Flip/BRRRR going south, seeking help

Rehabbing & House Flipping
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Flip/BRRRR going south, seeking help

Jesse Rodriguez
Rental Property Investor · Los Angeles, CA · Member since 2020 · 141 posts · 61 votes

Hello,

I have a property under an HML that I was gonna BRRRR instead I'm going to sell because I underestimated rehab, rents and loads of other mistakes I made. The property is still in distress and I put it on the market to sell. It's been 3 weeks and only 2 people have came to see it. I've already dropped the price once and I'm afraid I'm going to have to drop it again. I'll be lucky to pay off that HML, might end up having to pay the rest of my own pocket. This is a nightmare situation and I was wondering if anyone had tips/advice/suggestions on what to do. I'd appreciate any help, thanks!

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Paul Azad
Member since 2024 · 162 posts · 232 votes
2y

you are not alone nor dumb, i read an American study that 40% of home flippers lose or only break even on their projects. please talk to an attorney with bankruptcy and real estate experience before filing as could have long term complications. Good Luck 

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  • Jesse Rodriguez
    OP
    Rental Property Investor · Los Angeles, CA · Member since 2020 · 141 posts · 61 votes
    2y

    @Jacob Sherman I owe 226k

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  • Jon K.
    Rental Property Investor · Perry Hall, MD · Member since 2016 · 588 posts · 600 votes
    2y
    Quote from @Jesse Rodriguez:
    Quote from @JD Martin:
    Quote from @Jesse Rodriguez:

    @Jon K. Thanls for the response. Your right about the lost price. I bought at 225k off a wholesaler, I thought the arv would be 310-325k but it's more like 240-250k. My rehab budget is 50k but after getting bids, it'll more like 88k. Market rent would total $2500. I'd likely be negative cash flow as well. So now I'm trying to sell without putting any work just so I can pay off that HML.

    No good way to answer without more information, but what I gather here is that:
    1. You bought for $225 and ARV is $250. That's a killer right there. But you were killed even in your original numbers. If you thought ARV would be $325 and your rehab budget was $50k you shouldn't have paid more than about $190k for it (about 70%). You always need cushion for cost overruns, closing costs, time delays, and all the host(s) of things that can go wrong with a flip. Even if your original numbers were right you were going to be working for free - 325-225-50=50k-holding costs-closing costs-taxes = about Zero. 
    2. Total ARV rent for 3 units is $2500? Must be small units, that's $833 per unit. What are local market rents for similar sized units in your area?
    3. I'd be a little suspicious of the HML because most want you to succeed - there's no glory in taking back a unit unless they've grossly underloaned on the value. Unless the HML is Joe's Uncle, who knows nothing about RE, they are generally not going to lend you something that's guaranteed to fail which is the case using your original numbers.

    If you're not on the personal hook for any deficiency, or don't have any assets, you may have to just chalk this one up to bankruptcy and learn from the mistakes. If all of your numbers are right you're unlikely to find someone who's going to take this off your hands without you bringing a check to closing. 
    2. 

     Thank you for the insightful response, I think you’re 100% right. You pretty much laid out the exact situation, so I’m wondering if I should fix and hold or sell for a loss. The problem is that it’s listed for 239k and I don’t think it will sell. So I’m going to lose money either way, so I’m trying to figure out how to lose less. 


    Your conclusion that you'll lose money either way depends on the timeframe. If you continue down the BRRRR path you will suffer a short term loss (short is relative of course) but if the property cash flows it will eventually make you whole. Hold it long enough and you'll come out ahead, even if that takes 35 years. So, the timeframe is a factor.

    Selling it at a loss might actually require less additional capital that finishing the rehab in the short term. Hard to say.

    I suggest talking to your CPA about both choices as well as a loss on a "flip" (which this would be if you were to simply sell it at a loss) is going to be treated differently than putting a lot of capital into something you hold as a rental. Obligatory I am not a CPA and this is not tax advice. At the amount of money you're going to have to put into this one way or the other, it's going to make a difference.

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  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    2y
    Quote from @Jesse Rodriguez:

    Hello,

    I have a property under an HML that I was gonna BRRRR instead I'm going to sell because I underestimated rehab, rents and loads of other mistakes I made. The property is still in distress and I put it on the market to sell. It's been 3 weeks and only 2 people have came to see it. I've already dropped the price once and I'm afraid I'm going to have to drop it again. I'll be lucky to pay off that HML, might end up having to pay the rest of my own pocket. This is a nightmare situation and I was wondering if anyone had tips/advice/suggestions on what to do. I'd appreciate any help, thanks!


     this market was flat for one year, best strategy is to rent it out for two years or you move there.

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