The long awaited conclusion:)
Hey BP community!
First off, I apologize for taking so long to post the results. You all were so supportive and encouraging, and I really appreciate your enthusiastic feedback.
I wish I were posting that the house sold at asking price in 30 days, my investor realized a higher than expected return and I netted a solid $25k. However, that’s not quite how it happened. I deliberated for some time about sharing the experience, and what I learned, and ultimately decided that if it was of some benefit to this amazing community, I ought to.
A quick recap
I partnered with a contractor on this deal who was referred to me by someone I really respect (an executive at a big RE company). Supposedly, the contractor had been flipping homes for 20 years, doing development, and had made millions of dollars. This was my first flip, so I felt honored that someone of his stature would work with little old me. Our deal was that I would fund the purchase of the property, he would oversee and fund the rehab at cost and we would split the profits.
I raised the funds for the purchase here on BP, here's a link the marketplace post.
The numbers ought to have looked something like this
$92k purchase
$45-50k rehab
$200k sale
$42k profits: $21k to contractor, $4.2k to the investor + principal, $16.8k to me + $6k commission on the sale, I wasn’t looking for a home run, just a solid first flip.
And this is what actually happened
As the project was finishing up (2 months behind schedule), I realized that the contractor I partnered with had completely misrepresented himself.
He estimated around $40-45k for the job, but by the time it was finished, he claimed to have $65k into it. I never saw a receipt or invoice, despite asking for them repeatedly.
I was dismayed at the quality of the work he had done. The flooring, drywall, tile, transitions, texturing, paint… basically everything looked pretty rough. I did not know what to do, and hoped that I was just me being too picky and that the right buyer would be thrilled with the home. This, folks, is what they call wishful thinking…
When I put the house on the market, it got a lot of attention. It was a good time to list, a great area, and it was priced fairly; we had almost 10 showings in the first weekend. I immediately started receiving negative feedback about all the things I was concerned about.
In addition to the poor finish work, the guy didn’t bother to put a mailbox up, or house numbers. He didn’t think it was necessary to case the windows in, and as my wife put it, they looked like “prison windows”.
After receiving enough critical feedback to know it wasn’t an anomaly, I confronted him about the shoddy workmanship. His response was to blame it on “picky College Park buyers” and accused me of not marketing the property well enough. After a few heated discussions over the course of several weeks, it became clear to me that he had no intention of taking any responsibility for the work he had done.
After agonizing over what to do, my wife and I decided to bite the bullet and hire someone to remedy what we could. We put about $7,000 of our own money into redoing the transitions, repainting, touching up the tile work, casing the windows, trim work and closing up one wall and adding a built in bookcase to improve the flow of the house, along with completing the walkway from the driveway to the front door, so potential buyers didn’t have to walk through the wet grass to get to the front door.
After doing all this, and re-listing the property at a 10% discount, we received 3 offers in less than a week, one of them cash. We could see the finish line!
We accepted an offer at $185k, and were set to close in 6 weeks. The buyer’s agent scheduled an inspection for that weekend. During the inspection, I received several concerned phone calls from the agent about the AC, electrical, and windows, all of which my “partner” had assured me were completely redone, rewired, etc. His favorite phrase throughout the process, “Bro, it’s like a brand new house”; Not quite...
I didn't hear anything back until Monday evening, when my broker called me to say she had received a complaint from the buyer's agent, accusing me of misrepresenting the property on the MLS. Based on what the contractor had told me, I had listed the property as fully renovated. In fact, it was not… Many of the outlets weren't working and weren't GFCI protected, the AC unit was not brand new, but over 10 years old, just with a new shell, there were plumbing leaks and the windows were not even secured to the frame of the house. I explained to my broker what had happened and immediately called the buyer's agent to explain, apologize and wrote her clients a check for the cost of their inspection.
At this point, I knew the contractor had blatantly lied to me and taken advantage of my trusting nature and inexperience.
I forwarded the inspection report to him and gave him 3 options.
- He could buy the property from me, and make my investor and myself whole.
- I would drop the price significantly, disclosing all the defects the inspection had revealed, pay my investor and myself back and he would get what was leftover.
- I would rent/refinance the property at a low LTV, pay my investor back and the contractor would get whatever was left.
After some posturing, he agreed to buy the property for just over $110,000.
My investor was received his principal, along with the interest rate I advertised, which ended up as an ROI for him of around 16.5%. My first commitment to my investors is that they always get paid first, and I mean it. I had recently listened to Will Barnard's podcast, and it just reinforced for me how much integrity matters in this (or any) business.
My wife and I ended up losing about $2,000 on the deal after closing costs. It sucked, but it was an extremely valuable learning experience, and far less than the cost of a guru course.
What I learned
Whether you’re partnering with a GC or just hiring one, vet your contractor!
- Is he licensed?
- Are there any complaints against him?
- What’s his BBB status? Is he even registered with the BBB?
- What type of insurance/bond does he have?
- ASK FOR REFERENCES, then go see his work. - If he wont/cant give you any references, run! If he’s evasive about showing you projects he’s worked on or introducing you to former clients, run!
- Set expectations clearly up front. Put them in writing and hold people accountable.
Partner only when it makes sense, and then only with someone you’d trust with your children.
In retrospect, it didn’t make a lot of sense for me to partner on this deal. I could have paid a licensed GC $60k+ and still netted a decent profit for myself and my investor.
Control Matters
Thankfully, I controlled this property and the contractor had no ownership of it, so I was in a strong position when it came to those difficult negotiations.
What I’m doing now
The only way I could look at this experience as a failure, is if I had decided to give up on REI. I learned SO MUCH, and this experience has informed and will continue to inform: my processes, my instincts, contracts, structuring deals and most of all partnerships.
- It had the potential to be a great deal. I had & have great instincts and I'm far better investor, realtor and partner as a result of the experience.
- I’m finishing up my second flip, which has had challenges of it’s own, but will make a nice profit for myself and a 15+% return for my investors.
- I’m BRRRR’ing with several private investors to build single family rental portfolios with serious cash flow. Each investor has their own goals and timeframes, but the 3-5 year plan is to transition into apartment buildings when the bubble bursts. (I’m not an economist, I just read stuff that people far smarter than I have written, and it seems like the apartment market is getting overheated and overbuilt).
- I’m working as an agent to help other investors find cash flowing rental properties. @Ryan Rupnarain just posted about one we worked on together.
- My wife and I are house hacking, and are finishing up a studio apartment attached to our home that will bring in some serious cash flow.
- I'm always looking for the next deal.
Thanks for reading!