Two Year Reflection
Two weeks ago marked the two year anniversary of our first house flip. It is crazy to think of everything we have learned over the past two years, but it is also exciting to look forward to see what we can now accomplish. If you have read any of our previous posts, you know that we like to learn through reflection; thus, it seems appropriate to provide our top eight lessons learned over the past two years.
- The Flipping Triangle
There are three components of flipping: the house, the money (purchase, rehab, fixed costs), and your team. These three components form a triangle that determines your success. Throughout these two years we have struggled with different parts of this triangle. We have learned the importance of keeping this triangle balanced. External factors will always challenge the formation of this triangle (competing projects for money or resources, increase in competition decreasing availability on the market to find good deals, etc.). Keeping one’s triangle in formation and balanced is the only way you will keep going in this business.
- Build an A and B team (at minimum)
You might be thinking that we are only talking about subs here; two years ago, we would have thought the same thing too! That is the first mini lesson under this point. Your team is not limited to the subs. It includes your realtor, your accountant, lawyer, utility companies, insurance brokers, material providers, etc. If you were to write out, from start to finish, every task on how to flip a house, and every single person responsible to execute each task, that is your team. So how do you do it? Keep asking and talking about what you need. If you are working with someone who is a good contact, most likely he/she will know other good contacts as well (good people typically work with other good people...and same is true for the reverse). Lastly, work with realtors who work with investors! I cannot stress this one enough! They will make your life a lot easier, and if they are good you should see a direct impact on the success of your business because of them. (And if you are reading this right now wondering if your realtor is one of the better ones, than they probably are not!)
A lot of management classes will tell you that over 80% success is directly correlated to effective communication. Notice I said “effective communication”, not quantity of communication. Over communicating (for example micromanagement) and lack of communication are both detrimental to the success of a project and potentially business. Each project and business requires a different level of communication. I am actually planning on writing a future article on this topic specifically, so stay tuned! It’s not only important to realize how much communication your team needs, but how much communication you need. As overkill as it sounds, the communication needs of all should be expressed, in order for expectations to be known and achieved.
- Think Creatively and Be Persistent
Don’t expect flipping to mirror any HGTV show you have seen. When you want to dive into flipping, you don’t just go tour three (or more) properties (like Property Brothers- no offense I love the show), and pick which one is best for you and your budget. Nor does your budget look like anything Flip or Flop seems to show you at the end of the show. If you are lucky to be in a non-competitive market, you will be able to find the house easily, but may struggle with the team component. Whereas if you are in a competitive market, like we find ourselves in, the house is one of the hardest parts of the puzzle. With competitive markets, not only is the inventory lower, the purchase price is higher, and the margins are slimmer. This is due to the more established flippers who are willing to make just $5,000 off a two month (or more) project. For us, we would never be able to quit our 9-5 if making only $5,000 in two months was our business plan. Once we established how much we needed to make flipping one house, we extrapolated that to two, three, and four houses at a time. This allows us to be a bit more competitive with our maximum purchase price once we start scaling. However, until we have dedicated crews solely working on our projects, we still struggle competing with renovation budgets. Instead of only looking at how you can save with the renovation budgets, you need to look at all of the other places where you are spending money (materials, holding costs, purchase costs, fixed costs, etc.) and see where you can make up some of the difference. You also need to look at houses that these big players are not looking at to see if you can find one that works. One thing we noticed is these bigger entities are less likely to take on a full rehab. Whether it be because of too much time needed, lack of resources, lack of knowledge, who really cares their reason why, but it is something we have the knowledge and resources to handle. Three of our four houses have been full renovations. We take into consideration the longer holding period, as well as, the increase in renovation budget and make sure our bottom line is still met. While this works for us, I would not recommend a full renovation for a newbie flipper. Instead you must think creatively. We did just that with our one and only cosmetic flip to date. How did we get the property? We did three key creative things, 1) we extended our search area a bit further than our typical reach, 2) we looked for a property that had been on the market for over 60 days, and was way below market value, and 3) we identified the reason why the property was not selling, and offered much lower than asking. While we did not get the property at first, we kept watching the property, and learned through our realtor (who checked in with their realtor three weeks later) that the owner had fixed one of the major issues (septic). We were excited about this “insider” news because the listing agent failed to update the listing description which still stated that it had a failed septic. We then readjusted our number, eliminating the expense we had allocated for solving the septic issue, and were able to reach an agreement with the seller. Take away: Think Creatively and Be Persistent!
Advice comes from all different sources, and when you least expect it. Whether you are watching a tv show, or talking to someone about their work (non-real estate sector) you might gain helpful information that is applicable to your business. You will only be able to identify these tidbits if you are truly listening. Typically when others are talking, most people automatically start thinking about what they are going to say in response. It is very important that you consciously remind yourself to actively listen to the person. Early on our real estate agent once said to us, “I think it makes more sense for you to buy a lower priced home, than to tie up resources with a higher priced home when you make the same return either way”. It made us rethink how we analyze deals. And, to think it came from our realtor whose commission is solely based on the sale price of a home!
- Ask...you never know
One of my favorite cartoon strips is a job seeker who is being interviewed for an entry level position being told they need prior experience. It is so ironic, but so true! When it comes to securing financing, we immediately thought of the cartoon! Through research, we identified that most banks will loan after two years of tax returns. However, our real estate agent connected us to a bank that works with investors to see if they could do something short of the two year tax return marker (I hope you have been reading this whole article because this is now the second example of how working with an investor focused realtor is so key to your success!!). We put together a packet of our previous projects, and invited him to our current project and gave him a tour. The packet was focused on what he would want to see...numbers, with of course some pictures too. Needless to say, it went really well, and our current project is via a loan with this bank. Another example of taking a chance and just asking is with our business credit card. In our first year of business, without a single tax return yet, we were able to secure a very substantial credit line!! This allows us to limit the money borrowed, decreasing the interest paid, as we have a month to pay off our purchases through our business credit card. Getting the point?!?!
- Utilize the internet
Technology has changed business. This is not news. So use it! We have used the internet to find resources, compare pricing, read reviews, research how to fix unique situations (for example getting pet urine out of 100 year old floorboards), and youtube do-it-yourself processes. Google is a member of your team!
- Believe in yourself & treat this like the business you want it to become
Last but not least, you absolutely need to believe in yourself, and your business. Treat both the same way you want yourself and your business to be treated. It takes a lot of work to get organized and started, and if you are not willing to take those steps, others will see right through it. From Day 1, we have treated our business as a business. Specifically, we have a working Business Plan, Contracts, Lien Waivers, and Trackers for everything! We have business cards, flyers, signs, t-shirts, a website and social media accounts. We also recognized that we cannot build a business overnight. While we speak daily about our projects, we also meet regularly to discuss the business side (where we are at, and where we are going).
We recognize everyone’s path will yield different results and lessons learned. This in large part is due to the prior knowledge you have coupled with the situational challenges to which you are presented. We hope that some, if not all, of this article is helpful in your journey.