My First Flip & Fix: Termites, Hauntings & A Foundation of Dirt

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We all have crazy things that have happened to us that seem too out of the ordinary to be true. 

This happens in all walks of life, but I have found that there is a special kind of crazy for the stories that have come from real estate investors. I have been in the business for a while and had lots of unbelievable stories. The one I will tell you here is one of my first fix and flip.

I’ve outlined the mistakes so you can learn something from them, as I did!

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The Haunted House Tour

It all started in the town I live in — Bordentown, NJ. 

My wife and I were newly married, and I had just quit my job as a sales rep to invest in real estate full time. We had some rentals, but back in 2007 the fix and resell market was getting so hot that I started looking for a fix and flip project.

The town we live in is a pleasant town with mostly nice houses. There was this one house that was by far the “ugly duckling” in the area. It was missing a few windows and had clearly been vacant for some time. Our town does a “haunted house tour” where they walk you past all the houses that have stories of being haunted — you know what I’m talking about, right? 

Well, this house was on the tour.

I would drive past the house on my way around town, and I would always think that it was a shame to let a house get to that condition. I thought that someone should do something about that house. I would think this every time I drove past it, and then I would forget about it for a while. I got tired of thinking and not doing, so I decided to look into it further. I did a public record search online and found the name of the owner of record. I then searched for him online, but wasn’t able to get anywhere. 

Related: How to Analyze a Fix and Flip: A Step by Step Case Study

At least I tried, right?

A Few Months Later

Fast forward the story to a few months later when I was being courted by a title company for my business. They asked me if there was any property they could look into for me at no charge to prove themselves. I thought what the heck and I gave them the address of the house. 

They sent me the report and to my surprise, the name of the owner of record was spelled differently on the deed versus the way it was spelled on all the other public record documents. “Huh,” I said. I searched for the name with the new spelling, and only person with that name came up in the tri-state area (it was a very unique name). 

I picked up the phone and called the contact.

The man on the other end knew the house I was calling about and said it was his grandfather’s house.  The man I was talking to seemed to be in his mid 70’s, so it didn’t seem to add up. I did a bunch of digging with him on the phone — and got the full story. 

An Old Home’s Story

Isaac (the grandfather) died in 1964. His son Charles inherited the house, but did not want to live there. He decided to allow his cousin James to live in the house with his family, as long as he would pay the real estate tax bill. 

In 1984 Charles dies and doesn’t tell his son Charles Jr. about the arrangement. Charles Jr. is who I am now speaking to on the phone and lives in upstate New York. 

In 1992 the cousin James dies. His family and their descendants continue to live in the house, still paying the tax bills addressed to Isaac, who died in 1964. At some time in early 2002, the remnants of James’ family moved out also. 

When they moved, they of course stopped paying the tax bills made out to their distant relative who died 40 years ago, so the property went into arrears on taxes. By the time I contacted Charles Jr., he had been contacted by the tax lien holder and was considering his options.

The Deal

Charles Jr. and I were able to strike a deal for me to purchase the house at a price that would pay off all the back taxes and put a few thousand dollars in his pocket. He was able take ownership of the property through the surrogate courts fairly easily, as he was the sole surviving heir to the estate of his father Charles Sr.  

It ended up being a nice windfall for Charles Jr., as a few months ago he didn’t even know he owned the house!

It would be great if the story ended there, right?  Not so much. 

The Aftermath

Once we closed, the tax lien holder promptly sued me for something called “Title Raiding.” 

In essence that means that you swoop in and purchase a property right before it goes to the courthouse steps on a foreclosure. Most of the time, banks are happy when you do this because it’s off their plate. Not the same for tax lien holders, as they actually WANT the property. 

Mistake #1

I was not sure what to do and hired the first attorney I could find who was able to come to court, not necessarily one who knew anything about real estate. We ended up having to defend ourselves in court and also pay settlement to the tax lien holder, which combined set us back $15,000 right after we purchased the house.

Mistake #2

In hindsight I should not have let the tax lien holder push me around and paint me as a big developer who was trying to rob them of their profits. I was a small time investor just getting started, but didn’t get in control of the conversation in court so I was bulldozed by their attorneys.

Related: Finding Your Buying Criteria When Fixing & Flipping Houses

Once all that was done, we unsuccessfully tried to do a quick flip and sell the house as is to another investor. No bites. Plan B was to fix and flip it ourselves, which was still a possibility as we had a little less than $80,000 invested so far and the ARV was $350,000 at that time. We had a line of credit in place that was attached to some real estate owned by some family who were willing to back us. Through that line we had the cash to redevelop the house but weren’t sure where to start. 

Mistake #3

Instead of taking time to get a mentor and develop a plan, we just jumped right in.

Our first move was to get all the possessions out of the house — and it was full of them. There were interesting items like a player piano, the kind that play music on their own using those big rolls, the ones you see in the old cartoons. There were American Flags with 48 stars, bottles of unopened whiskey from the 1970’s and a ton of furniture. 

On this job, we did not make the mistake that some investors including myself make of getting hung up on the stuff inside a house versus fixing the house itself. We brought in an auction house who took everything (I kept the flags and the whiskey of course), sold it for us and sent us a check for the sale minus a commission and a fee for disposal of what they couldn’t sell. 

We had the house emptied within a week!

Mistake #4

Our next move was to replace the roof because it was leaking in many places. We went with the contractor that returned our calls. 

Once they replaced the roof, they then informed us that the roof joists had termite damage and needed to be replaced. Think about that for a second — the ROOF joists had termite damage, meaning that the termites had to work their way through the whole house from the ground up to get to the roof

Mistake #5

We would have discovered that had we done a full demolition of the inside of the house to assess the structure first.

To see how bad the damage was, we had a structural engineer come through along with an architect. Right away both of them told me the house was beyond repair and that it needed to be torn down.

Mistake #6

Instead of listening to them and investigating the costs of building a new house, I stayed the course to rehab the house because I thought it would cost too much to build a home from scratch. I told the architect to draw up plans to reframe the interior of the house to replace the termite damaged wood, which he was glad to do.

Now it was time to start rebuilding the house.

Mistake #7

We hired a framing crew consisting of a few people I could find in the neighborhood that had been laid off from other construction projects

Upon further inspection of the interior framing, we found that the back of the house had no foundation; it was sitting on dirt! That explained all the termites. 

Mistake #8

Our “framing crew” convinced me that they could dig out an area under the exterior wall and install a foundation over a weekend to avoid pulling permits for the work. I agreed. 

Of course the crew was not able to finish the foundation within a weekend, so the house was left with a an open hole and concrete forms sitting in them on a busy intersection come Monday morning.

Hitting Rock Bottom

By Monday afternoon, I got a call from the local building inspector. I think that was the point where the project hit “rock bottom”. 

I decided that I couldn’t lie to him so I decided to tell him the truth about everything  I confessed to working without permits on the house and hiring non-licensed contractors. I told him that my architect and structural engineer had recommended that I tear the building down — and I didn’t listen. 

I think he felt bad for me because he charged me a nominal fine and told me to come in with a viable plan for the house in 2 weeks.

That was the point when I decided to stop trying to do things myself. I wasn’t qualified to run a project like this myself. I let my ego and desire to make money get in the way, which prevented me from seeing what was in front of me clearly. 

Picking Up the Pieces

I went out and found someone in my network who had handled large projects like this and asked him for help. He came to the site and showed me that the house needed to come down; there was no saving it. He also showed me that I was wrong on the costs to build a new house on the site. If I played my cards right, I could build a new house on the site and get out. I might not make much (if any) money on the sale, but at least I would get out of the project. 

My mentor introduced me to a few builders he had worked with and helped me negotiate a deal with them.  Once we had one selected, I went back to my architect and got plans for a house that would fit the lot and the character of the area. I took these plans with my newly hired builder to the town inspector and got moving with our new plan.

It was a very hard thing to do, but we took that house with a new roof, a new foundation in the back, some new framing and other interior work, and we tore it down. To be honest, with all the termite damage it didn’t take much to influence to get into the ground.

Within about 3 months, we had a beautiful new house on the lot. 

My mentor was right; the cost to build was less than what I thought and had I proceeded with that plan from the start I would have been in a good position. The problem was that I didn’t go with that plan from the start and had to account for all the money I spent on the house we tore down. We priced the house to cover all our costs and break even. The house sat for a while because the market at the time to sell the house was very different than it was when we bought it. I got stubborn for a while trying to hold out for our price to no avail. I ended up having to let the house go for below asking and ended up taking a loss on the project.

The problem was that we were now in late 2007/early 2008, when the bottom fell out of the real estate market. Home sales were falling off the map, and the price we thought we could get for the house when we started the rehab was nowhere near the current market. By not having a tight timeline from the start of the project with a solid plan and by sitting on the house waiting for our price, we allowed too much time to pass. (We can call this Mistake # 9). 

Time is money, right?

Conclusion

The good news is that I learned a lot from the project. 

I learned not to do things that I wasn’t qualified to do by myself. I learned how to build a house from the ground up, which has benefited me greatly through my career. From that one lesson, I have made back what I lost on this project many times over.

I hope my mistakes taught you something and that you don’t make them yourself!

I would love to hear from others on their first fix and flip.

What successes and/or challenges did you experience? What would you do differently? How has it changed how you conduct business today?

Thanks for reading and please — don’t forget to comment below!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

18 Comments

    • Thanks Frankie! I appreciate your comment and am glad you were inspired by my article. Hopefully you were inpired to take action in your business and avoid some of the mistakes I made. That was the intent anyway!
      I’m glad I didn’t give up too, thanks for saying that. I have found that the difference between success and failure is allowing setbacks like the ones that happened to me on this project to be the reason I quit. Instead I dusted myself off and went at it again.

      Take care,

      Matt

  1. Well if it makes you feel any better I did the same thing, but I still have the house as a rental.
    Why would I keep a flip from 2007 you might ask?

    My story in a nutshell, I got the house for free by purchasing the house next door. I rented this mess to a handyman who was to fix and pay a small nominal rent eventually buying the property when it was in livable sale able condition. As you might guess anyone who would move into such a house has low standards as to what is livable, and the house never got repaired.

    In the end I booted this fellow out, and hired a contractor to handle the exterior first, he went like gang busters until one day he simply vanished from the face of the planet.

    In comes a professional who promptly discovers the sill plates rotted out, and the after ripping down the newly sided rear shed/entrance finds no foundation under the rear of the house, and lots of termite damage. After all is complete inside and out to a very high standard I am stuck with $70k of renovation debt on a $90k house, in a collapsed RE market.

    The only saving grace was the house was free, the now defunct bank gave me a $95k non recourse line of credit secured by the deed of the property, which was in a land trust.
    One of my less scrupulous friends suggested I simply pocket the $95k and let the bank take the deed, tempting but not ethical.

    The lender folded selling the interest only line of credit to some mystery person who in turn appointed a collection agency to manage the loan. In 2012 the loan term expired and they demanded payment in full or threatened foreclosure. Due to the banking climate and the dead RE market in this part of town, I suggested they do some investigation. I was paying 4% interest only, was current and was taking very good care of their collateral.
    Foreclosing would create a major loss for the mortgage holder, and where were they going to get a 4% note in first position at this time? The lender agree extending the terms to 2014.

    During the line of credit days my payment was $178 a month while my rent was $925 a month. To tell you the truth I would have been ok with the interest only payments to go on forever. Somewhere along the way the note holder sold to another who gave new instructions to the collection agency to torture me into refinancing. This was done by claiming that I was paying the note late, slapping me with huge fees, and not answering the phone.

    I decided to refinance, once they received the inquiry for a payoff statement. The note holder decided he wanted to offer a loan of 15 years fixed at 4%. Where I decided paying 4.5% to a banking friend was a better long term plan.

    • Hey Dennis,

      Wow thats a crazy story too. I think your story is an example that sticking to your goal, not giving up, and using resources like the line of credit will eventually yield success. I would be curious if todays sales market would yield a profitable exit for you. Even if today is not the day to sell at least you are now in an amoritizing mortgage so you are getting some principal reduction along with cash flow.

      Matt

    • Hey Adam,
      Back in 2007 in New Jersey they could! The act that they sued you for was called Title Raiding and it meant coming in at the last second and purchasing a property before the foreclosure make it to the courthouse steps. Its normally reserved for large foreclosures like shopping malls and hotels but it has been used in residential real estate as well. I have not encountered it since this deal and have heard that there have been some redefinitions of it through other cases since then.
      I hope that helps!
      Matt

  2. Great Post! Glad you took it as a lesson and not letting it break the desire to invest in real estate all together. I’m not particularly interested in fixing and flipping at the moment, but I sure will keep your experience in mind.

    Thanks again!

    • Hi Monteria,
      Thanks for your comment. After this deal we got away from fix and flips for awhile because of the shifting market, understandably. We focused on rentals and multifamily for years afterwards and only in the last 4 years got back into fix and flips, as the market recovered. I hope you were able to apply soem of the lessons to your focus areas though!

      Take care,

      Matt

    • Matt Faircloth

      Hey Jeff,
      Thanks for the comment. Sometimes I win on repairing something versus replacing it, sometimes I don’t. I tend to look at the cost to repair versus the cost to replace. If the repair cost is more than 40% of the replace cost, I just go for replacement. It would rather do that than have to pay another bill in 6 months when the repairs fail.
      And there is nothing wrong with being frugal! 🙂

      Matt

  3. Wow! What a story. It was like reading a Real Estate horror movie.
    I’m interested to see how the original house looked and the turn out of the new home you build. So sorry you had to go through this. But successful people always look at their obstacles/failures as a learning opportunity and moves forward rather than a set back to quit completely. Very inspirational. Thank you for sharing with us. Truly.

    • Matt Faircloth

      Hey Karen,
      I would love to share some pictures of the property, but I’m not sure how to do that on Bigger Pockets. If you have any ideas I’m all ears! you could also shoot me a message on BP with your email and I’ll send you before and after pics.
      Matt

  4. Jerry W.

    Matt,
    Thanks for sharing your story. I have an unfinished flip story. About 2 years ago I had a good run and bought and sold a property that no one liked. The property was rough but I made about $14K gross in about 30 days. Now of course I am a very experienced flipper, and spot a for sale by owner on the way home from looking at an MLS property. I eventually get to see the house by flashlight, (since the power had been off for months), and I can tell it has great bones, but is covered in trash and junk. Turns out it sales at foreclosure in 6 days. After jumping many hoops, including the bank refusing to take the payoff and new liens appearing, I get it bought at a decent price. Now I could have got that place ready to rent for about $5K, but I figured I could put about $12K into it and flip it and make about $20K, possibly more. That would require that I do a good portion of the work myself. I am smart and offer my handyman a percentage if he will do most of the work. We go to work on weekends. it takes 3 weekends to just haul off the huge piles of junk. There is a problem I saw in the basement and we dig out the holes the owner chipped in the floor and replace any pipe that looks bad. I see a way to make a crappy bedroom into a decent one by taking out the bathroom and moving it down the wall almost tripling the size of the bedroom that would barely hold a bed. We add a few more drains to be able to install a walk in shower and bathtub. Then we get busy and barely get over to mow it when we get notices from the police for weeds in yards. (The house is in a town 32 miles away) For 2 years now we barely do 30 hours a year in work. I have fixed the stairs, put in new windows and painted most of the trim. While I tore out all of the kitchen cabinets, I have yet to even buy replacements, let alone install them. My handyman has a great business and is probably working 60 hours a week. I have bought 7 houses since then for rentals, and they are all fixed up enough to rent and are full. Hopefully someday I can have a happy ending story, until then I have learned that one lucky deal does not make you a genius at doing a fix and flip. I have called 3 contractors to give me bids and none have yet to send me a bid.

    • Matt Faircloth

      Hey Jerry,

      Wow, sorry to hear that! Fix and flips are always a gamble because you can’t know everything. Time is a killer, so keep it moving! I hope you are able to get out of that deal and at least get your money back. Don’t worry too much about the finer points just focus on getting out of the deal and moving on! I lost money on the deal we had but was able to move on to new projects quickly. It sounds like you have some other good stuff in the pipeline, so shake off that bad deal and get on to the winners, LOL.
      Thanks for leaving a comment!
      Matt

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