This may come as a shock to you, so you may wanna take a seat… but ….
I make a lot of mistakes.
I know – calm down people – this is not news that you wanted to read today. But it’s the truth. I screw up, make mistakes, lose money, and …
I’m okay with it.
As I’ve mentioned on the BiggerPockets Podcast a few times, I’m a big fan of just moving forward until something stops you. You might get 1/2 way to a deal and get stopped by something. The next time you might get 3/4 of the way there. But eventually, after each problem that stops you (and you learn from) you will get there. (Of course, I’m not advocating that you just go out there unprepared. I’m just saying don’t let analysis paralysis and the desire to know everything stop you.)
So, today I wanted to share a quick story of how NOT to flip a house. This was a flip I attempted to do several years ago when I was still figuring things out – and I learned a TON from my mistakes, which I’ll share throughout this post.
Hang on – and perhaps grab a tissue… this is going to be a sad story!
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
The Ugly Princess, the Hero, and the House
She was absolutely ugly.
You know the type. Ugly paneling, ugly landscaping, ugly layout. She was a 3500 square foot beast of a house that was just begging for a hero to come and rescue her from her despair and make a ton of money in the process.
I was that hero.
Let me show you just a few pictures of what the house looked like:
The home was a duplex located at the top of a large hill, with views on the top floor that you would kill for. It overlooked the entire town with sweeping views of the ocean harbor I live near. It was perfect.
My emotions were already involved.
Even more so – I had an incredible deal. I had negotiated the bank down from around $80,000 down to just $45,000, simply by being patient. This was in the absolute bottom of the market, and I got a killer deal.
The home was actually lived in up until the point that it was foreclosed on. It may have been ugly – but it was functional. I had considered the idea of simply a “paint and carpet” flip on the duplex and maybe I could turn it into a great rental.
After all, I could have put maybe $15,000 into it and had a $60,000 duplex, in a great location, that would bring in around $1250 per month in income, easily meeting the famed “2% Rule” and providing incredible cash flow. Even with the 50% Rule (which I talked about in this video post) this thing would have made me a lot of monthly income.
But no… I wanted to be the hero.
She wasn’t going to be a cash flow friendly virtual ATM for my rental pool… she was going to be beautiful. In fact, I decided what she really needed was to not be a duplex – because I wanted to have the highest chance for getting a great price.
After all – you mean ol’ investors always want a great deal – and I didn’t want to sell a deal. I wanted to sell a masterpiece.
I decided to convert the home into a single family house.
No problem… just gotta remove a staircase and build another, demo some walls, and bam – I’d have a single family home worth much more than a silly duplex…
Here was the break-down of my numbers:
Purchase Price: $45,000
Closing Costs/Fees/etc: $3000
Total investment: $73,000.00
After Repair Value: $110,000 – $120,000.
Total profit, after all selling fees: approximately $26,000 – $36,000.
Okay – I know what you are thinking.
Pretty good flip, right?
This is something even J Scott would be proud of!
I was ready to continue with my plan.
I was already cashing that $25,000 in my head.
A trip to Italy sounded nice…
The First Sign of Trouble
The first sign of trouble should have been when trying to get financing.
I had no way to get a normal bank loan, having recently quit my job to go full-time in real estate. So I turned to my favorite hard money lender and showed him the deal. I showed him the numbers and my plan to turn it into a single family home.
I waited for him to tell me just how great I did! I was like Ralphie on A Christmas Story, waiting for the A+++++++++ from his teacher.
However, I was shocked to hear the last thing I expected:
Was he joking?
Nope – he said it was too big of a house. It was too big of risk. He couldn’t do it.
At this point, I should have taken a hint. However, I decided to push forward. I searched the internet high and low for a hard money lender (which, I wish the BiggerPockets Hard Money Lender directory was around then!) until I found one that would agree to drive out to my town to look at the property.
After several conversations, this lender agreed to fund the deal, and even agreed to fund the repairs.
I closed on the deal and began construction.
If You Give a House a Cookie…
Several weeks ago on the BiggerPockets Podcast I made a reference to the children’s book “If You Give a Mouse a Cookie,” which is about a mouse who, when given a cookie, asks for a glass a milk – which prompts the mouse to ask for a straw, followed by a mirror, and so on and so forth. The reference was made about tenants and not giving in on late fees and other penalties, but I think the analogy works here as well.
I gave the house a cookie.
With new stairs, it only makes sense that I re-do all the drywall in that part of the house. After all – I want it to match, right?
- and if I do new drywall, I might as well do new electrical…
- and if do new electrical, I might as well do a new heat source…
- and if I do a new heat system, I might as well do new wood floors …
- and if I do new wood floors, I might as well do windows, granite, travertine,…
You get the idea. I gave the mouse a cookie… and she kept asking for more.
Pretty soon, my plan had completely changed.
This wasn’t going to be a quick flip … this house deserved much more. This was going to be a “high end” flip.
There were no high-end flips in my town. None. So clearly, this house would sell for so much more and much quicker than the other homes. This was going to be easy, plus it’s going to look incredible.
So as I changed my plan, I also altered my After Repair Value. This thing could fetch much higher than I was thinking. This could get $150,000 or maybe even a bit more. This could really be something.
I’m going to make over $50,000 on this flip…
Italy, here I come!
Working on the Flip
I began working on the house every day, tearing out walls (finding hundreds of 1960’s adult magazines in the process, stuffed in the wall, as well as a diary from a 9 year old girl from the 1920s.)
Ah, the fun of remodeling a home.
Now… I may have tried to distract you there with the fun fact about the magazines and diary but did you notice what I just said?
I began work.
Yep… me. I began working on the project, with my own two hands.
After all – think of how much money I could save by doing all the work myself! I can do pretty much anything with construction, and since my budget (which had now increased from $25,000 up to about $40,000 with the great new features I was adding daily…) was based around the idea of me doing most of the work – I really didn’t have much of a choice.
So day after day, I worked tirelessly from dawn to dusk.
After three months of working on this home, I realized an important fact that somehow slipped my mind during the planning…
The house was big. Well, “big” is an understatement.
3500 square feet is huge. It’s gigantic. It’s monstrous.
Now, I’m pretty good with math, but somehow the simple fact that 3500 sq ft is almost three times bigger than the typical 1200 sq ft house that I’m accustomed to remodeling for a flip slipped my mind.
It also costs three times as much to remodel and takes three times as long.
So to speed things up, I hired a local handyman to help me out. He was an older gentleman who was good with a hammer and knew how to do everything.
Finally, I could rest some. After all, I was now working “on my business” instead of “in my business.” He could do almost everything. Rather than spending 7 days a week working at the home, I dropped down to a more normal five day, 40 hour workweek.
Nine Months Later…
Yes, you just read that correctly.
Nine months later.
A full 12 months we spent working on this job, from the day I destroyed the first wall to the day my Realtor put the sign in the yard. The final three months of that time were spent with myself, my wife, and several friends (and the old handyman) all working 12 hour days to finish the job. I lived, ate, breathed, and dreamed about that house.
In the end – we put a little more than $50,000 into the rehab, most of which went toward material since my wife and I worked for free for this entire year. With a $45,000 purchase price and $50,000 in repairs, (plus the hard money points, closing costs, and holding costs up to this point) we were into the project at right around $105,000.
The market had begun to slowly improve, and there were comps in the area showing that similar houses were selling for $150k-$170k. It was incredible! We were sure to get an offer quickly and I’d have over $50,000 in profit on this deal. All my hard work would finally pay off!
Before I get to the sad part of this story … let me first show you some photos of how the project turned out:
After no bites at $170,000, we dropped the house to $165,000 within a couple weeks.
A month later we dropped it again to $155,000.
The house was being shown occasionally, but no bites. Finally – success! We had an offer for $150,000 but after a whole month of hassel and being “off the market,” the buyers loan fell through and they backed out.
And so we re-listed it and dropped the price.
And so we dropped the price again.
Over the next nine months, we dropped the price of the home every month or so, but still it sat – beautiful and depressing.
Finally – one full year after listing the house, we received an offer for $125,000 and took it. After paying the Realtor fees and the closing costs – we received a check at closing for under $10,000. However, we had spent $10,000 in extra holding costs for that year of time – leaving us with…
absolutely no profit.
Learn to calculate ALL the expenses on your next flip! Check out the new BiggerPockets Fix and Flip Analysis and Reporting Tool. Try it out for free today!
I still don’t know exactly why the home only sold for $125,000. The comps still value it around $150,000. Even the appraisal came in around that price. The buyers got a killer deal (congrats to them!) and I ended up getting out alive. Plus – I gave a local handyman work for 9 months, a couple Realtors made some money, and I turned the ugliest house on the street into a beautiful home for a nice family. Yes, I tell myself those things so I can sleep better at night about it!
Top Eight Lesson’s Learned About this Failed Flip
So, one year of work and another year of waiting… and we made nothing. We were lucky to have escaped this flip without any major losses but the time I spent on this project and the missed opportunities I experienced because of this flip – were huge.
However, as I mentioned in the beginning – I am a big fan of moving forward and learning from one’s mistakes.
People have asked me if I regret this flip – however, it’s difficult to regret something which brought me to the place I am at today. However, I can say I learned a TON from the experience about how not to flip a house and through my experiences, it’s my hope that the lessons in this story can at least save other people the drama I experienced during this flip.
Here’s a few major lesson’s I learned:
1.) Don’t Try to be Original – No one was flipping homes in this style or price range. I thought being the only one with a higher end flip would make it easier to sell. It didn’t.
2.) Don’t be the Hero – As I mentioned earlier – this home would have made an incredible rental property. The 2% would have easily been met and I’d be collecting hundreds of dollars per month in cash flow right now. Instead, I tried to turn it into something it wasn’t simply because I wanted to make something beautiful.
3.) Size Matters – Don’t make the same mistake I did. A house 3x bigger than normal costs 3x more and takes 3x longer than normal.
4.) Listen to Your Lenders – My hard money lender has been in the game a lot longer than I had. When he refused to fund it, I thought he was crazy. Now I see why. Listen to your lenders – they probably know what they are talking about.
5.) Have a Plan Before Beginning – The more I did to this house, the more I wanted to do. I doubled my budget because I wanted it nicer and nicer. I should have had an exact plan and stuck to it. Don’t improvise.
6.) Don’t Do All Your Own Labor – When planning the budget for this project, I planned on doing most of the labor myself. Again, not realizing the size, this became overwhelming. Maybe I can swing a hammer, but as an investor, my strengths lie in the numbers, in the deal making, and in the management – not in the construction. I should have budgeted for a construction crew to come in and take care of this thing.
7.) Speed Matters – Additionally, the handyman I hired to work with me was good and relatively inexpensive – but he was slow and the house was large. I should have had this home remodeled in 3 months and on the market, but instead we crawled along slowly for months and months. I missed the “summer selling season” the first time around, which was a major contributor to my 12 month selling season.
8.) Know Your Market – My market was incredibly slow during this time. My house flip was not the only one that sat for so long. Many houses sat for 6, 9, or 12 months trying to sell. The inventory was too high, the credit market too dried up, and the buyers too fearful. I probably should have purchased this, rented it out for a few years, and worried about “the flip” later on.
Let me just end with a pitch here. I honestly didn’t write this post for this reason – but I can’t help but bring it up. When I first read “The Book on Flipping Houses” by J Scott several months ago, nearly every chapter I cringed and thought “Oooh… I didn’t do that back then. If only I had…”
Had I read it then, I wouldn’t have made the mistakes I made on this project. Every one of the eight mistakes I outlined above could have been avoided.
So if you haven’t picked up a copy yet – please do. Read it twice. Take notes. Teach others.
Flipping houses is not what you see on TV.
However, it’s not a complete gamble either. It’s a business – and had I run this flip like a business I may have succeeded.
Either way – I still went to Italy .. and it was terrific.
Do you have a similar story? Have you ever “wasted” a chunk of your life for no profit?
Share your thoughts, comments, questions, or jokes at my expense below!