A lot of this may be obvious to some of the readers, but I’m going to mention it anyway.
I own other property in New York and Miami and incorrectly thought that this qualified me to do a flip. Initially, I had thought of buying the property, fixing it and renting it, but now that I have actually spent time and driven around Miami Gardens, I’ve changed strategy to just flip it. Lesson 1, decide in advance your plans for the property. Buy to hold for rents, or buy to flip.
My second and biggest mistake was buying the property without doing an inspection with a GC to understand what my expenses were going to be. In 2017, 3/2 single family homes in Miami Gardens that have been remodeled sell anywhere between 180K and 220K. (Source https://www.realtor.com/soldhomeprices/33054/beds-3)
The family who lived there for 30 years never spent a dollar maintaining or doing any upgrades. Basically, the home looks (inside and out) as it did in the 80s. It was originally built in 1950s and aside from the stove and refrigerator, the kitchen shows that it is from the 1950s.
I met with two contractors. The first one, highly recommended, was nice and professional, two guys, each of them showed up in a brand new – or last year’s -- Ford F150. I try my best NOT to judge people based on what they drive, but I’m human. These two fellows spent over two hours going over everything inside and out; deep conversations in which I actually learned many things. I said I was flying back home the day after and would like a proposal ASAP. The day after I was also meeting contractor #2. I wanted to have both proposals to make a decision, but the another lesson is that proposals come with questions and with assumptions and you should take your time (between 2 and 5 days) to have your questions answered and then make a final decision. I received the proposal and almost had a hard attack. I was expecting something in the 30s or 40s, but they came in at 95K. …. I was going to lose money on this. Doubleshit, what have a done??!! These guys were high end and looked like they hand pick the projects they did and always delivered. I want to do a decent job on this house, but one thing I learned is to build and spend according to what the area supports. Don’t build the Taj Mahal in Miami Gardens because you are not going to get Taj Mahal buyers or Taj Mahal money.
I was so broken by this expensive proposal that I decided I could tackle some of the fixes myself and just hire these guys or another GC, for the tasks that absolutely required a license. So I went to the Building Services division of the "City of Miami Gardens", a very nice building. They were extremely helpful, I sat down with the Spanish guy in the middle window and explained I had just bought a house and wanted to fix some things myself. Of the 10 things I wanted to do, 7 required permits. Of those 7, three (AC, full electrical wiring and plumbing for the bathrooms) required licensed contractors. I could live with that; I thought I could get 4 permits as an "owner builder" (their terminology) and hire out the other 3. Until a supervisor overheard us and asked if I owned the property as a person or under an LLC. I had bought it under an LLC. As an LLC, which she kept referring as an investment company, I was no longer considered for "owner builder" upgrades. I told her I was the sole owner and she said that under an LLC, only a General Contractor could work on the property. I was crushed. As I gathered my papers and got up from the chair, I asked if I could at least remove the old kitchen cabinets and she said "you can't touch anything!" There are so many lessons in that paragraph that my head is still spinning.
The next day I met with Contractor #2. This guy was more reasonable and told me which items to first tackle and what could be done later, once the house passed inspection. He took all the info and will provide a proposal I’m hoping will be around 35K based on the approx. he quoted for the bathrooms. That amount I could live with and many things I will fix myself with my family (garden, interior and exterior paint, cleanup, fence, etc)
In essence, I failed to do my homework prior to purchasing the house. I should have used that time to meet with contractors and to understand what needed to be done (in detail) and what couldn't be done without permits. By the way, I don't oppose the need for permits. I know they are a necessary quality control mechanism. But I just don't like that I can't work on the house because it is under an LLC, even though I am the single-owner of the damn LLC. Any liability protections may end up being negated by the extra expenses I will have. Insurance for the LLC may also be higher.
Yep, tough lesson. But just do you know, even if you buy in your personal name, “owner builder” permits are only allowed if you are an owner occupant (not a flip) and you sign affidavits to that effect.
How did this end up? We’re you ultimately successful? And would you do it again knowing what you know now?
I’m looking at a nearly identical situation in a near by neighborhood. The house is currently completely gutted after the last owner (my mother in law) hired someone to remediate a mold issue. Their contractor dissappeared on them after doing little more than the demo and now the owner is looking to sell it to me for a hot price. It appears to be a great opportunity if I can pull it off but I’m very nervous about the pitfalls.
Thanks for sharing your story. It's good to know that we should buy in our names instead of as an LLC in the beginning. Your post was a great help to us!
James, the project is still ongoing as we hit the Christmas recess and Miami (being a Latin American country) stops working altogether during that time. In all seriousness, even the City of Miami was closed for a while and that delayed the inspection of the electrical work. This has been an education for me because finding the right contractors takes time and work. As I said, I met with three sets of guys and ultimately, it was the combination of one of them + having a family member of mine present that has made the project move forward. Without my cousin onsite, the work would have taken 4 months instead of 2 months. Before starting any project, visualize it from beginning to end. Not only will you need contractors, but you'll also need a competent broker to market the property. Have your funding aligned and be ready and open to accept that many unknowns will pop up and you'll have to adapt, solve the problem and move on. Don't get stuck on arguing with the plumber that he quoted you 2K and now extra work is required because the old pipes were rotted and it's 3K.
Look at the comparable properties in the area and come up with a reasonable average. In other words, don't take the top priced property and say "mine will be as good as this so I'll use that number". Don't be arrogant, be realistic. Suppose it could sell for $300K and you need to invest $100K over X number of months. What should be a good price based on those numbers? The purchase price of the property can by itself define your deal as a good deal or a break-even or losing deal.
This thing is not for the faint of heart and at some moments you will think that you spend all your money and 6 months of effort to break even. But don't lose hope and work hard at it. Again, be realistic and don't fall in love with properties, God knows there's millions of them.
For those new to this, I'd also recommend reading at least one book on flipping. Please, do not be mislead by what you see on TV. There's a lot of editing on those shows and they are packed to tell a story in 20 minutes that took six months to happen (impossible). They leave a LOT of mistakes and lessons out because the lessons are long and difficult to explain and the frantic pace of TV doesn't allow for that. Be ready to learn all those lessons the hard way. But rest assured that if you put in the hard work and are realistic about your expectations, and do your homework about all points mentioned here, you will reduce the number of unpleasant surprises and end up with an asset that can produce money for you in the long run (rentals) or result in a nice bonus if you end up flipping it.
Thanks for sharing. Permits do protect homeowners present and future from unsafe conditions, but 7 permits, ouch. No wonder nothing was updated. Must have a strong GC lobby effort therabouts ;-)
Wayne, you are correct about the LLC. In the end, I ended up leaving my property in the name of my LLC, even though my lawyer offered to modify -- if I wanted -- using a quit claim deed.
The electrical work is the one that should always be hired out to a professional. I have done this and the corresponding permits were filed. What I have seen is that other properties in the area are being fixed little by little, quietly and without every permit the city calls for. There are risks in this and I'm not advocating that everyone does this. What I'm saying is that you should evaluate the work that needs to be done and see if you can tackle it yourself. If you are careful about it and the times that you do it, you can do MOST of it without ALL the permits the city asks for.
When I first bought the house, I went to the city with the list of things I needed and asked what did I need a permit for. Of the 9 things I wrote, the city person told me I needed for ALL of them. Here's the list:
Windows and Doors, Remodel Bathroom, Fix Perimeter Fence, rewire all Electrical, create a second bathroom in washer and dryer room, repair Driveway (pour concrete), Install Central Air, Install New Kitchen.
My cousin is an engineer and knows about code. In addition to also being an engineer, I own other properties and know the difference quality work and shoddy work. Even without knowledge of electrical work, I didn't even think about doing this work ourselves. The electrical had to be hired out and the proper permits needed to be in place. The rest of the work on that list we could handle or have people who could.
Marian, I also believe in permits but I know the difference between bureaucracy and contractors funding the political careers of many in exchange for xxxx or 10 people working in a city office that can run with 4 and those other salaries being funded by permits for everything. There's gotta be a balance.
To each his own. Different strokes for different folks....
@Bill B. Thanks for sharing this ...a very big learning curve for me since I live close to that area and have been analyzing some properties looking for my first deal in that vicinity. Can you recommend any of the contractors you used and send me their details if possible? Thanks!
@Bill B. Hello Bill. Sorry to hear you have had some issues. I believe some of the issues you had would have not necessarily needed a permit. Such as remodeling a bathroom, you can pull a permit for it but if your just doing a cosmetic remodel (tiling, new vanity, mirror, bathtub etc.) it would have likely not been an issue unless you are changing the layout and moving around plumbing etc.. Also the driveway pouring concrete you can pull a permit, but thats something that inspectors aren't looking for. Unless you have actual layout change, pulling permits for everything has got to cost a pretty penny. If it is a simple chainlink fence that needs some repair, or a regular wood fence that needs some boards replace it would be ill-advised to pull a permit for those. Of course for all the necessary areas like electrical, mechanical & plumbing it is a must. Last thing you want is the house catching on fire.
I have a property an in Miami Gardens as well. Your correct on not putting in higher-end finishes. The area needs only the basic finishes. Many properties are old in the area, so as long as the materials are new you should get your ARV price as long as you understand the comps. Comps for a 3/2 run as high as 280K, but usually run around $210-240K. Once your finished with the construction, I would be happy to help a fellow an investor sell the property for a discount rate. I work with a few investors and usually do a flat fee to help save you money.
@Bill B. Thanks for sharing, I guess you learned a lot on this one, no worries we all make mistakes, please feel free to reach me next time if you want an investor on the area to take a look on a property
But how would they know? Who is really watching? What if you were to do some easier things like the cabinets and flooring and have a GC do the rest? Is anyone really going to investigate this?
Working with contractors in South Fl can be challenging especially during the holidays. You need to screen your contractors properly and check the dbpr for any incidents. Also, Knowing what permits are needed prior to purchasing a home is crucial as well to better help you calculate construction cost. If you need any advice with your current project I am always available.
Seems to me like you over thought things and involved too many people in your business unnecessarily.
Wayne, do you always need a permit to do work on your own home? I see a lot of homes in Miami being sold cash due to violations. There’s a tendency to hack up the house and make little studios here.
I think doing a flip without permits is a MAJOR risk, not worth taking. If you cannot budget the construction with the proper permit and contractors, walk away.
I once heard that a flip was done without permits (electrical mostly), they sold a house, it caught on fire and someone died. Guess who went to jail...the flipper. This may not be a common occurrence however doing any work on flips (or any rentals imo) without permits is foolish...
This is my wrap up post about this deal.
One day after the property listed, I received an offer for the full asking price. I couldn’t believe my luck and told the broker to decline it (to say no) since I was sure I would get more offers and a bidding war was to ensue, which was going to net me 10% above asking price.…..Wrong! Very wrong and stupid. Stupid and ambitious, but most of all, very ignorant and showing lack of understanding of the market for that area.
From a construction point of view, I went through hell and back dealing with Miami area contractors and learned many important lessons. There’s so much demand for construction work, that apprentices are posing as handymen, handymen as General Contractors, and GC as developers who won’t talk to you unless you have deep pockets and large projects. Lots of chiefs, very few Indians. I leveled with one of the guys and asked him about this phenomena and he confirmed that after seeing many handymen sell themselves as GCs, others were getting into the game and making much more money. You end up with lots of promises and no actual work taking place since they often commit themselves to multiple jobs at the same time. One guy I had was only able to work on Saturdays and some Sundays but he didn’t tell me this until after I paid him an advance. Lesson here: get references and recommendations, make phone calls, inspect previous jobs they have done by going to actual sites. Another lesson, you can save some money by using small contractors but very few will meet the dates they give you. Most of them will not sign anything and if they sign, will come up with enough creative excuses to NOT meet the dates while they tend to other projects.
Since I had failed to have the property inspected when I first bought it, I paid for that mistake dearly. I can’t think of one area of the house that was not repaired or right out replaced by my rehab. Everything was old and rotten showing 30 years of not receiving any kind of maintenance. Kitchen completely gutted and replaced. Bathrooms, completely redone, including most of the plumbing. Roof repaired. All windows replaced. Central AC new. Driveway redone completely. Entire electrical wiring replaced (the whole house). Landscaping completely done, including new trees planted. All new kitchen appliances, etc. I’m pleased to think that the buyer (a young family) ended up with a great single family home in a decent neighborhood and won’t have to worry about repairs for a looooong time.
All those repairs should have taken 2 months, instead they took 5 months and I blame myself for not researching and selecting a GC or a project manager prior to buying the house. And that is another very valuable lesson learned. Since then, I have listened to 20 or 30 podcasts and recently decided to listen to at least 2 per week. The amount of wisdom in these podcasts is invaluable. Learn about this business first, talk to people who have made mistakes and to people who have made money. Disregard 80% of what you see on HGTV since it is “Unreality TV”. Read these forums and ask tons of questions. In other words, get educated first or go into a deal (as I did) knowing that there’ll be lots of bumps and delays and arguments and upsets, but these are all important lessons.
The property sold two weeks ago. We received 5 serious offers and 15 bulls#it offers. After just two weeks of listing in March, we settled on an offer and signed contract in April. The title company and the bank made everything possible to delay this deal. I had bought the property cash before, but now that a bank was involved, they drowned me in requests for paperwork. The last thing I was asked was a list of improvements I had done since my purchase price was so different from the sale price and they wanted to cover themselves against fraud. This was bull on the bank’s part since the market had set the price, not me. While speaking about pricing, the bank-mandated appraisal came in below the amount we had signed the contract for. At that point, I was so tired, I approved the reduction in price and gave the buyer a big smile. From signing of contract to actual closing, 1 month and 28 days went by. Almost two months! The property sold in May. I could have waited for additional offers and since I was monitoring sales in the area using Trulia, I’m sure another good offer could have come, but the construction and the fear of another break-in wore me down.
The title company was also very poor at communicating and managing the closing. It seemed that we were playing that game where A tells something to B, and B to C and C to D and when it gets to E, it’s not at all what A had initially said. I found corrections in the documentation that neither the title company nor the attorneys found. A week before the closing, no one knew when it was about to happen. On Friday, I was told it would be the following Monday. On that Monday morning, no one knew at what time it was to happen. How does someone run a business that way? Well, that’s Miami for you. I have done 3 or 4 closing in NY and worked in Finance enough to know that’s not how business is done. In the end, I did not receive the check until the next day after the closing.
What saved this deal for me was finding an amazing broker who took ownership of the last construction jobs, the permits with the city and even drove by the area on a regular basis, after the property had a break-in one night.
In the end, I learned a lot in these months and that’s very valuable to me. I walk away with the experience and a couple of dollars to show for. In addition to all the other advise on this post, I also recommend avoiding remote projects, those you cannot visit on a regular basis. Unless you have a knowledgeable person of yours, someone you trust, who manages the project and drops by on a regular basis. Unless you have a GC who can do this for you and delivers on time and on budget.
Will I do it again? yes, but very differently and partnering with others to reduce the chance of making the same mistakes.
Bing T. In the future, you may want to consider the following MAO Formula that I use to determine my Offer Price, for Potential Flip Acquisitions.
Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.
I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything.
ARV - Desired Profit - Closing Costs to Buy - Repairs - 10% of Repairs - Holdings Costs - Concessions - Realtor Fees - Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer).
ARV: After repaired value or what you think it will sell for once repaired.
Desired Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. As a General Rule, my Desired Profit is $20,000 or 20% of ARV whichever is greater. To have an offer accepted, one may need to adjust their Desired Profit; however, it should not be below $20,000, or what one feels is acceptable.
Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees.
Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs.
Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, property insurance premiums, property taxes, loan payments, HOA Fees, etc.).
Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV.
Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV.
Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these.
This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing