Seeking “Biggest Mistake/Lessons Learned” Stories for BP Magazine
Melanie StephensPro Member
Investor · Tabernash, CO · Member since 2012 · 11 posts · 237 votesHello BP Investors!
I am looking for stories about your biggest real estate mistake, and what you learned from it, for BiggerPockets Wealth Magazine. If selected, your story, name and company will be featured in the magazine.
Stories will include details about the property and project, the types of challenges it created and (knowing what you know now), what you would do differently. Stories will be accompanied by high-quality images (of the investor and/or project).
If you have an interesting story to share that has some great lessons for other investors, please post a few short details here on the forum, PM me, or email me directly at melanie @ biggerpockets.com. If it looks like it could work for the magazine, I’ll contact you for more information and then possibly a more in-depth interview.
Looking forward to hearing your stories!
Melanie Stephens
melanie @ biggerpockets.com
One 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.
Our biggest loss has been a syndication deal. While the syndication leader came highly recommended, we have not made a dime. Going forward we will only invest where we have control over our ability to be profitable. Yes, we took advantage of the losses from a tax perspective. It's not enough. The investments we control are all-around more profitable.
@Melanie Stephens
I bought my first flip in a historic district. I didn't know how nuanced the historic guidelines were, nor did I realize how much neighbors could throw a wrench in your game. When I was nearly 90% done and already over budget, a neighbor complained and I was issued a stop work order. Then COVID happened. Filed for permits and the township lost the paperwork. Four months later, even more over budget the property is still sitting, I'm still waiting for permits and comps in the area have plateaued
I bought a property subject to the existing mortgage. The seller also had another lien on the property for some type of loan he received to pay property taxes for several of his properties. I knew I would be paying the existing first lien PITI but never computed I would be paying the second lien (at least I didn't structure it that way). It just didn't register to me. I was talking to my Attorney and she made a comment related to paying the 2nd lien holder. In my head I was like WTF, lol! Luckily the monthly payment of the 2nd lien was small ($150 a month) and my loan term was only 8 months. The Seller actually paid off the ~$6K lien in full with his proceeds from closing. I made him whole when I refinanced him out at 8 months.
Most of these fails seem to be because the buyer didn't do as much due diligence as needed. That's the one topic I try to cover as thoroughly as possible. Even when considering tenants! It's worth it to pay a few bucks and get extensive reports on folks.
Setting my asking price too low. My first investment property was with my Dad and it was also out of state. We made a good return and we were ready to invest closer to home. When we bought our property it was on the market for 90 days and when we sold it was not even on the market for 24 hours. Our Realtor was very helpful in setting the asking price, but in hindsight when it sold that fast we had it priced too low.
Hi @Melanie Stephens, I've made so many mistakes in the past 2 years that I even ended up on Bloomberg magazine! Long story short, I lost around $400,000 on a flip deal gone wrong in a suburban city in the Bay Area. We had issues with inspectors and contractors delaying our project by several months and by the time we put the home on the market, the real estate market had softened.
Another mistake is one that I'm currently dealing with now and it involves another flip gone wrong. By the time we were done with the project, the home wouldn't even sell for what we bought it for in as-in condition! We decided to convert it into an Airbnb rental to hold it as the market recovered, but as we know now, COVID had other plans for the Airbnb rental strategy.
We're now getting ready to put the home on the market to sell it and move on with our lives.
I have other stories that could definitely help some investors from making catastrophic mistakes and am glad to share them with you!
My biggest mistake was not knowing about future law changes that effect tenant/landlord law in my state. I bought 2 under valued 4 plexes in Oregon. They needed some work, and the rent were about $300-$500 below market value per unit. I figured I would put about $40k into each to bring them up to standards, then bump the rents to market value. Right before closing the previous property manager locked everyone into a 1 year lease, so I couldn’t bump the rents for the first year. During that year oregon passed a bill that enabled state wide rent control. So I am only able to inch the rents up %7 of the current rent, plus inflation (about 3%). I still like the properties, but I will be slowly bumping rents for the next 6 year to get to today’s market value for rent. If I would have known bout the bill ahead of time I would taken a more serious look at out of state investing. 🤷🏻♂️
These are all great post. I appreciate everyone sharing their experiences. Learning so much by just reading through them. Thank you all!
Hi Melanie, I think one investor already mentioned this below, but two of my biggest mistakes was not only overbidding for a property, but also not performing a home inspection. Fast forward months after closing, I came to find out I could have purchased the property for 10k below asking because of issues stemming from code violations that I had to get repaired like wiring and HVAC issues; all of which would have been discovered during the home inspection.
@Mario Russo thanks for sharing. I have a couple investment houses in WI. We live in Stillwater. I am having a hard time finding something to buy in our market. Are you having any luck?
@Sean Pan
Are you serious?
I saw quite a few failed flips in bay areas. Hope everything is well.
@Sean Pan I have seen a couple of flip catastrophes here in Marin within the past 8 months.
Case 1: Principal lender was in for something like $1.1 million. Other private investors were in for about another $300K. Property went on the market as a framed shell. We offered the flippers, who still controlled to property, $800K for the shell. They turned us down. I understand property went to auction and sold for $500K cash.
Case 2: flipper borrowed $700K from a HNWI for the purchase. Gutted the house and promptly got red-tagged with holes in the roof where skylights were to go. Lender took back the property. The place has been sitting on the market forever, now asking mid-500's. We kicked the tires and passed on it. Lender who took back the property will be very lucky to get $400K.
My FIRST deal when I was 20 yrs old: Mistake #1 -- let basically-retired grandma be my agent for the fun of getting her a commission check despite playing with literally all of my life savings in the process. Mistake #2 -- submit an offer and then immediately go on vacation with grandma and the rest of the fam for 10 days. Mistake #3 -- get back, get a home inspection done, realize the roof is trash, and realize it's already too late to request changes since the 10 days were up. In summary, basically I HAD to purchase my first rental property despite the crappy ~$11k roof or forfeit my deposit but I'll never make that mistake again and it ended up working out (because a bad hail storm came through and wrecked the roof even worse and insurance covered it) :)
We got ourselves into a pickle last winter-fortunately it all worked out OK in the end. We were looking to do a lease option and our Realtor connected us with a family she knew. These people had a condo to fix and flip and sell, and then were looking to get into a lease option. We agreed to finance the rehab on their place, place a lein for the rehab amount, and then purchase a house for them to lease option. Even though we had title pull the records, title missed (I actually still don't understand how this was missed) about $15,000 worth of medical leins/HOA leins on the condo the owners didn't disclose, and title didn't show them. 1) We would've been SCREWED if the owners decided not to sell the home, because then our rehab money was stuck unless they sold the property. We were also forced to accept breaking even and being lucky with getting our rehab money back out just to encourage the sale. We will never do that again. 2) Now we were stuck with these people living in a home we purchased (they had moved into the new property while we rehabbed the condo). As time went on we discovered they were less and less stable as the man of the family lost his job, then fell into drinking/depression (they had three kids under 7). We finally were able to get them to move out with the incentive of refunding some of their option consideration. The ONLY thing that saved us was they gave us $32,000 in option consideration up front which covered us. The other thing that saved us is that Colorado has a robust market. We ended up making $1500 both deals combined. But man, did we learn a lot...
it's encouraging to see all the RE activity in 20's & 30's. Only way to learn, take risk. But when it comes to tenants, get the skinny from an experienced landlord! I'm of an age where i have experience as a tenant so I am slighty aware of risk. Tenant foolery hasn't changed and never will. they will try any and everything. no respect for the lease they signed, etc. that makes me see red! and none of them have an attorney. maybe that should be a requirement. Maybe we should confer with their parents or relatives. Never know what you'll hear. Also a credit score less than 600 should not eliminate most applicants, everyone has horrific medical bills. I love it when they complain about how i interfere with their privacy when i am doing things that benefit THEM! Like I care about their furniture placement. Dog damage to lawns is such a problem i am considering not allowing dog if I have nice lawn. They dont walk their dogs, which is abusive. especially when the house is next to a lovely park. lots more but I've said enuf, you get the message. happy to answer questions.
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.
Why do you think both projects sold for around 100k less than originally expected?
Hi everyone!
All of these “Biggest Mistake” stories are so interesting and there is so much to learn from them!
Thank you to everyone who has shared their stories, both on and off of this forum.
Please keep the stories coming!
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Also, I am looking for additional “Biggest Mistakes” and “Lessons Learned” stories about TENANTS, in particular inherited tenants and/or tenant challenges that have come up due to Covid.
If you have stories you would like to share, please post here, message me on BP, or email me at melanie @ biggerpockets.com.
Thanks again everyone!
Melanie
@David Song yes, I'm serious. But luckily I still have my health :)
We learn our best lessons through our failures. Even though these failures sting (a lot), we can always make the money back in the future.