My kids love YouTube.
They always want to show me videos on there and one of their recent favorites it’s a series of videos called “Epic FAILs” – which are some of the most viewed videos on YouTube. They are videos of people “epically failing” doing something: from the Brazilian soccer goalie who goal kicks in the opposite direction to the news anchor who inadvertently blurts out a part of the human anatomy on live news to wardrobe malfunctions more embarrassing than Janet Jackson, these videos are all the rage.
Based on YouTube views alone, it’s readily apparent that people love to see other people failing in some way. Maybe its be because the viewer can say “good thing that’s not ME” or if it’s just human nature to rubberneck at car accidents, I’m really not sure.
I actually hope it’s because people have a strong desire to learn from other people’s mistakes. The point is that we as humans learn far more from failure than we ever do from success. And it’s really no different in the real estate investing world.
Failing is all part of the real estate investing business. As much as you’d like to hit a home run on every real estate deal you do, for some of them, you just mess up. And hopefully, you pick yourself up, dust yourself off and move on to the next deal – having learned valuable lessons never to repeat again.
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The Importance of Sticking to The House Flip Rules
As much as I am a big believer in NOT breaking the rules, sticking to the numbers and making disciplined real estate investing decisions, I am guilty of not listening to my own advice at times. As my father used to say, “do as I say, not as I do”. How Dad knew. But the longer you invest in real estate, the more mistakes you will make and the more failures you overcome and the more you learn.
And although this EPIC fail house flip happened nearly two years ago, this is the story of my most recent (and hopefully last) EPIC fail. As a full-time real estate investor, I just should have known better, but I broke my own rules. But I came away with some valuable lessons learned that no matter what, stick to the rules and keep yourself in the black at all times.
Although this epic fail didn’t sink me, I did learn a ton from it and hopefully you will too.
Epic FAIL House Flip: Vital Stats
- When: Mid 2011
- Where: Buzzards Bay, MA (2 Bedroom, 1 bath)
- Projected ARV: $170,000
- Financing: Private money lenders
- Type of House: 2 Bedroom, 1 Bath
- Projected ARV: $170,000
- 70% Rule: $119,000
- Estimated Repairs: $50,000
- MAO: $69,000
- Projected Profit (at 20%): $34,000
- Projected Other Expenses (at 10%): $17,000
House Flip Projection Summary
As you can see on this house flip, I didn’t use any of my own money at all. I found the private money through friends, family and other associates who I had met through networking. As I and many others have written here on Bigger Pockets before: it is actually possible to flip houses with no money. And although this flip didn’t go as planned, the financing part was fairly sound.
With the kind of money lenders I used in this house flip, you can negotiate very favorable interest rates. In this case I paid out all the interest at closing and not monthly. Two things you can always negotiate with lenders are: financing rates rates and payment terms.
If I’d used a traditional hard money lender, which in many cases is a great way to get into house flipping with no money, my margins would’ve been even more slim than they were using private money. Every house flip is different, so you just have to work the numbers to see you which works out best.
The Epic Fail House Flip: What Went Wrong?
On this house flip, I simply didn’t stick to my own rules. Of course, you learn lessons as you go along as a real estate investor and I certainly learned mine here. Since this flip in 2011, I have never deviated from my own rules. And as you’ll see, although the profit was fairly slim, in my opinion it could’ve been far worse if I didn’t even have the framework for the rules that I still follow today.
By sticking to the rules; including ARV, the 70% Rule, not over inflating your ARV and holding firm to your MAO, you stay in the game and they help prevent you from serious downside risk.
Here’s the breakdown on the numbers:
Cost of Repairs
Total Downside: -$19,988
Why Was This House Flip an Epic Fail?
As you can see, most of the major numbers were in the negative, with cost overruns on just about every aspect of the project. The major mistakes are as follows:
- MAO: The biggest cost overrun was on MAO having paid $5,000 more than I should have paid. The reasons for this are many, but none of them are really all that good. The truth of the matter was is that at this point, my deal flow was light and I believe I was just too overeager to make it happen. The seller just wouldn’t budge and come down to my MAO and I figured that I could make up the difference on the repairs, which I never did.
- ARV: On this one, I actually thought I could sell it for $172,000! My realtor had given me a number below 170,000 to begin with, so I broke those rules using some “eraser math” right at the start. Don’t ever do this!
- Cost of Repairs: Another part where I did some more “eraser math” was on the cost of repairs. I never factored in the frame problems that we eventually had on this project. I knew there were some framing issues Right from the start and I figured I was so smart I could manage my way into profitability with my contractors. How wrong I was!
Why House Flipping Formulas Are So Important
Some of you might actually be laughing at the fact that we did actually make a profit of over $14,000 on this flip. But for me, it was an epic failure because I failed to keep to my principles and formulas. That “inner voice” was calling to me throughout this entire house flip and I just simply ignored it.
As you look at the numbers, you can see that when you do stick to the rules how much more profit you can make. But the best part of the rules is that even when you fail to follow them and fudge them just a little, they still keep you out of real financial disaster. However, when you fudge them a lot, that’s when you get into real trouble.
Ever since this flip, I’ve stuck to my rules nearly 100%. Even on one of the most recent flips that made me out very nice profit, I did have some variations in my numbers. But overall, I stuck to the rules as much as possible. And when you do this, you make big profits, not tiny ones like this one.
If you’re first starting out flipping houses, you’ll probably be tempted to break the rules. My advice is don’t do it. The more you do it and stick to the rules, many of which are outlined here on Bigger Pockets, the more money you will make – regardless of market conditions.
And when that happens, I can’t wait to hear about it.
If you’ve made it this far, please leave a comment below! I’d LOVE to hear about any of your EPIC fail house flips or anything else related to real estate investing or flipping houses!
Photo: Iwan Wolkow