Feeling Frustrated with Flipping (alliteration!)

24 Replies

This is going to be long. I hope I can get some advice and pointers on where to go from here. 

TLDR: I have a few deals under my belt, some good processes in place, but I am not making money and I don't know how to go from 3-4 deals a year to 3-4 deals a month. 

Introduction

I started looking into buying deals last October. So I am almost at a year of doing this. I love rehabbing and I love flipping and I really feel I am on the brink of something big, but I am finding it difficult on how to get from where I am now, to where I want to be. I am hoping that if I write a little bit about my experiences, and my frustrations I could get some advice on how to make it to that next level. 

My original business plan was pretty standard. I wanted to do probate marketing because I loved the idea of helping people through what my wife and I went through with her mothers estate in 2014. In amazing luck, the local REIA group was holding a probate workshop and I attended with gusto! I sent out my first batch of probate letters to my target zip codes in Feb of this year. My first response was a woman who made it through my screening process who just lost her daughter, in my excitement to send out letters I didn't think to check the age of the decedent. She was very angry and screamed at me for 10 min. I received 2-3 more calls of "please remove me from your list" and another call from a person who said my letter was nice, but her dad who died, lived in some guys house and didn't own his own property, and that was the extent of the feedback. So not being discouraged, I changed my marketing a little, improved my screening process and in March sent out another batch of letters. I hit gold, I got 4 calls of interested parties. I went and looked at 3 of the houses (the other was not what I was looking for) and put an offer on one that got accepted. I had my first deal!

The First Deal

The first deal actually went pretty smooth until the end. I bought the home for $80,000 put about $55k into it initially ($10K over my estimate), but was still on par to make around $5-$7K. Considering how little time I put into the deal I was ok with that. We got an offer the same day it went up for sale for $2K over asking price, as long as I agreed to 3% closing costs. This cut my profit to around $4K, but I wanted to free up the money to do it again and I agreed. Then the fun started. The closing date was set 45 days out which meant another interest payment I wasn't planning on, profit :$2.8K.  The city came out to inspect for point of sale and decided that they missed the electrical panel being a federal pacific panel, my contractor failed to tell me this, so I had to have the panel replaced, profit now $2k. Once the panel was finished several other electrical issues appeared that needed fixed, profit $1.6K.  The next day, the AC condenser blew, wouldn't cool the house, HVAC guy also said the blower was gone in the furnace, profit -$2.2K. Finally had home inspection. Everything passed but my contractor did not pull a permit for the panel, so now we had to permit the panel and have it resinspected with the city, profit -$3.6K . The sale went through, but I lost money. 

Lessons learned: 1) Get a new contractor!  2) Have a healthy contingency 3) Just because a buyer has the highest offer, it doesn't make them the best deal. 

The Second Deal

My second deal just went on the market Monday (The Second Deal). This one was better than the first. I have a new contractor, and while he was more expensive than the first, his quality of work was much better. I bought this deal from a wholesaler for $62, I have about $45K in it and it is listed for $135K. Its a great deal for the money, but the price seems to scare buyers in that area away. It comps ok, but when ppl hear $135K I get the impression they think its high. I will make money on this one, but not as much as I had originally estimated if I need to drop the price. 

Lessons learned: 1) Good contractors are worth a premium 2) When setting price/ARV price it lower than market value to run numbers. If you can get more than great, if not you won't shrink your profit margins

The Software

While I was working on getting the second deal going, I decided to put my software skills to use. I wrote a shell of a program, then paid a freelance developer to finish it, that will automatically create lists of probate cases, find the owner from the fiscal officer's website and provide me a nice list each month. What used to take me 4-8 hrs of work a month, took about 4 hrs of coding, 1hr of project management and is now finished in 5 minutes each month. I also improved my marketing content and this netted my third deal:

The Third Deal

My current deal is a brick beauty in University Heights, a very desirable Cleveland Suburb. This one, once finished should fetch $240-$260K. It was extremely outdated, but well maintained so I was able to get it for $141,000. I will put about $60K into it. 

So that is where I stand, it sounds a lot better written out than it feels to me right now. My largest problem is I am out of capital until the second house sells, I won't have enough to finish the third deal. So how will I expand my business? I don't see how I can ever do more than 1 at a time consistently. I have started to look for capital partners, but most of my friends and family that have money to invest (2-3 ppl) have no more than $25K at most that they want to invest. That won't net me many deals. Please, comment and give me some ideas to go forward!

Updated 7 months ago

I meant to add that my original business plan was to use probate marketing to generate leads, rehab and flip the high profit homes, rehab and BRRRR the lower value homes, and sell off the rest. I decided to just concentrate on flipping first to generate capital.

This post has been removed.

Originally posted by @Christopher Blanco :

This is going to be long. I hope I can get some advice and pointers on where to go from here. 

TLDR: I have a few deals under my belt, some good processes in place, but I am not making money and I don't know how to go from 3-4 deals a year to 3-4 deals a month. 

Introduction

I started looking into buying deals last October. So I am almost at a year of doing this. I love rehabbing and I love flipping and I really feel I am on the brink of something big, but I am finding it difficult on how to get from where I am now, to where I want to be. I am hoping that if I write a little bit about my experiences, and my frustrations I could get some advice on how to make it to that next level. 

My original business plan was pretty standard. I wanted to do probate marketing because I loved the idea of helping people through what my wife and I went through with her mothers estate in 2014. In amazing luck, the local REIA group was holding a probate workshop and I attended with gusto! I sent out my first batch of probate letters to my target zip codes in Feb of this year. My first response was a woman who made it through my screening process who just lost her daughter, in my excitement to send out letters I didn't think to check the age of the decedent. She was very angry and screamed at me for 10 min. I received 2-3 more calls of "please remove me from your list" and another call from a person who said my letter was nice, but her dad who died, lived in some guys house and didn't own his own property, and that was the extent of the feedback. So not being discouraged, I changed my marketing a little, improved my screening process and in March sent out another batch of letters. I hit gold, I got 4 calls of interested parties. I went and looked at 3 of the houses (the other was not what I was looking for) and put an offer on one that got accepted. I had my first deal!

The First Deal

The first deal actually went pretty smooth until the end. I bought the home for $80,000 put about $55k into it initially ($10K over my estimate), but was still on par to make around $5-$7K. Considering how little time I put into the deal I was ok with that. We got an offer the same day it went up for sale for $2K over asking price, as long as I agreed to 3% closing costs. This cut my profit to around $4K, but I wanted to free up the money to do it again and I agreed. Then the fun started. The closing date was set 45 days out which meant another interest payment I wasn't planning on, profit :$2.8K.  The city came out to inspect for point of sale and decided that they missed the electrical panel being a federal pacific panel, my contractor failed to tell me this, so I had to have the panel replaced, profit now $2k. Once the panel was finished several other electrical issues appeared that needed fixed, profit $1.6K.  The next day, the AC condenser blew, wouldn't cool the house, HVAC guy also said the blower was gone in the furnace, profit -$2.2K. Finally had home inspection. Everything passed but my contractor did not pull a permit for the panel, so now we had to permit the panel and have it resinspected with the city, profit -$3.6K . The sale went through, but I lost money. 

Lessons learned: 1) Get a new contractor!  2) Have a healthy contingency 3) Just because a buyer has the highest offer, it doesn't make them the best deal. 

The Second Deal

My second deal just went on the market Monday (The Second Deal). This one was better than the first. I have a new contractor, and while he was more expensive than the first, his quality of work was much better. I bought this deal from a wholesaler for $62, I have about $45K in it and it is listed for $135K. Its a great deal for the money, but the price seems to scare buyers in that area away. It comps ok, but when ppl hear $135K I get the impression they think its high. I will make money on this one, but not as much as I had originally estimated if I need to drop the price. 

Lessons learned: 1) Good contractors are worth a premium 2) When setting price/ARV price it lower than market value to run numbers. If you can get more than great, if not you won't shrink your profit margins

The Software

While I was working on getting the second deal going, I decided to put my software skills to use. I wrote a shell of a program, then paid a freelance developer to finish it, that will automatically create lists of probate cases, find the owner from the fiscal officer's website and provide me a nice list each month. What used to take me 4-8 hrs of work a month, took about 4 hrs of coding, 1hr of project management and is now finished in 5 minutes each month. I also improved my marketing content and this netted my third deal:

The Third Deal

My current deal is a brick beauty in University Heights, a very desirable Cleveland Suburb. This one, once finished should fetch $240-$260K. It was extremely outdated, but well maintained so I was able to get it for $141,000. I will put about $60K into it. 

So that is where I stand, it sounds a lot better written out than it feels to me right now. My largest problem is I am out of capital until the second house sells, I won't have enough to finish the third deal. So how will I expand my business? I don't see how I can ever do more than 1 at a time consistently. I have started to look for capital partners, but most of my friends and family that have money to invest (2-3 ppl) have no more than $25K at most that they want to invest. That won't net me many deals. Please, comment and give me some ideas to go forward!

 For me personally I would not have bought any of those houses

If I spend 70k for the house and the fixup it would have to have an expected selling price of over $120,000

Updated 7 months ago

Your updates asks how you can do more For me if those are the deals I was finding, I would stop flipping until I could figure out how to spend less and make more

@Michael Plante Thanks for the response, I am confused though on what your advice is?  Spend less and make more...that's kind of generic and the point of flipping, I get that. On each house, as I have learned,  I have spent less and will make more. Doesn't really give me a lot of guidance. Also, I don't think I gave an example of a $120K house where I spent 70K, so I am not sure how that is relevant.

I think you've actually already identified your own problem - lack of capital. So what you need to find is a well-funded partner, or partner with some financiers that can keep you from getting stuck in the mud once your own lines/capital is exhausted. 

Flipping gets harder the hotter the market becomes. That seems counterintuitive, but the real key to flipping is getting great buys, because your profit lies in the spread regardless of what the top or bottom of the market is. It appears that your spreads aren't that great. On my buy & hold properties, I expect to have no more than 70% ARV in the property when I am done rehabbing, everything included (holding costs, rehab, etc). So for example looking at your better property, you will have 200k in it, and if it sells for 250 you had 80% ARV in it. Now you deduct your realtor fees and other costs, and taxes (unless you're rolling everything), and you're not really left with very much money.

Originally posted by @Christopher Blanco :

@Michael Plante Thanks for the response, I am confused though on what your advice is?  Spend less and make more...that's kind of generic and the point of flipping, I get that. On each house, as I have learned,  I have spent less and will make more. Doesn't really give me a lot of guidance. Also, I don't think I gave an example of a $120K house where I spent 70K, so I am not sure how that is relevant.

The spend 70 TOTAL costs to sell for 120 was an example of something I did approx 8 months ago

I don’t know your area.  What I know is in the areas I buy I can sell for almost double what I pay for the property, fix up and sell costs 

And having learned from my mistakes I now only look for deals I can double my investment 

Maybe there are not deals like that in your area 

Look for more profit on your flips in the end. This will help you cover the problems of bad contractors, unseen problems, possible market to start shifting on you etc etc. and time is money and it takes time to do flips from start to finish. Way too much work and risk for 7K profits. We shoot for at least 30K profit on our flips when all said and done. Sometimes we will go lower if it’s in our neighborhood, basic rehab and already vacant with no tenants to get out. Sooner or later you will run into a bigger problem that can put you into the negative in a big way when your only looking at profits less than 10K. Too much risk and time for that little
Money in return, and with each sale
You should be setting aside more and more money for marketing to get more leads/deals.

I usually buy low with no intention of selling unless the profit is golden. I keep repair costs low by doing only what is actually needed and doing the work myself. Usually it will be under 5-10k.  I rent for slightly below market so that tenants stay long term and so I don't have to deal with as much turnover. I see this strategy as less risky than flipping unless you have very reliable contractors and numbers.

Originally posted by @Mike Flora :

Look for more profit on your flips in the end. This will help you cover the problems of bad contractors, unseen problems, possible market to start shifting on you etc etc. and time is money and it takes time to do flips from start to finish. Way too much work and risk for 7K profits. We shoot for at least 30K profit on our flips when all said and done. Sometimes we will go lower if it’s in our neighborhood, basic rehab and already vacant with no tenants to get out. Sooner or later you will run into a bigger problem that can put you into the negative in a big way when your only looking at profits less than 10K. Too much risk and time for that little
Money in return, and with each sale
You should be setting aside more and more money for marketing to get more leads/deals.

 This post says it much better than I did 

Originally posted by @Jassem A. :

I usually buy low with no intention of selling unless the profit is golden. I keep repair costs low by doing only what is actually needed and doing the work myself. Usually it will be under 5-10k.  I rent for slightly below market so that tenants stay long term and so I don't have to deal with as much turnover. I see this strategy as less risky than flipping unless you have very reliable contractors and numbers.

 For us we need to know if we are fixing up to rent or sell

Completely different rehab for renters compared to buyers

And we even refine it more if selling is it a outright sale, a rent with option to purchase or a sell while holding the mortgage. 

Different level and cost of products workmanship and detail depending upon which of the above we plan on doIng. 

Agree 100%.  For example, the 2nd house probably would not make a good rental, as I rehabbed it to sell. 

Originally posted by @Michael Plante :
Originally posted by @Jassem A.:

I usually buy low with no intention of selling unless the profit is golden. I keep repair costs low by doing only what is actually needed and doing the work myself. Usually it will be under 5-10k.  I rent for slightly below market so that tenants stay long term and so I don't have to deal with as much turnover. I see this strategy as less risky than flipping unless you have very reliable contractors and numbers.

 For us we need to know if we are fixing up to rent or sell

Completely different rehab for renters compared to buyers

And we even refine it more if selling is it a outright sale, a rent with option to purchase or a sell while holding the mortgage. 

Different level and cost of products workmanship and detail depending upon which of the above we plan on doIng. 

@Christopher Blanco thanks for sharing your stories. I think the great thing is that you STARTED and you've learned lessons. I always like to say, "it doesn't get easier, you just get better."

Not sure about your market, but I'd suggest 2 things:

1. Get a partner. It doesn't need to be 50/50, but flipping is a lot of work and if you can divide and conquer many of the tasks, then it becomes a lot more manageable

2. Stick to buying only when you have your metrics met..like the 70% rule and be conservative on your ARV.

3. Didn't hear much about your selling agent, but now that you've done 3, you should be able to get an agent that has a network of buyers and can help your sell price

4. You should also work with some wholesalers now that you have a track record

5. Not sure terms of your Hard Money (if you work with any), but reach out to all of the HMLs you can here and on LinkedIn and get their terms and negotiate them...now that you've done 3, you can get better terms if you shop around

All the best man and contact me any time for any other questions. 

Onwards!

Shawn

@Christopher Blanco I think the repeated issue is that you are buying too expensive. All three of these deals (other than possibly the third, depending on rehab) are really thin. It will take longer and be much more frustrating than you hope, but spending the time to find good deals will put you in a much better situation. To help with finishing the third property, there are options. Home equity line, personal loan, or credit cards can all get you to the finish line.

I think if you had used a lender or a partner from the beginning, you could have avoided the problem that everyone's been saying - your margins are too thin. Both would have checked your numbers, and both wouldn't have done these deals. I always use a hard money lender because they're essentially a partner that watches my back. They'll make sure I do my due diligence (verifies my ARV, vets my contractors, checks title, etc).

On our flips, I have 3 criteria:

  1. Profit has to be at least $30k.  This is what makes the flip worth it for me.  I might consider going down to $20k if it's a cheap 2-week rehab.
  2. Profit has to be at least $10k/month for each month of holding (i.e. a 6-month project from close to close should net me $60k).  This takes into consideration the velocity of money.
  3. Profit has to be at least 10% of ARV. This ensures that the riskier, more expensive projects should give me a higher reward, and makes sure that my spread isn't too thin.

Overall though, this aligns pretty well with the 70% rule everyone's talking about.

First of all, you need to buy at a great entry point.  I wouldn't buy something that I could not make 25 to 30k off of.  This will also protect you from unforeseen costs, so you will still make money if something goes wrong. One of the most underestimated trait of a RE investor is patience.  A lot of us go through this, blowing a couple hundred hours of work and marketing money to NOT have a deal.  Many of us walk away from deals if it is just 1k over our parameters!  Be prepared to do the same.  Don't just buy something just to have a deal.

Second, maybe you should perfect your systems first before doing more than one at time.  I.E. establishing buying parameters, have several established contractor relationships, financing, etc. 

All in all, I have to say I do like your marketing plan and your software idea.  Since there may be legalities with wholesaling in your state, perhaps you should consider getting a RE license.  That way, if you get 3 deals at once and you can only handle one, you could sell the other two to another investor or list the property to get a commission.

@Christopher Blanco You don’t have to do it on your own or limit to friends and family. There are other alternatives out there. When I met @Justin R. , he was on his 4th deal, as I see some of his responses here, he has made a ton of deals, maybe he could chime in some of his non-secret recipe here on how he did it as far as partnering goes.

@Christopher Blanco I think @Mike Flora put it well. I would like to add that I do not believe your question should be how you can go from 3-4 deals a year to 3-4 deals a month right now but should be how you can go from losing money or make a thin profit to being all in at 70% ARV. I would not suggest borrowing money at this point as it would just complicate things and eat away of your around thin spread. I am a beginner flipper as well and have had many growing pain as well. Sometimes it is better to start slower and get things correct and then accelerate. Believe me I would love to do more deals as well and in the beginning it does take a little longer than more experienced investors. Hit me up if you would like to talk further since we are in the same market. All the best!

Some good advice on here already. I would also add that the amount of rehab money and time put into a property should be proportional to the minimum profit you will accept. If you can get in and out of a property with no work or only minor updates (paint, carpet, fixtures, etc.), you can afford to take less of a profit margin. But A $55K rehab is going to tie up your money for several months, so you should factor that into your minimum acceptable profit. In flipping, the velocity of money is extremely important - if you can recycle the same money through 4 or 5 deals per year, it increases your ROI exponentially over only reusing it once or twice. The more rehab involved, the more risk - so your reward should be higher.

Make sure you get really dialed in on your target area comps so that you know immediately when you come across a great deal.  You also need to make sure you are not overimproving your rehabs compared to comps (again, this ties in with being dialed in on your target area).  You don't want to be putting in high end finishes that double your material costs if the market is telling you that more basic finishes will get the house sold quickly.

You should also seriously consider adding wholetailing to your bag of tricks.  By the time this year is done, I will have made as much money wholetailing as I have rehabbing, and it's a lot less brain damage and stress.  Buy a property at a big discount from a seller who NEEDS to sell quickly, put it right back on the market after you close at a price where you will sell it fast.  I would rather make a quick $15K than a slow $25K because I can recycle the money into the next deal quickly and juice my returns.

I think the bottom line is, you really need to increase your marketing so that your lead funnel is constantly being filled with motivated seller properties.  If you had more deals to analyze, you may not have decided to purchase any of the properties you mentioned and would be in a much different situation. 

You make money when you buy a house, not when you sell.  You've gained valuable experience on doing the flips, but unfortunately buying at the wrong price.  You've paid for your education.  Now you just need to find BETTER deals!

What I have seen on flipping, bank owned, REO etc. the big bats get the deals that can make money. Most small fish cannot land a good deal.

The banks are pricing the deals so high you need inside angle, i.e. buying lots of houses so you have power to lower the price.

There are always exceptions to this.

David K, "Amen"!! It is ALWAYS made on the buy!
Billy Smith, You noticed what is truly going on. Banks / Reo agents are pricing things on the higher end of things. And you are also correct that you do need an "inside track" to buy the good deals. Gone are the days of straight up, high bidder getting the deal. I don't think anyone wants preferential treatment, Just a Fair Playing Field!

@John Lopes , @Billy Smith , @David K. , @Owen D., @Vince Lucas

Thank you so much for all of your advice. I am going to finish out these rehabs and then revamp my business model going into next year. I agree on the Wholetailing side. I have been reluctant to add that to the mix, but I definitely see the value in that. I also agree in the Marketing side, I need to increase that. With the probate cases, after I whittle things down to zip codes that makes sense, and cases that actually have properties, I am getting about 100 new leads a month. Each month I get 4-5% return calls and about 15% of the calls turn into deals. While that isn't bad, with only 100 letters a month I need to multiply that 10 fold to make a business out of it. I am going to add driving for dollars and other marketing to the mix to increase the chances of purchasing properties. 

@Christopher Blanco , 1 st let me start by saying CONGRATS for taking that scary big step into the world of REI! Sounds as if you have gained a GR8 deal of educational experience. Something that I have no doubt you will put to GR8 use in future projects to come. Our fellow BP colleagues have given you solid sound advice. I might add that you mentioned you attended your local REIA, are there any other investors within your Meet-up/REIA that you have vetted that may be looking to share in a partnership that will benefit both parties? I agree with @Shawn Ward in the fact that Flipping is HARD and the divide an conquer thing makes it not only more manageable but cost effective depending on the structure of your partnership, thus freeing up more $ for additional rehab cost, another down payment for another house, you name it.  Thanks for sharing your story, very well laid out I might add.  Here is to wishing you nothing but continued success in your 2017 and future REI ventures!  Thanks for allowing me to share.

Several people have identified your problem to be a lack of capital. While Capital is imperative, that is not the stem of your problem. Your problem is that you have not purchased any of these three properties correctly. By correctly, I mean you overpaid as your spread after rehab costs is minimal to negative. Never, never, never be satisfied with a $7k profit just because you think it will be easy or quick. You need a large enough spread to cover unforeseen occurrences and expenses and enough to have a profit worth the time, effort, and most important, the risk you take.

As far as scaling your business, don’t scale what you have started. Start over, get better deals, then scale that by getting hard money lenders on board, private lenders (which is much better than hard money) and possibly even an experienced partner with capital.

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