Hey guys I'm looking at doing my first flip and I'm interested to hear your stories of what you did wrong, or perhaps something you wish you had done differently on your first rehab project!
Everything. You don't know what u don't know. Team up with a seasoned veteran and learn the ropes. It shortens the learning curve.
We partnered with a supposed "experienced investor". She didn't have a dime to contribute. If someone doesn't have money to put into a deal, run as fast as you can- especially if they claim to be *experienced*. An experienced investor who doesn't have and/or can't get money to do a deal? That's a huge red flag to me, short of clearly showing reasons why.
Other than taking longer than I thought it would, and wishing I had got the heat up and running as one of the first things, there was really nothing on my first that I regret. On a later flip I regret not testing the septic either prior to purchase or very early on. Cost us on the back end at sale time, and could have saved a little bit of "extras" along the way to help mitigate those costs.
Putting some things off until later in the project hoping that they will work out. My 1st house had an indoor hot tub in a sauna type room with cedar paneling. It also had a full bath in it. My hope was that it would work and I kept working on everything else until I finally filled it up and tried running it and the ancient heating system. Of course, water came flowing out of the heater and I messed around with it trying to get it to seal. Finally found a crack in the manifold and had a specialist come look, $2k for a new heater but I had no idea what else may be wrong with the system and tub. So I decided to scrap it. This was a few days before I was supposed to list.
So, I had to rip out the large tub with a sawzall, get rid of it, put up bead board around the wall where the tub was, all the night before listing. What a pain, but I made it work.
Moral - always dig into EVERYTHING early in the project so you have some idea of what you will be facing. Leave noting to chance. Even if you do not address the item immediately, at least you know what you are facing and any expenses involved.
The same thing I did on the last one.....and every major renovation I've ever flipped. UNDER ESTIMATE THE REPAIRS AND THE TIME IN WHICH IT CAN GET DONE. I will however tell you, I don't really think that it's something I did "wrong". This dilemma is actually something that will keep you in check.
Okay, before you think I'm really bad at estimating know this. I have been involved in construction for 25 years. Real Estate for almost 20 years and I have NEVER had a project come in under budget or faster than expected. None of that matters. I guarantee it will happen on your first deal too. So I tell you this because you will think you failed or in some way missed something. It just happens. Expect it. accept it, and here is the key.........manage it. Here is what I mean.
For the purpose of this conversation I am going to assume the project needs some serious rehab. If it only needs a coat of paint, you can't hardly screw that up. I have wholesaled properties that needed little to no work and those obviously went fine. I am talking about at least $25k in renovation work. Here is an example:
If you purchase a house for $75k and estimate the repairs at $25k with an expected completion date of 4 weeks (I know those flipping shows say it only took them 4 days....I call BS). You will probably come in at $30K in repairs and 5 weeks to completion. That's about 20% OVER what you thought. Now these figures do vary. I have had some deals only go over by 5% all the way to 30%!!! (major miss on something unforeseen). But they ALL go over. Again expect it, accept it and manage it.
Things just can't always be accounted for in this business. There are too many moving parts, things that will surprise you, problems you just didn't see coming, things hidden beneath the surface, contractor delays, weather, etc, etc, etc.
Now most people may look at this and say....Well why not just add 20% to the budget if you know it's going to happen anyway? This way you will come in at cost. DUH! It doesn't work that way. I do actually add an overage figure to all my budgets and I STILL go over.
Here is the catch. When you estimate these projects, you can't be too generous with your budget. You have to keep it realistic yet ALMOST unattainable. Here's why....It gives you something to shoot for, a goal, a target.
Using the above example, let's say you decide to play it safe and just set your budget at $40k instead of $25K. How much do you think you will come in at? You guessed it! $40K. It's a false figure. You will assume you are safe and have plenty to work with. Even if you beat that by $5K you are still at $35K. Don't get all excited thinking you came in under budget on your first flip. You lost money. Go back to the original example. Set your budget at a slightly unattainable $25K. It's going to be tight and you know it. It keeps you honest, keeps you looking for discounts, working your contractors for breaks and forcing you to save, save, save EVERY place you can. You KNOW you have to stay on top of this or you will blow WAY past it. And when you do go over....by the 20%... now putting your repairs at $30K, you are at least $5-10K UNDER what an over-inflated, super safe, false budget does for you.
So coming full circle. It's not really what went "wrong" just something that WILL happen that I thought you should know. Just my two cents. I have done many flips. I still learn something on EVERY deal and I definitely don't have all the answers. That's what keeps this business exciting! I wish you the best of luck!
Paid too much.
Definitely everything. Overestimated my ability, underestimated the cost, delegated too much responsibility, didn't know squat and paid for it.
With all the things that can and will go wrong, you're definitely never too experienced to not screw it up once in a while. Hopefully it goes into the lesson's learned bucket, instead of the lessons repeated bucket.
Really great replies everyone
@Michael Knaus Excellent advice, sticking to a budget is definitely important.
What DIDN'T go wrong on my first flip?! Went into a joint venture with lots of excitement and trust, but no understanding of the rehab process. Turned out my "seasoned" partner didn't have such a good grasp either, so the budget was off by nearly six figures. The property was a "niche" property- high end and gorgeous, but needed a pretty specific type of buyer. My partner was also the contractor, and the workmanship wasn't at a level I wanted my name on, so things got awkward sometimes. The project ended up going under, and I cut my losses at around $50k.
What would I have done differently? I'd have started with a different property, in a price point that would have been easier to market and sell. I'd have done my own due diligence on the rehab numbers and ARV, using BP calculators and checking the numbers with a mentor. Heck, I wish I'd HAD a mentor before taking on that project, because they would have said to run like hell from this project and this partner.
It's not always like this, though. There are shady investors out there, and there are also stand-up, honest people who just want to make neighborhoods better and make some money doing it. Best of luck on your first project, and may you avoid all the pitfalls mentioned in these posts. Great question!
Didn’t update the wiring throughout and it needed it.
Got beat up on the inspection for that.
Here are the mistakes on my first flip that I did by myself:
1. Over improved for the neighborhood.
2. Took care of the landscapping myself rather ham hiring it out.
3. Put hanging plants with no water system that took a lot of maintenance and eventually died. But they looked great for the pictures.
Ended up losing 5k on this deal.
A lot went right, but there were a few things that didn't. Probably the biggest thing was that I partnered with a contractor who had a different vision for the property than I did.
It was an old duplex that he envisioned as being sold only to an investor and he wanted to finish it with low-mid grade finishes (formica, wall-wall carpet, clean up the old gas stoves, etc). I had wanted to do something I could be more proud of.
Second mistake was a failure on my part to have an understanding with my partner/contractor as to how much time he would be spending on the project, as he had other outside work. Our project definitely took a back seat.
Third was hiring an idiot plumber. He worked at the speed of molasses running uphill. In January.
Zero sense of urgency - and when the new owners moved in and the brand new heating system (which he had just installed) stopped working and started throwing up error codes, he refused to even look at it unless he got paid for the call. After a very heated exchange of messages and threats of lawsuits, he finally fixed the problem. But this knucklehead slowed us down by at least two weeks.
Time. Took way to long. Did not effect my bottom line on that property but did prevent my ability to do more flips.
What I learned is that if you can not get in and out within 3-6 months it is not a good investment. Time is money. Smaller flips, time in and out in 1-2 months, will be more profitable over time and allow you to keep quality contractors continuously employed.
Spending more on hiring more contractors will effect bottom line on one flip but enables you to do more flips in same time period increasing over all profits. Markets change rapidly. Taking too long to market can be costly.
If you intend to succeed it must be operated as a business.
Same thing I still do wrong on my flips: treat it like a house I'm gonna live in.
I love houses, and I love renovating houses. I tend to get into one and think, "Ooh, it'd be really cool if we did this. And that. Oh, and let's do that, too." And it makes the house truly amazing, but it adds cost and time, and often doesn't add to the sales price.
8 years into this and I'm finally making myself resist the urge to treat houses like one I'm going to live in, and try to only add "extras" if they're going to make the house sell faster or bring more money on the sales price. I'm going to be doing 2-3 houses a month this coming year. Some of them have to be just "a nice house", not a work of art.