Painful First Flip Turned Flop. Any Advice??

30 Replies

Dear BP Community,

It all looked so good on paper, and then when the project started things did not go according to plan...

I'm dealing with a painful first flip that I still haven't sold yet but purchased in October. Pick an aspect of the flip and it went wrong: over schedule, over budget, manpower issues with contractors jumping off the job, design flaws, payment terms, forgot to fill the oil tank over the winter and ruined the radiators and downstairs flooring... The list goes on and on.

Although it's a painful experience, there was a lot to be learned here. My rental portfolio is doing well, and my job will help me slowly recover.

I'm wondering if there are any other first time flippers in the Lehigh Valley, Allentown, Bethlehem, or Easton who may have experienced something similar, a "battle scar" to share.

What have you learned through your failure? Did you try to flip again? What was the most important lesson you learned from your first flip? How did you pull through the challenge and continue investing in RE?

Thanks!

Matt, 

Thanks for sharing your post - I'm sure it took a lot to write down and admit failure. 

I have two similar situations on flips. My first two lost money both times and once it was really big (25%). I was inexperienced, listened to the wrong people for advice, and was too excited without enough due diligence because it also "looked so good on paper". On top of that, the one house was on the market for 3 weeks and was broken in to and they stole all of the appliances, FURNACE, toilets, AC unit, and other random things. I learned that vacant property insurance does not cover theft of materials inside the home. That alone cost 12k. It was awful, but I made it through the experience and learned a TON.

Now, I am thankful for the experience because of how much I learned and how strong I now am because of the loss. It happened for me to get better and become the investor I am today.

Stay focused. 

Nick

I have had a couple of bad deals as well @Mathew P.

They all ended up being from my lack of experience and being to trusting of other people 

BIG MISTAKE 

I am sure you have heard the old saying trust but verify,very true in this business

You need to be on the job everyday to make sure the work gets done properly or to your satisfaction, no excuses allowed on this one

Remember you only fail if you quit,if I can come back from my struggles you can as well 

Good luck on the next one

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I think he meant he paid for something not paying for. I think the first line of defense  is contractor contracts, if you say $3000 for plumbing, you should not pay a dime until it is done and water flows from that faucet. Investors are scared of a lien, the truth is, most liens don't go through, and an attorney that knows a lot about contractors lien is worth the consultation.

@Nick S. Thank you for the thoughtful response and the encouragement. Yes, it's humbling to admit the failure to myself and in public. But your insight is helping me to grow stronger too so thank you for that.

Sorry to hear about your first two losses (the theft case sounds like a nightmare). Great point about your learnings and the increased toughness as a result. It sounds like you really bounced back and have put the experience into perspective.

If I could ask: have you been focusing more on flips since the first two to make up for your losses/no quit attitude, or have you re-focused and ventured more into buy-and-holds?

Only asking because I tried the flip as an experiment to learn contracting but also have a (somewhat) successful rental business. This experience may be a "wake up call" for me that flipping is not my true strength and focusing on what I know best would be the best path forward.

But on the other hand I HATE QUITTING and want to prove to myself and the FLIPPING GODS that I can do this.

However the thought of focusing my energy/resources on rentals seems like a better fit and something I'd be more comfortable with.

Would you bounce back and try flipping again to prove you can do it and to learn more, or would you focus your energy on rentals?

@Mark Brogan thanks for the encouragement and support.

One thing I detest more than anything is quitting because of one setback. Not going to happen. Sounds like you've bounced back as well and share this mentality.

So question: If I focus on my moderately successful rental business and do not do another flip, does that make me a quitter? Should I do another flip to prove to myself and the universe that I can do it and nothing will stop me...
Or would I be simply dissipating my limited time/resources/energy by doing another flip, and my investing would be better off focused on my strengths of being a landlord?

John Anderson @Manolo D.

The payment terms mistake was that I agreed to pay the contract weekly for the work that was accomplished that week. It seemed fair up front... And what a mistake it was.

The challenge was that the contractor was jumping off my job to take care of other jobs, yet whatever he managed to accomplish that week was paid. There were 2 weeks of vacation in there for Christmas, an anniversary week of vacation, etc.

The result was little incentive to complete my job. That's why I still own the property even though it was purchased in October

@Mathew P. If you paid them weekly PER WORK ACCOMPLISHED, and assuming per contract terms, then you agreed to a price, why are you over budget? Why don't you have timeline clause? Vacations are ok, they happen, but I don't think a project, especially as small as a house take more than 4 weeks.

@Manolo D.

What you are asking makes sense after having gone through this process.

The excuses to myself at the time for not doing more due diligence/paperwork were: I know the contractor and trust him based on his established reputation with an investment group I (still) belong to. (and will continue to belong to because the buy-and-hold deals that come up are excellent). The people he works with are trustworthy and respectable. I assumed there would be more accountability because of this connection.

The reality: We didn't sign paper work, so there was no timeline clause, and there was no agreed upon total/completion renovation price or scope of work document.

Be gentle with your feedback after reading this. lol.

I'll always require a contract moving forward.

We have all made mistakes. Any investor that has not made a mistake is either lying or never invested.  This will make you stronger and as you said it will establish guidelines and rules to follow for the next one.  Good luck to you.  

The school of hard knocks graduates none.

@Mathew P. Haha, at first all questions were raised on timeline, then on payments. Now the question passes to your group, why they couldn't have advised you better. This project is an expensive lesson to pay, however it must be paid. I have been there, the other side of the coin though, lost more than 100k on a project, but, I had to finish. Learned my lesson, applied it, took another contract and recouped it after a dozen projects and after more than a year. I am thankful I lost on the first one, it lead me to a path where I could improve business and gave me the bullets that I needed to be bolder and stronger. If you stop now, you are stuck on where you started, maybe lower, but you must do what you need to, cut your losses and hire another contractor, move on, finish the job, rinse and repeat, now that you got a flip under your belt (assuming you'll finish and sell), your next should profit you and be better at it, dream big! Who knows, 2 years from now, you'll be flipping 5 at a time.

no it does not make you a quitter Mathew pezon, it makes you smarter than most since you figured out early on that you are already doing what you do best which is landlording

Now go buy another rental

Good luck 

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I also just finished a rehab. But it's not a flip. To say the least I fired the first contractor do to not pulling permits I hired another contractor that wasn't on the job and let his subordinates handle things. I picked the worst house in the city. Why you might say. Just so what could go wrong will go wrong. And everything went wrong. And that was the beauty. Now the place is finished which is a triple decker. I've accomplished a major goal. And now looking for the next one. The experience priceless. I found out what I needed to grow in an learned many new skills. Life is great. So Mathew my advice is to go to real estate meeting and constantly eat crap and sleep Realestate. 

Thanks Manolo D. @Mark Brogan

Thanks for the encouragement. Perhaps another flip will come up but Mark Brogan's advice seems to resonate with me: focus on my strengths and what I understand and am successful at.

All your input is uplifting. Thank you all!

This was a very interesting post.  I'm still a little confused about the best way to pay the GC.  Tomorrow, my team is meeting and touring a potential first flip.  I really want to learn from people who have been in the pits and have recovered.  To me, it doesn't get any more real than that.  With that said, I have two (maybe more) questions:  What is the best way to set up payment with the GC?  On a schedule once work has been completed or weekly?  My gut tells me on a schedule after work has been completed.  The other question is about insurance.  I have read many posts that say, just have your GC add you as an additional insurer, another says you only need Builder's Risk and then others say get a standard homeowners policy.  What's the best way to go and do you have any recommendations as to who to use?  Please help, I'm nervous about tomorrow and I really want it to go well.  Thanks so much.

@Mathew P.

Sorry for the delay.

Since the two challenges I’ve focused entirely on building a strong and profitable rental portfolio. I’m at the point where the cash flow is strong enough to easily sustain the holding costs of flips, and I feel like I truly know the markets that I would want to flip in.

As far as learning contracting, why not buy a run down rental? It’s just an easy way to learn, and your exit strategy doesn’t rely on a buyer, only a renter, and that’s much easier to put in place. Even if you renovate a little too much, you’re only going to get a better tenant (to a point). I learned half of what I know by working for other investors for free on weekends and days off, and the other half I learned by trial and error and youtube.

I hate quitting too, but leaving one aspect of real estate isn’t quitting the game. There are tons of ways to make money in this business. I’ve seen landlords leave because they hated it and went straight into holding notes – that’s not quitting to me, it’s finding the niche that fits you at the time and builds your wealth.

It’s not about proving myself anymore. I know I can do it, but now I know what I didn’t know before and I have the confidence and knowledge to do it right this time. Worst case situation now is I own a little higher end rental than I'd like. 

Well for one never ever pay a contractor the full amount up front, don't even pay half the amount. A good contractor might ask for a third upfront but you can work with them on that. Having worked for and been a contractor I would ask for the materials paid for and depending on the job a little bit as the progress moves on. If you have a $20k remodel or more you have to understand the contractor is worried about you not paying him, as much as you are worried about him taking off with your money.

Don't ever pay in-full until the job is done. Try to keep a sizable portion unpaid as an incentive to finish the job. That includes even a small trim piece missing or an electrical wall plate missing.

How you structure payments can vary. I'll tell you how I structure payments with my current contractor, but I will not say that this is the best way, simply that it has worked for me so far.

I pay the contractor for what they quote for labour, but reimburse them for materials so the materials are not included in the quote. I make sure I pay them back for materials as soon as they provide me a receipt and I know that is it on site, I don't want them holding those costs long at all.

For labour, I pay my contractor a small deposit (around 10% of the job) when they start. I then pay for the work they have completed, but hold back 10%. So if they have finished $10k worth of work, I will have paid them $9k. They get the last 10% after we do a final walkthrough/inspection where I point out the last minor things for them to fix. Once those last things are 100% done, they get 100% of the money after signing a waiver of liens.

Again, not saying this is the right way to do it, but it works for me and works for the contractor I have.

That's a tough post to post, so kudos for seeing it for what it is. One of my earliest forays into real estate, a house that I was building for myself/family, I lost my *** on. A combination of market forces, timing, construction loan delays, inexperience, and overbuilding (I'll get to that in a minute) sunk me, and it took me a while to recover from that beat down. But recover I did, and a lot of the lessons (in my opinion) have contributed to my buy & hold abilities today. So while it wasn't a flip loss, it was similar.

Thoughts:

1. Not every market is well suited for flips. There has to be a big enough cushion of space between purchase floor and sales ceiling to absorb the rehab & profit. Keeping in mind that rehab costs the same virtually everywhere in the US (more or less, with exceptions), the greater the distance between the floor & ceiling, the more probable it is that you can be a profitable flipper.

2. It's impossible to judge whether this is your strength from one house. The more important question is was the journey worth making again? If you hated the process from top to bottom, then you probably should move on to other forays. If you enjoyed yourself, even in the face of losing money, you may be on to something. But see point #1 before continuing.

3. If you are going to be a flipper, you need to have a solid understanding on what brings value>cost. In my own example, because I was building the house for myself, I spent lots of extra money on t&g plywood floors, 6" walls, upgraded insulation, etc. None of that brought me 5 cents more when I went to sell the house. Buyers only care about extra insulation and squeak-free floors if it's free; they're not going to pay for that benefit. In hindsight, if I was going to be selling the house, I would have made far more money if I put the extra expenditures from insulation, floors, walls, etc into a house that was a little bigger. What people are willing to spend on is different in different areas, so look at what's sold and see if you can reverse engineer what it was that made it attractive.

4. How I continued: I rebuilt my balance sheet after the beat down and went on. I try not to dwell on it too much :)  If you constantly relive your failures, you'll be paralyzed by fear. Just be honest about what went wrong and it will be a lot harder to make that mistake twice. In my case, one big problem was that I did not have strong enough cash reserves to absorb the constant construction loan delays. This dragged construction out far longer than it should have been, because I was constantly depleting the bank account and waiting for replenishment. I also did not take into account that I might one day sell the house, so I overbuilt. I did not consider the timing of the market - I was near a market bottom for selling. I did not consider what could happen to the land around me - it was sold for a massive, cut-rate subdivision, blowing the floor out of my house sale. Finally, and most importantly, I did not have enough cash, foresight or fortitude to hold and wait for a better market. In hindsight, even with all the mistakes, I would have made a healthy profit if I had been able (financially and mentally) to hold out for a better market. Instead, I took my lumps and unloaded in a low market, and the buyer has been the beneficiary of my loss. 

Sorry to hear about your flip @Mathew P. . If you choose not to do another one, it doesn't at all make you a quitter. If you didn't like it, at least you can say you tried it. No one says that because you're an investor, you have to flip properties. You tried it, you didn't like it, you moved on... no big deal (other than your losses). I know you're killing it with rentals, so keep doing that. If you find another good flip opportunity and you want to give it another try, then go for it! If you don't, it doesn't make you a quitter by any stretch. It just means you know what you enjoy doing and that's what you're going to focus on. There is no shame in that!

Sorry to hear that your first project did not go as planned. I am curious though what were the details on this house? Purchase price? Reno cost? Reno details? And current estimated ARV? I think I am spoiled by the potential in my area that I feel a deal that clears 20% ROI would feel like a giant loss I just can't see how to be in the red, not trying to bring you down at all just would like to hear the numbers and see where the loss is. Don't quit though keep at it and learn and grow

@Mathew P. if you look at my profile, I confess right away.  I was very careless and foolish.  Thought I understood much more than I did.  Planned to do all the work myself, and trusted a friend knew more than he did.  We ruined the bones of a house we might have been able to rehab and save if we had simply done a few right steps at first.

We gave up on it because the foundation was falling out from under it...the city condemned it and we had to pay $10k to have them flatten it.  I still have a little bit left to pay off on the original mortgage.  The lot is finally almost enough to cover that balance so I can sell it.

I regrouped, studied up, and purchased another property 8 years later.  Finally got the confidence and found the "right" one.  I needed the perfect opportunity because I had failed so badly before, and I knew I had more still to learn, I gave myself plenty of "mistake room."  I bought that in 2012.  I still have it and it makes me good money.  I also have 6 other doors since then and one flip that netted 18%.  

We're changing our strategy in 6-12 months to focus on multiunit (4-8) instead of SFH. It has been a great learning curve, and I am blessed to have learned what I did. The key for us was staying principled in our purchases (no trash/C or D properties), and ALWAYS sticking to very conservative numbers. Risk is not something that is profitable in REI. It is calculations and adherence to a plan...and never quitting, lol.

Thanks for baring your scar, and know you are among the wounded but not dead. We are mercenaries of the market; rehab rangers; flipping fighters.

Blessings.