Well, We Got Burned .. What I Learned
Just got burned on a flip. Did a cash out refi on my property to pay back some hard money that is due and banked on an appraisal without researching the market value. Appraisal fell short. Profit will still be made when we sell, but not the 'lick' we initially aimed for when we got started. Needless to say it was out first flip attempt, so I guess I will label it as "cost of tuition." Took our team 7 months to complete the project, and we probably went over-budget $10-15k.
Just wanting to share a couple things that I learned from the endeavor:
1). Always Consider the Time Value of Money: It took us 7 months from start to finish to have this house ready to put on the market. While the property did need a major renovation, this is mainly due to us doing the work ourselves and hiring out laborers. We did this to save cost because the contractors bids we were receiving pretty high. We thought we saved cost. Instead we put into the house about the same amount as it would have cost us to contract the job out. Just instead of a 1-2 month turnaround, we had a 6 month turnaround. If we would have focused on other aspects of our business, man we could have gotten a lot of other things done! Not only that, but our money was tied into the project far too long! Well, lesson learned on that one...
2). Know The Market: While we had a pretty good grasp on the overall aspect of the market, we failed to really research it. We were looking at what this flip could be instead of what the surrounding market dictated it was. We had to have an appraisal to cash out refi on our LTV, and we made some assumptions because we were certain it would come in at a specific number. Oh were we ever so wrong. While the property still appraised fairly decent, it was clearly below our expectations. Now we know. Next time we do any flip, we must research the comps and recently sold houses. Regardless of the quality of the house inside, you must know what similar houses around the area sold for. This is what dictates the market. And by failing to do our homework, we took an L.
3). Have a budget and have a plan: When we bought the house, we knew its potential and we had a very large profit margin. Time and unpreparedness sharply and gradually cut into this margin. Therefore, we were borrowing a lot of OPM and investing our own capital to get it done. We were all "go,go,go" and were stringing things together left and right. A little money here a little money there. Paying a laborer, making five trips to Lowe's in a day. This stuff adds up, and soon your margin starts to disappear. If we would have had a budget in place, we could have planned accordingly, and tightened up expenses when needed. While a budget is ever important, having a WRITTEN strategic plan could have done us wonders. We winged it through the rehab, and it will cost us money. Our plan was in our head, and we did a lot of things that could have been avoided if we had the 'roadmap' to guide us there. This led to us creating a lot more work than necessary. So with a high profit bargain, but no budget or plan to instruct us, we managed to spend a tremendous amount of capital and watch our money disappear before our eyes.
All in all, not all is lost. We still have the house to sell! We will still be in the green from our first flip, but our potential could have been so much better. Moving forward, I guarantee we will approach our next flip with a different angle and have it completed in the most efficient way we know how to. But hey, that is the beauty of this business and real estate. And we learned, a ton. Easy to say, we are a lot smarter today than we were yesterday. In the grand scheme of things, that is how you start to build towards success.
Just wanted to share my experience with you all. It feels great to get all this in writing. Thank you all for reading!!