First Flip: The Education from Hell

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First Flip: The Education from Hell

Richardd Barran
Flipper/Rehabber · Johnson City, TN · Member since 2020 · 26 posts · 49 votes

Investment Info:

Single-family residence fix & flip investment.

Purchase price: $105,000
Cash invested: $65,000
Sale price: $245,000

Screw Analysis Paralysis. This was it. I'm taking action!
Narrator's voice "And this is when I realized I screwed up"

We would run into some obstacles that would require additional work that could push the project over budget and cause delays in closing the deal. Luckily, this was a problem I was prepared for. We told our contractor that our budget was 55k, but our real budget is 65k for emergencies and situations like this. We call this our "oh ****" budget. And boy, did it come in handy.

What made you interested in investing in this type of deal?

This is a great way to build capital. Our end game is STR's and this is a great way to afford them!

How did you find this deal and how did you negotiate it?

MLS, escalation clause, inspection contingency.

How did you finance this deal?

Private Money, 70% ARV

How did you add value to the deal?

I took action on the deal we found on MLS, walked it, and put in an offer at a time when people were buying way above the asking price. We created a sense of urgency by adding an escalation clause but within a short time window of response.

What was the outcome?

In the end, we lost about $4500 after paying our lender contractor and realtor, but we gained more knowledge with that flip than I did with $120,000 worth of student loan debt. And honestly. This was the best $4500 I ever spent and would not change it for the world. The wealth of knowledge is immeasurable.

Lessons learned? Challenges?

1. We learned how to create a draw system for contractors to eliminate the possibility of theft, rehab due diligence, and create accountability to make sure our contractors our happy and paid on time.
2. TRUST YOUR GUT. We should have fired our contractor the first time something was 'off".
3. You can find great work through referrals of other RE investors. At this point, I do not hire anyone without vetting them first from personal experience with my peers and networking.

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Tyler Fontaine
Property Manager · Member since 2022 · 196 posts · 125 votes
3y

I ran into some similar obstacles on my first flip with my business partner as well. Couldn't agree more with the fact that this is the cheapest education that you can get in comparison to the value.

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  • Tyler Fontaine
    Property Manager · Member since 2022 · 196 posts · 125 votes
    3y

    I ran into some similar obstacles on my first flip with my business partner as well. Couldn't agree more with the fact that this is the cheapest education that you can get in comparison to the value.

    1Reply
  • Mark LangdonPro Member
    Investor · Whippany, NJ · Member since 2010 · 356 posts · 104 votes
    3y

    Its amazing how "Trust you Gut" is that important. If anytime on any deal your gut is saying otherwise; it is almost always right. No one usually makes a killing on their first deal so don't worry; if they did its beginners luck and then they get cocky and the next deal is not as great. Just keep going; you learned  a lot. Its the people that quit now that never know how great real estate can change their life.

    [email protected]973-464-3839
    1Reply
  • Khari F.
    Kissimmee, FL · Member since 2018 · 150 posts · 27 votes
    3y

    @Richardd Barran

    Whats an escalation clause? Did you hire an attorney to prepare draw schedule and contract?

    0Reply
  • Nate Sanow
    I​nvestor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes
    3y

    I’m a little confused on how you lost money as it looks like + $75k profit on paper before closing costs. But either way, I’m glad you found out these lessons early and aren’t too underwater. These lessons are ones we all have to learn at some point 

    1Reply
  • Richardd Barran
    OP
    Flipper/Rehabber · Johnson City, TN · Member since 2020 · 26 posts · 49 votes
    3y
    Quote from @Khari F.:

    @Richardd Barran

    Whats an escalation clause? Did you hire an attorney to prepare draw schedule and contract?

    Great Question!


    An Escalation Clause, not my definition, but one I agree with:

    An escalation clause, or “escalator,” is a section in a real estate contract that states that a prospective buyer is willing to raise their offer on a home should the seller receive a higher competing offer. The clause will state how much more the buyer is willing to pay than the highest offer and their spending limit. Essentially, escalation clauses offer buyers protection if other potential buyers outbid them. Took it from this link: Escalation


    So here's a simplified, applicable version of this example:

    1. My realtor finds a great deal on the MLS. Let's say the property is listed at 50k and ARV is 100k.

    2. I run the numbers and make sure it makes sense. I buy at 70% - repairs. If our price is not too far from that, I schedule a time to walk the property.  

    3. I walk the property and liked it. 

    4. I make an offer. 

    Escalation Clause:

    My offer is 35k with an escalation clause to 45k. 

    That means 45 is the max I am willing to pay. If this reaches multiple offers, my offer will still be higher than other offers until it reaches 45k. 

    This is awesome for MLS properties because I promise you, your eyes are not the only one who sees this property.

    There are drawbacks to this, but I love using this strategy for deals we find on the MLS.

    0Reply
  • Richardd Barran
    OP
    Flipper/Rehabber · Johnson City, TN · Member since 2020 · 26 posts · 49 votes
    3y
    Quote from @Nate Sanow:

    I’m a little confused on how you lost money as it looks like + $75k profit on paper before closing costs. But either way, I’m glad you found out these lessons early and aren’t too underwater. These lessons are ones we all have to learn at some point 

    Yeah, I hear you! That is a great question. 

    I was not able to able to talk about the full breakdown since there is a character limit, but we dealt with theft, a break-in, and hiring a new contractor. We had a brand new scope of work to fix the illegal work that was done before. We accrued plenty of interest and points we owed our private lender and we had to take out a 15k high-interest credit card to pay for the materials when our money ran out. 

    So all in all, our original scope of work was 65k, but it was more like 120k after everything is said and done. 

    We spent the majority of the budget with the first contractor and when we found out 20k was stolen from us, our private lender got involved in a possible lawsuit and we fired him immediately. We used the remainder of our private funding to fix the major foundation issues we did not see. As I said, this was our first flip and we were completely unaware of how to inspect the crawlspace or what to look for. 

    Our second contractor knew about the first contractor we hired and he had a reputation we did not know about until it was too late. Our second contractor helped us out. We bought the materials with a credit card and he was not going to charge us for the labor until we sold the property. He didn't even put a lien on the house, even though we encouraged him to do so. He felt us out and went with his gut with us. 

    There were also a bunch of holding and misc costs that I did not break down. For example. Our realtor is our friend and she lent us money for the granite and was sure that it would sell at our asking with granite installed.

    When we sold our house, we made sure we paid all of our debts in full, and we only have 4.5k debt left to pay off on our credit card. 

    All in all, we lost about 4.5k which is a 2.25k split between us. But like I said, we gained a crap load of knowledge. 



    1Reply
  • Nate Sanow
    I​nvestor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes
    3y
    Quote from @Richardd Barran:
    Quote from @Nate Sanow:

    I’m a little confused on how you lost money as it looks like + $75k profit on paper before closing costs. But either way, I’m glad you found out these lessons early and aren’t too underwater. These lessons are ones we all have to learn at some point 

    Yeah, I hear you! That is a great question. 

    I was not able to able to talk about the full breakdown since there is a character limit, but we dealt with theft, a break-in, and hiring a new contractor. We had a brand new scope of work to fix the illegal work that was done before. We accrued plenty of interest and points we owed our private lender and we had to take out a 15k high-interest credit card to pay for the materials when our money ran out. 

    So all in all, our original scope of work was 65k, but it was more like 120k after everything is said and done. 

    We spent the majority of the budget with the first contractor and when we found out 20k was stolen from us, our private lender got involved in a possible lawsuit and we fired him immediately. We used the remainder of our private funding to fix the major foundation issues we did not see. As I said, this was our first flip and we were completely unaware of how to inspect the crawlspace or what to look for. 

    Our second contractor knew about the first contractor we hired and he had a reputation we did not know about until it was too late. Our second contractor helped us out. We bought the materials with a credit card and he was not going to charge us for the labor until we sold the property. He didn't even put a lien on the house, even though we encouraged him to do so. He felt us out and went with his gut with us. 

    There were also a bunch of holding and misc costs that I did not break down. For example. Our realtor is our friend and she lent us money for the granite and was sure that it would sell at our asking with granite installed.

    When we sold our house, we made sure we paid all of our debts in full, and we only have 4.5k debt left to pay off on our credit card. 

    All in all, we lost about 4.5k which is a 2.25k split between us. But like I said, we gained a crap load of knowledge. 



    Gotcha. Sorry you had to go through this but its part of the business.  I think some contractors are actually jealous of investors and use that as their reason for being a thief. 
    0Reply
  • Richardd Barran
    OP
    Flipper/Rehabber · Johnson City, TN · Member since 2020 · 26 posts · 49 votes
    3y

    @Nate Sanow No sweat, my friend! 

    Regardless of their reasons, thank goodness we are not the giving-up types, haha! This situation makes us better investors in the long run! 

    0Reply
  • Khari F.
    Kissimmee, FL · Member since 2018 · 150 posts · 27 votes
    3y
    Quote from @Richardd Barran:
    Quote from @Khari F.:

    @Richardd Barran

    Whats an escalation clause? Did you hire an attorney to prepare draw schedule and contract?

    Great Question!


    An Escalation Clause, not my definition, but one I agree with:

    An escalation clause, or “escalator,” is a section in a real estate contract that states that a prospective buyer is willing to raise their offer on a home should the seller receive a higher competing offer. The clause will state how much more the buyer is willing to pay than the highest offer and their spending limit. Essentially, escalation clauses offer buyers protection if other potential buyers outbid them. Took it from this link: Escalation


    So here's a simplified, applicable version of this example:

    1. My realtor finds a great deal on the MLS. Let's say the property is listed at 50k and ARV is 100k.

    2. I run the numbers and make sure it makes sense. I buy at 70% - repairs. If our price is not too far from that, I schedule a time to walk the property.  

    3. I walk the property and liked it. 

    4. I make an offer. 

    Escalation Clause:

    My offer is 35k with an escalation clause to 45k. 

    That means 45 is the max I am willing to pay. If this reaches multiple offers, my offer will still be higher than other offers until it reaches 45k. 

    This is awesome for MLS properties because I promise you, your eyes are not the only one who sees this property.

    There are drawbacks to this, but I love using this strategy for deals we find on the MLS.

    Do you request proof from seller for higher bid?  If seller knows in advance. They just have someone bid up? * great read. Thanks

    0Reply
  • Richardd Barran
    OP
    Flipper/Rehabber · Johnson City, TN · Member since 2020 · 26 posts · 49 votes
    3y
    Quote from @Khari F.:
    Quote from @Richardd Barran:
    Quote from @Khari F.:

    @Richardd Barran

    Whats an escalation clause? Did you hire an attorney to prepare draw schedule and contract?

    Great Question!


    An Escalation Clause, not my definition, but one I agree with:

    An escalation clause, or “escalator,” is a section in a real estate contract that states that a prospective buyer is willing to raise their offer on a home should the seller receive a higher competing offer. The clause will state how much more the buyer is willing to pay than the highest offer and their spending limit. Essentially, escalation clauses offer buyers protection if other potential buyers outbid them. Took it from this link: Escalation


    So here's a simplified, applicable version of this example:

    1. My realtor finds a great deal on the MLS. Let's say the property is listed at 50k and ARV is 100k.

    2. I run the numbers and make sure it makes sense. I buy at 70% - repairs. If our price is not too far from that, I schedule a time to walk the property.  

    3. I walk the property and liked it. 

    4. I make an offer. 

    Escalation Clause:

    My offer is 35k with an escalation clause to 45k. 

    That means 45 is the max I am willing to pay. If this reaches multiple offers, my offer will still be higher than other offers until it reaches 45k. 

    This is awesome for MLS properties because I promise you, your eyes are not the only one who sees this property.

    There are drawbacks to this, but I love using this strategy for deals we find on the MLS.

    Do you request proof from seller for higher bid?  If seller knows in advance. They just have someone bid up? * great read. Thanks


     That I do not know. I would ask a realtor about this one. And thank you so much! Finishing up flip #2 a the moment, and this one felt like easy mode after the hell we went through with the first one, haha! 

    0Reply
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