains to purchase 21 units over three buildings. My first purchase was a 12 unit in Allentown, PA. Using the BP calculator this property provided a 13.8% annual ROI with a 20% upside in getting rents to market value and some promising appreciation value due to the neighborhood transitioning to a more professional tenant pool.
This property was purchased with a tax assessment at $312,400 but soon after purchase the city filed a reassessment appeal with the tax board seeking a $900,000 assessment. We also received three separate bills from the city- Unit registration fee $900, Business License fee $35, and a Business Privilege tax $120.
The additional $1,000 in fixed costs and potential for a tripling in my property taxes could drop the ROI to under 5% but there is still a lot of upside in rents to keep this a good deal.
Some lessons learned:
- Bank property appraisals do not scrutinize published tax information. This is surprising as they do such a good job deep diving rent and capital rate data.
- Local tax assessors are helpful and will provide how they assess properties- cost to build assessments, and income-based assessments.
- Central NJ · Member since 2020 · 7 posts · 2 votes6y
Melanie, my biggest failure is as follows, and it hurts to admit. LOL At the time I had been GC building homes and add-a-levels in my town for 20 years. Put a nest egg together had about 120 thousand or so. Wife and I decided to buy a house to flip, what could go wrong? I have all the trades, employees, vendor discounts, its a win-win. SURE. I bought the house in December of 06 for $510,000 put $25,000 cash down. The mortgage was I think around 4000 a month with taxes. Went through permitting started renovations in February '07, can you guess where this is going? Put about $40,000 cash into reno. went back on the market mid-summer of '07. Got an offer of $600,000 went back at 618. back and forth back and forth and we stuck at 610,000. they walked. So it sat 4000 a month, 4000 a month. so on and son and welcome the crash of 07 08. tho make a long story short. It wound up a short sale, I lost 125,000 dollars. And learned so many lessons. My mom worked in real estate she was an office admin with no license, but always told me to take the first offer it is usually your best. OOOPS she was so right. so here were are 12 years later and a bit wiser and I am jumping in again with both feet. Hopefully with better results. This is off the top of my head some 12 years later, so some numbers might not be perfect but you get the gist.
- New to Real Estate · Sacramento, CA · Member since 2017 · 32 posts · 19 votes6y
I bought a turn key $850,000 duplex in D.C with an FHA loan ($35,000) down with the intent to live in the basement unit and airbnb the top unit (house hack). However due to life changes, I was quickly forced to airbnb both units. The house was flipped with new appliances, granite counter tops, jacuzzi tub in master etc. The problem was all the other items were done as cheaply as possible and mostly glossed over in the inspection. I mostly blame my naiveness in humanity and eagerness to get the project going.. here are many of the items (not all):
- All 3 HVAC units went out in the first 3 months
- Both "high end" endless water heaters died within 6 months
- The 1918 LEAD pipe entering the home burst
- Some lighting was found to be battery operated instead of electric
- Unfortunately a rock from DC water entered the piping which resulted in multiple cancelations and major repairs
- No insulation between the upper and lower unit resulting in numerous noise complaints
- Pitch incorrect in back yard which results in flooding
- Plumbing piping incorrectly sized throughout home
- All gas lines removed and everything replaced with electric to pass city inspection easier (only house on the st without gas)
Oh yeah, furnishing a two units that can sleep a total of 16 people is not easy nor cheap (especially with a puppy). Little did we know DC a year later banned full time Airbnb rentals.... i still own the home, get a pit in my stomach every time it rains, it is cashflow neutral and am open to sell lol. That said, this property taught me more than any course or book in the world. I now have 13 SFHs valued at $5.7M and am thankful this home taught so many hard lessons early.My main lesson: Find your own inspector and hire experts especially on older homes or flips :)
-Blake
- New to Real Estate · Sacramento, CA · Member since 2017 · 32 posts · 19 votes6y
I also forgot, asking your then GF and now fiance to become a property manager of a 150k+ revenue producing business is one of the hardest stresses on a relationship.
- Contractor · Lansing, MI · Member since 2019 · 3 posts · 1 vote6y
Billy Daniel,
I don't know the laws in AR, but in Michigan, it is illegal for a contractor to remove materials that have been installed. They have become part of the property and it is therefor theft, to do so. You should reach out to a local attorney that is familiar with construction law in your area. If the same is true in your area, call the police, file a report of theft. Dont call the police first, as they may not actually know what the law says about this. If the contractor came back after you had ordered him from the property, you can probably smack him with breaking and entering, as well. Doesn't matter if they had a key and didn't physically break into the place. Its still a crime to come back and take things that you paid for. As an electrical contractor, I can tell you that scheduling is one of the hardest parts for a small company with limited resources (employees). Don't become too jaded with last minute changes. I have to move things around DAILY. It's annoying and frustrating to us, as well. Good contractors will be in communication, regardless. As for price, the cheap guy is that rate for a reason ;)
Duston
- Investor · Fulton, MD · Member since 2015 · 19 posts · 11 votes6y
Unfortunately, I have three huge mistakes that are embarrassing but I can provide additional details if selected.
1. Before I was an active rehabber, I was the lender to a contractor/flipper that rehabbed several properties in the area. I did a lot of research and validated references and felt that it was a safe bet. Unfortunately, he did very little work on the property and after 2 years, I finally took it from him. In the end I sold it but lost a lot of money on the deal.
2. I was just starting out and tried to rehab a property with unlicensed contractors and didn't get permits. Huge mistake that I will never repeat. The short version is that we got caught about 2 weeks before finishing and I had to rip out all of the drywall and basically redo the project with licensed contractors.
3. I am currently working on a project with a contractor that I had a successful flip with in the past. Because of the successful flip, I didn't monitor him as closely as I should have and got too far ahead of him with my payments. He was terrible on the new project and I had to fire him and bring on a new contractor. Time will tell how much I will lose but I am taking measures to try and recoup money for work not completed.
- Investor · Peoria, AZ · Member since 2016 · 114 posts · 163 votes6y
After my wife and bought two turn key properties in Kansas City, MO, we decided to try our hand at the BRRRR strategy. Since my wife and I are long time Dave Ramsey followers, she was able to leave her job last year and focus on real estate investing as well as pursue some other passions. We have been BIG Bigger Pockets fans for a few years, and we've listened to most of the podcasts, read most of your books, and are huge advocates for the brand.
We started researching markets based on advice from one of your podcasts - employment growth, income growth, crime, industries etc. We landed on Atlanta because we had some personal interest in the area and the culture. My wife took the lead from there as I am still working a W-2 as a professional sales person in financial services. She is very much the analytical person and I'm the "salesy" guy. She started shopping for real estate agents, contractors and property managers and was able to make some good connections fairly quickly.
We decided on a realtor who brought us some properties to review. We decided on a 12-- sq ft, 3/1 just outside of Atlanta but within the perimeter. Our estimates showed that we could pay $50,000, rehab for $50,000 and then cash out refi for about $160,000 ARV. Our realtor suggested a contractor and we were off and running without ever seeing the property as we live in Phoenix, AZ (obviously, we are living where we want to live but investing where the numbers make sense).
Now, bring on the challenges. Here's just a small list of some of the opportunities (challenges) we ran into:
-Day one presented our contractor with a squatter that was washing his clothes in our kitchen sink
-City of Atlanta is very difficult to work with on permits which delayed construction probably 60 days overall through the process
-Contractor spent two months determining if our house was in a flood zone
-Contractor had not worked on residential properties before. He was primarily a commercial contractor
-Contractor was not a communicator and really struggled with follow through
-When we flew out to meet with contractor and check on update, we visited the property before we were to meet with him. When we walked in, we found that his crew had "accidentally" gutted the entire house down to the studs even though we were planning on only replacing 2 full sheets of drywall
-Contractor's project managers were fired because they were stealing from the job site
-Rain, rain, rain - Need I say more...
-COVID - need I say more....
The list goes on and on, but thankfully, we are now 12 months in, the project is almost complete, and we are having weekly check in calls with contractor. In addition, we wrote up a contract addendum that is now charging the contractor for every month we go over the target completion date (now 5 months ago).
We should have our property ready to be leased within 30 days, cash out refi completed in same time frame, and we've almost completed our 2nd BRRRR with another contractor just down the street with much better results. In addition, we just had an offer on a duplex down the street accepted and we are having that property inspected as I write this post.
We've learned so much from this first BRRRR, and we're so excited to continue to grow our net worth through this great tool. Specifically, I would suggest the following to new investors thinking of using the BRRRR strategy:
-Always, always, always get an inspection on the home before you close on the property
-Interview your contractors diligently. Ask the tough questions like what happens if you go over budget, the time line, run into problems, who will be managing the project, what will the communication look like
-Have regular phone meetings to check on status of rehab and budget (we do weekly now on all of our projects)
-Create your own scope of work based on the inspect and then ask the contractor what is missing
-Work with multiple contractors
-Don't leverage yourself financially so much that you go broke if you go over by 20% or the project runs much longer
Overall, this has been such a fun experience for my wife and I to work through. We've grown stronger as a couple, and it's caused us to clearly identify our own strengths and weaknesses. We are very excited about our future in real estate investing, and our goal is to have 50 paid off doors within 5 years so let's connect some time to see how we can help each other reach our goals.
- Lender · Newark, NJ · Member since 2016 · 695 posts · 252 votes6y
dont be cheap and try to cut corners, it will cost you in long run.
i.e - dont go with cheap contractor cos of price
-dont be cheap and not pay for heat in middle of winter (lesson learned, it was 1st property)
-when you do have a good worker, pay them and treat them right.
- Hollywood Florida · Member since 2019 · 90 posts · 46 votes6y
@Vincent Morales thank you much for sharing you experiences ! Took a lot of notes from it. I sure you will kill it in the future !
- Real Estate Investor · Woodland Park, CO · Member since 2013 · 43 posts · 19 votes6y
@Melanie Stephens
After operating a high integrity house buying business since 1996, the government sued me. They claimed all my dealings with private lenders were securities, not exempt real estate secured notes.
The made allegations and ran press releases saying my company was running a Ponzi Scheme. Complete nightmare. Fraud claim dropped and was never argued. Yet I lost a $6 million portfolio, and my reputation.
They took over my 56 properties and defaulted on every underlying agreement. After 5 years I am finally sharing my story and lessons... and bouncing back stronger than ever
- Rental Property Investor · Minnetonka, MN · Member since 2018 · 35 posts · 10 votes6y
My wife and I made an offer on a duplex in Wisconsin. This was going to be an out of state investment for us as we currently live in Minnesota. Our offer was accepted and didn't realize that in Wisconsin the seller has the right to remedy any of the repairs that you request be fixed before closing. After seeing all the repairs that needed to be done, the deal didn't make sense from a numbers standpoint and we were basically locked into the deal with no way out. After a lot of back and forth the seller was nice enough to let us out of the deal but we lost our earnest money in the process. Hard lesson to learn!
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