My First Flip Bankrupted Me [Part 5]

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** This is part 5 of me documenting my fun and often stressful real estate journey

It’s pitch black in my bedroom. I roll over to check my phone to see what time it is. 4:30am.

I’m thankful to be able to go back to sleep before needing to start my day. What awaits me is another day of panic, stress, and the growing fear that I won’t be able to escape a financial mess I put myself in.

The truth is...I don’t want to wake up. I don’t want to spend another day worrying about making payments, paying off debts, and wondering what else could go wrong with my properties.

I roll over in hopes that all of the problems will go away before I wake up.

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I just listed my car for sale.

I feel like the scene from Titanic when the water levels are rising to a point where those left in the boat are in trouble. The water is symbolic for the amount of debt that seems to be increasing by the day ready to swallow me whole.

It was only 12 months ago when I purchased a 4plex and two houses to flip in a matter of a few weeks. I was super excited about my future in real estate and was finally closing deals after multiple years of studying and networking. I thought I had a handle on the likelihood of things going wrong and how best to avoid them. Everyone is winning in this game, surely I can too.

I have four credit cards that are near maxed out. Thankfully, one of the cards has enough credit available so I can afford gas and food. But I’m not exactly living a life of luxury here. My diet for the past month has been grilled chicken and plain pasta twice a day with a protein shake after I get home from the gym. During the week, I have a snack of chips and salsa to cure my cravings for something more satiable. Costco pricing has helped keep my monthly food budget to poverty levels.

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So how did I get into this mess…

I bought my first flip on September 27, 2019. After the rehab work began, I didn’t see much risk in flipping houses. The contractor bought the materials, did the labor, I ordered a draw request, the inspector approved the work completed, and the lender wired money into my account. All it cost me was $150 for the inspection.

During the first week of December 2018, I closed on a 4plex in Las Vegas and my second flip. I had some cash and a HELOC available from my condo. My condo was listed for sale so I wasn't worried about using HELOC money for a flip.

In January 2018, the contractor for my second flip notified me that he operated differently than my first contractor. This threw me off as my only experience to date was that the contractor bought materials and performed the rehab, then demanded payment following completion.

The second contractor wanted 40% of the rehab budget up front. Since it was a $120k rehab and first time we’d be working together, he was fine accepting $15k. That was all the cash I had.

The first flip was progressing well. All indications had a completion date of around the end of March or early April. I made my decision to purchase the second flip because I knew the first house would be listed at a great time and in a great market.

Both flips were purchased in the same neighborhood of Cincinnati. I had heard great things about the area and numerous people were telling me that the area was great and the houses would sell pretty quickly.

To this point, I didn’t see the risk. House #1 was progressing and would sell reasonably quickly. I would use the proceeds to complete house #2.

I decided to sell my condo and buy a 7 bed, 5 bath house hack that a friend owned.

A majority of my cash went to my friend for the first payment in our installment payment agreement. I would pay 20% of the down payment ($60k) in cash spread out over 3 periods.

The net income from my job and the house hack covered my monthly loans for all three properties (house and two flips) and my 4plex (from its income).

My line of thinking was that the first house was maybe only 4-6 weeks away from completion and the money from that house selling will provide plenty of reserves for anything going wrong with the second flip and anything I’d need with my house hack.

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The first flip is taking longer than expected. But it’s almost done, only a couple more weeks. April 2019.

I post the house on Zillow as an FSBO and get inquiries. People are interested. And I posted for top dollar. I'm ecstatic. I start charting out my expected earnings from the two flips selling. I'm months away from $100k cash, zero debt, and experience. My ambitious mind is tap dancing around the real estate camp fire ready to scale.

I’m nearing the final draw for flip #1. It’s almost done. An agent calls from my listing and wants to show the property. They see the house, but don’t make an offer.

June 2019. Months after I had planned and hoped on flip #1 being complete, I finally receive the okay from the contractor that it is ready for pictures.

There were multiple delays, some my fault, some the weather of Cincinnati’s fault, but we made it. The house is ready for pictures.

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I park my car as I pull in to work. My agent is calling. I’m excited to hear what he has to say as he’s going to the property with the photographer.

This is a conversation I may never forget. He attempts to soften the blow by beginning the conversation with “Spencer, I’m not trying to be the bad guy here, but you’re my client, and I have to look out for your best interest.” I’m kind of confused.

“Spencer, this is the worst F’in rehab I’ve ever seen.”

Me: “What do you mean the worst rehab? I thought it looked pretty good.”

“Spencer, you better not pay this contractor. He screwed you over.”

My stomach sank. The one scenario that could not happen, happened. The only wrench that could be thrown into my plan of walking on a tight rope was for the first flip to be delayed and have issues.

“Shaun, what should I do?”

“If you have to sell right now, we will need to offload this.”

“Offload this? What do you mean offload? Like drop the price by $5k or $10k?”

“No Spencer, we could only get at best $125k for this right now.” (Expecting $170k sales price)

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I’m extremely privileged. I won’t hide from it. I was able to get bailed out by my parents. I won’t disclose how much, but their contribution helped cover the emergency rehab needed on my first flip.

I had to pull the contractor from my second flip over to my first flip in order to re-do a whole bunch of work. It cost me two months of time and I don’t even want to know how much. I’m estimating $25k in total. This delayed the first one selling and now delayed the second one multiple months, which is double unfortunate, because it had an expected completion date of summer time.

This really, really sucks.

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During the two months of re-do work, I had to offload my 4plex to pay the second installment payment to my buddy. It’s not fun owing a friend $20k. I had a second offer on the 4plex for $25k more, but I had to take the cash offer to close quickly so I could pay him back.

I haven’t been able to sleep well.

My personality changed. Not forever. But I don’t know how to have fun. All I want to do is stay in my room and hope this all ends soon.

I’ve battled massive depression for multiple months. Thankfully I can hide it from my coworkers and friends.

I’ve had to tell a good friend that I’ll be late on payments multiple times.

I need to pay back my parents.

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Before you read this and think I’m an idiot, I promise I’m not. I’m just experiencing the compound effect of one thing going wrong.

I bought good deals. I sold my condo for $50k profit in 30 months.  I sold my 4plex for $50k more than I bought it in just 8 months. My first flip was scheduled to make $15k. EVEN WITH 15% INTEREST, 4 POINTS, AND 12-14 MONTHS OF HARD MONEY. Yes, read that again. My second flip was going to profit around $20k with terrible terms as well. My house hack has the potential to cash flow $2,000+ a month.

I’m writing this mostly for myself. I have no doubt that I’m going to be very successful in this business, but I want to remember this time and struggle I had to go through. This experience humbled me, but also gave me plenty of confidence. The experience I’ve gained this year and the pain I’ve felt will create a lethal combination for me going forward. I’m more confident than I’ve ever been that I’ll be able to reach the goals I set out for myself several years ago when I first started listening to the Bigger Pockets podcast.

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Someone just texted me saying they have cash in hand and want to purchase my car. I am meeting him tomorrow. What he doesn’t know is that this $2,500 in cash may save me.

I owe a friend $750 for rent this month (lease purchase), and I also owe him $3,500 as part of the last installment payment. I owe $3,800 of taxes on my second flip, which I’m 9 months late on. I have credit card minimum payments to be made. And I need to ensure I have enough cash in case something happens at my house hack.

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It’s pitch black in my bedroom. I roll over to check my phone to see what time it is. 4:30am.

I’m thankful to be living in 2019 and have the opportunities available to me. Life has crapped on me the past 5 months, but I’m still alive. I can afford food. I have plenty of friends. I have a solid job. And I have a great outlook on my future.

The truth is...I don’t want to wake up. Not because it’s going to be another day of panic, stress, and a growing fear that I won’t be able to escape a financial mess I put myself in, but because I need the rest. I’m about to sell my car. Which means riding the bus 2 hours to work in the morning and 2 hours home. Which means walking to Walmart for groceries. Which means not having the freedom to get anywhere quickly. My life is about to change. I’m in survival mode.

I roll over in hopes that all of the problems will go away before I wake up. Maybe today is when it will all be over.

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This story only gets worse.

We initially listed for $160k and had comps to prove that value. The house sat on the market for 4 months. We eventually got an offer after 150-200 showings. Offer was for $130k with $4k towards buyer’s closing costs. The quality of the work was so poor that the value of the house was significantly less than what the market was willing to bear.  We also had complaints about the neighbor's trash and junk cars in their yard that they wouldn't sell or remove.

The close wasn’t smooth either as we had numerous inspection items that had to be completed, the appraiser demanded a structural engineer to prove termite damage wasn’t a problem even after inspection, and we closed 15 days after expected which is a big deal when you’re holding a 15% interest rate loan. This is also when news began spreading that we would be closing the economy down so I began having even more fear that we’d be able to close.

In total, I probably lost over $30k from this property, but the domino effect left me with a true loss of significantly more.

I’m in great spirits and very thankful for this community. I hope those of you who are just getting into this game understand the risks of being ambitious and taking on more than you can. Be careful my friends.

@Spencer Cornelia . I hope you will be able to work your way out of this.  It would be great if every new investor could read your story, especially those that are thinking about buying OOS.  Good luck and keep us posted on your success. 

@Spencer Cornelia

I find it brave that you are sharing this, in your position I probably wouldn’t do it. Fortune favors the bold but I think there were missteps along the way here. You went too big too soon and really over-leveraged. Contractors need oversight, daily. You’ve got the means to pull yourself out of this. Too much, too soon, not enough reserves, too much leverage, not enough oversight on your part.

I wish you the best in your real estate career. As a new investor myself I find it very courageous for telling your story the way you did. Take it as a lesson learned and learn from your mistakes. Keep your head up, keep working hard, and one day you will see it all pay off. I wish you nothing but success in the future. Stay safe.

Spencer, thank you.  I truly feel for you, but I'm going to use your post when I speak to new borrowers.  I spend part of every week suggesting to newbies that they not buy 3 houses at once, that they not expect the contractor to do everything correctly, that they not do a deal with only a $15 profit, that they not over leverage, everything that you have compellingly discussed here.  Thank you.  This was brave.  You are a good man to share this so openly.  I hope it saves a few more people from getting themselves in deep doo doo.  Best of luck to you, I am  truly rooting for you.  With your ability to assume responsibility, I have no doubt you will be very successful.  I can't lend to you, but let me know if I can help with feedback, whatever.  

@Spencer Cornelia Sorry to hear of your troubles. I've been seeing a lot more of this locally with investors who are under capitalized and in over their heads. A client once told me "you can go broke buying good deals". Yet some new investors are so anxious to jump in to the market they will force it and buy bad ones too.

The Warren Buffett adage of "be fearful when others are greedy, and greedy when others are fearful" really hits home.

Real estate investing is not like what one sees on HGTV, where the house flippers go through a series of gut wrenching disasters yet all turns up roses in the end, clinking champagne glasses after their flip sells in one week for a 50% profit.

Thank you for sharing your cautionary tale.

Originally posted by @Ann Bellamy :

Spencer, thank you.  I truly feel for you, but I'm going to use your post when I speak to new borrowers.  I spend part of every week suggesting to newbies that they not buy 3 houses at once, that they not expect the contractor to do everything correctly, that they not do a deal with only a $15 profit, that they not over leverage, everything that you have compellingly discussed here.  Thank you.  This was brave.  You are a good man to share this so openly.  I hope it saves a few more people from getting themselves in deep doo doo.  Best of luck to you, I am  truly rooting for you.  With your ability to assume responsibility, I have no doubt you will be very successful.  I can't lend to you, but let me know if I can help with feedback, whatever.  

 This was a great post.  I feel like I've had this exact conversation with clients, and yet they don't always heed this kind of advice.  They get a bit of money and then they plow it into whatever property they can get their hands on.  

@Steven Lowe

After making $36k on my first flip & having it confiscated by a family member who pocketed it & went on a spending spree, I used my 807 credit score to pay my friend & contractor a $2500 bonus which was now my loss from a credit card 0% cash advance I can appreciate a true horror story of first time flips.

Thanks for sharing!

Onward. Mobile home park syndications for me from here on out!

And crypto & silver!

Lessons learnt, for me at least, are:

1. Remodel/contractor needs to be monitored on a daily basis.

2. dont have multiple properties lined up, each depending on the successful execution of the prior one....

I feel you're like me Spencer :)

You dive right in throwing caution to the wind and learn your very best lessons from the bad investments.

I'm the same way. I have to lose a bunch of money to learn first. 

I earn my lumps and always recover 

(Except I'm still down 50% on my crypto investments :D )

***

Only thing that stuck out, I wouldn't have brought the other GC over. I'd GC the repairs my self and find some contractors to finish and let him finish his house. Esp. Since it is the first time you used both GCs, giving one two jobs is pretty risky.

You'll be back on your feet 100% 

The lack of experience and no reserve caused the whole thing to fall apart. I can tell you the timing is not optimum and flipping homes take a lot of constituencies. Good luck.

Originally posted by @Matt Millard :

@Steven Lowe

After making $36k on my first flip & having it confiscated by a family member who pocketed it & went on a spending spree, I used my 807 credit score to pay my friend & contractor a $2500 bonus which was now my loss from a credit card 0% cash advance I can appreciate a true horror story of first time flips.

Thanks for sharing!

Onward. Mobile home park syndications for me from here on out!

And crypto & silver!

 Oh man...I think we all have those horror stories from being in the business.  One time I had a client bounce almost $90,000 in checks.  His story was that his ex wife had her lawyer freeze all his assets as part of an ugly divorce settlement.  Client ended up in jail.  He texted me months later asking if I could loan him $5K.  Ah, life.   

Self storage is another asset type I really like.  

@Spencer Cornelia how was the poor contractor work only discovered at the end? Did the inspector not do their job or you didn’t have your agent verify?

This is where having the agent when flipping long distance is good, and it seems you did have an agent. It’s just not clear to me why they didn’t catch this til the end.

Do not invest long distance. That’s the biggest piece of advice I give people. I owned some stuff long distance and it was always a headache. Real estate usually only works with massive scale and extremely deep pockets, of which most landlords don’t have

@Bob B. thanks Bob.  I'm the type to fire, aim, ready and this one I got stuck in a situation where I bit off more than I can chew.  But IMO you learn more through failure then through success.  And hopefully the next couple of posts you see from me will be making money and not losing money haha

@Spencer Cornelia

Thank you so much for sharing your experience! It is so easy to post the successes but so tough to post the failures! I have learned a ton by just reading your posts!

I am confident that you will come out of this and in retrospect this will be your greatest life lessons!

All the best brother! 

@Lee Ripma I found out the hard way that contractors need constant oversight.  I was so ignorant.  I didn't realize how "bad" a bad job could get.  I thought a "bad" job meant maybe replacing some small items after the fact at a cost of no more than a couple grand.  Oh how wrong I was...

@Spencer Cornelia I am pretty sure you are going to pull through this. Thanks for sharing your story. The one thing I wish you could mention are the 1or 2 major mistakes you made. I will say the one mistake that is obvious is taking on too many projects all at the same time. The biggest lessons should be to many people who read romantic success stories about investing in real estate and think it’s all peaches. You need to be mindful of all the moving parts and most of the time you get bogged down by some logistic issue and then you see the compounding effect of all the little problems. I always suggest build in your model the worst case scenario and a plan for your worst case. You will succeed.

@Spencer Cornelia

Spencer I really appreciate your honesty with all of us. Years ago i found myself in a similar situation. I bought a house for 55k cash and invested about 75k into it. I had maxed out credit cards and owed family members money. Luckily I had help as many people don't. Also I took over contractor duties just to get the house finished. My family sacrificed a lot. Lots of shady and dishonest contractors!

I remember having about $70.00 in my bank account on the day I finally had money from the house sale which ended up selling for 185k. Seeing about 140k transferred into my bank account was unbelievable. However, i got lucky and blessed and could have lost everything. I needed to slow down and learn from mistakes.

I paid off my debts and tried to keep things simple for a couple years. Hindsight taught me a lot. If I were to buy that same house again I would have done a more modest and simple rehab. I would have rented it out making monthly cash flow rather than going all in on a Expensive and scary flip.

I have bought and sold since then but I am way more cautious than before. I no longer minimize or underestimate rehab costs. Also I talk to my wife and pray before making big decisions. It isn't worth it to me to be rich and lose the most important things to me.

I have walked away from many "deals" that didn't feel right. Some profited the buyers greatly and others are still boarded up to this day.

I work a modest job as a teacher and make decent cash flow off rentals. I have cash needed to jump on a deal when the opportunity is right... But in Seattle area prices are too steep for me right now.

Rather than go all in and buy 5 or 10 houses a year I am more interested in a good buy on a house every year or 2 and still being able to spend valuable time with my wife and kids. I am not the best husband or dad but really want to improve in that area and not just my finances. Both are important to me.

I love learning from many of you on bigger pockets. You are bright and ambitious. Many of you are incredibly successful. In Some ways I am jealous of many of your conquests and accomplushments. However, We all are different. We have different. faiths, ambitions and life goals. Money is helpful to my family and myself but it isn't all we need. Money can do a lot of good things but can also ruin many lives.

Prioritize what is most important to you in life and listen to people with wisdom that you know. That is advice i need reminded of but maybe it is helpful to others as well?

I have probably rambled enough but this post got me thinking and reflecting a bit. Thank you!!

Yea @Kevin Wolfe you have no idea who therapeutic it is for me to finally get it out.  This was a very traumatic experience for me.  I was always very responsible with finances, super fiscally conservative, and lived frugally.  I jumped at the chance at making money flipping houses and it didn't work out.

There's no amount of words that can express the relief felt when you finally get a project like this off your hands and there's no more monthly payments of 15% interest and letters in the mail saying you are late on (ever) bill.

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